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With Another 50% Upside, You’ve Gotta Buy the Dip in Zumiez Stock

Zumiez stock - With Another 50% Upside, You’ve Gotta Buy the Dip in Zumiez Stock

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Shares of streetwear-focused retailer Zumiez (NASDAQ:ZUMZ) plunged after the company reported June sales that weren’t up to par with expectations or historical standards. The problem is that leading into the numbers, Zumiez stock had more than doubled from $12 a year earlier to $26.

Clearly, big expectations were priced in. Thus, when the numbers disappointed, Zumiez dropped like a rock.

But, I think this sell-off is an opportunity to buy the dip in Zumiez.

The worse-than-expected numbers in June illustrate that the streetwear comeback which has powered Zumiez stock materially higher over the past year is finally moderating. Consequently, go-forward growth prospects are likewise moderating, and Zumiez is falling. But, at just over $20, Zumiez has dropped into “good growth at a discount” range.

That means it is time to buy the dip.

Here’s a deeper look.

Zumiez Stock Has Been a Big Winner

Zumiez has been one of the biggest winners in retail over the past year thanks to a huge comeback in streetwear apparel. For the past several years, streetwear has been getting killed by athleisure. But, it seems like that slaughter may be over.

First, Zumiez sales growth has been red hot. In the first quarter, comparable sales rose 8.3% and net sales rose 13.9%. That was followed by a 7.5% comparable sales increase and 12.2% net sales increase in May.

Second, Piper Jaffray’s Spring 2018 Taking Stock With Teens Survey highlighted streetwear as one of the hottest trends among the all-important, trend-oriented teen demographic.

Combining the micro with the macro, we can see that there is a indeed a big comeback materializing in streetwear. That big comeback has powered a huge rally in Zumiez.

That rally hit a major road-bump with the company’s June sales report. In June, comparable sales were up just 2.7%. Net sales were up just 6%. That is a far cry from the 7.5%-plus comparable sales growth rates and 12%-plus net sales growth rates Zumiez had reported in the first five months of 2018.

The takeaway? The massive streetwear comeback is finally moderating and cooling off. Plus, Zumiez is starting to run up against tougher laps, so comparable and net sales growth will naturally come down.

Going forward, the streetwear comeback will continue to moderate, and the laps will only get tougher, so growth rates should continue to come down.

Valuation on Zumiez Stock Looks Compelling

But that doesn’t mean it is time to sell Zumiez.

This is still a growth company. Comparable sales were still up nearly 3% in June, and that was against an up 5% lap. That is pretty good for retail. It shows that while the streetwear comeback is moderating, streetwear popularity is still growing. Zumiez also has a solid unit growth narrative in its back pocket which will help power sales growth going forward.

Thus, over the next several years, Zumiez should be able to leverage a return to streetwear styles and unit growth to drive ~5% sales growth per year.

Meanwhile, a return to positive comparable sales growth has coincided with a rebound in operating margins. Management thinks that long-term, operating margins can get to the high-single-digit range. That would imply operating margins in 5 years of roughly 7-9%. I think the company can do that so long as macro-streetwear trends remain favorable.

Assuming 5% sales growth and operating margin expansion to 8%, I think that Zumiez can net around $2.50 in earnings per share in five years. A market average 16X forward multiple on that implies a four-year forward price target of $40. Discounted back by 10% per year, that equates to a present-day value for ZUMZ stock of around $27 and a year-end price target of $30.

Zumiez stock currently trades at $20, so I realistically see 50% upside into the end of the year.

Bottom Line on Zumiez Stock

The streetwear comeback is moderating, and will not lend itself to 5%-plus comparable sales growth forever for Zumiez.

That being said, the streetwear comeback is still happening, and will lend itself to 1-3% comparable sales growth. That is enough to drive healthy operating margin expansion and solid earnings growth.

This earnings growth simply isn’t priced in here and now. As such, I realistically see Zumiez rebounding by 50% into the end of the year.

As of this writing, Luke Lango was long ZUMZ.

Article printed from InvestorPlace Media, https://investorplace.com/2018/07/buy-dip-zumiez-stock/.

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