We started examining the options of cyclical consumer goods and services companies with a special focus on home improvement retailers: Home Depot (Monday) and Lowe’s (Tuesday). We continue the series on cyclicals as we examine the options of Zumiez Inc. (NASDAQ:ZUMZ).
Zumiez is a mall-based specialty retailer of action-sports related apparel, footwear, equipment and accessories. The company targets the youth, both men and women between the ages of 12 to 24, who seek popular brands that symbolize a lifestyle representing extreme sports. Zumiez offers its target customers (teens and young adults) a mix of apparel and hard-goods. The company stocks branded lifestyle products from Nike, Adidas, Element, Burton, Circa and Supra among others.
Zumiez in the News
On May 22, Zumiez reported its Q1 2014 earnings, which beats the analysts’ consensus estimate by a wide margin. The company reported adjusted earnings of $0.10 per share to beat the analysts’ consensus estimate of $0.05 per share. Reported earnings increased from $0.08 to $0.09 and Net sales increased by 9.7% to $162.9M to beat the analysts’ consensus estimate of $160M.
It might interest you to know that the reported earnings was 23.1% down year-over-year. However, investors are unfazed by the lower earnings because the fact remains that the nature of Zumiez’s business dictates that sales are typically strong in the third and fourth quarters.
On June 4, Zumiez provided its May comparable-store sales (comps) for the weekly period that ended on May 31. The company reports that its comps grew by 3.6% in comparison to the 1.1% increase in comps that was reported in the same quarter last year. The company reports that net sales in May increased by 13.3% to $49.5M up from the net sales of $43.6M that was reported in the same quarter last year.
A Good Enough Reason to Buy
The stock chart above shows how shares of Zumiez traded between May and June when the first quarter earnings and May comps report were released. You will observe that the share price of Zumiez has the tendency to rise on the strength of good news. I tested this thesis by plotting the quarterly results against the share price and the chart below confirms that the share price of Zumiez usually rises in line with impressive quarterly results.
Zumiez has outperformed analyst’s consensus estimate in 24 out of the last 26 quarters and I am optimistic that the company will outperform estimates in the current quarter and in the remaining two quarters. My optimism on Zumiez going forward is steeped in the fact that Zumiez has given guidance of earnings of $0.12 to $0.16 per share on revenue of $167M to $171M.
How to Trade Zumiez Options
I am optimistic about Zumiez going forward and I strongly believe that its share price will rise on the strength of impressive third and fourth quarter results. The open interest in Zumiez’s options are currently low but I believe that the interest will pick up in due time. A $30 strike price in August is achievable if the company delivers strong June and July Comps sales.
I am buying five call contracts of the ZUMZ Aug 2014 30.000 call (ZUMZ140816C00030000) on the premise that June and July comps sales will send the stock higher. If August is too close for your trading strategy, you should consider keeping tabs on Zumiez options to buy calls on the Feb 15 options as soon as the open interest picks up.
— Daily Option Alerts