Edgar Filing: Zumiez Inc

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-51300

ZUMIEZ INC.

(Exact name of registrant as specified in its charter)

Washington

91-1040022

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4001 204^th Street SW, Lynnwood, WA 98036

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (425) 551-1500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

At September 3, 2014, there were 29,204,071 shares outstanding of common stock.

ZUMIEZ INC.

FORM 10-Q

TABLE OF CONTENTS


Part I.	Financial Information

	Item 1.	Condensed Consolidated Financial Statements

		Condensed Consolidated Balance Sheets at August 2, 2014 (unaudited) and February 1, 2014	1

		Unaudited Condensed Consolidated Statements of Income for the three and six months ended August 2, 2014 and August 3, 2013	2

		Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended August 2, 2014 and August 3, 2013	3

		Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended August 2, 2014 and August 3, 2013	4

		Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended August 2, 2014 and August 3, 2013	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

Part II.	Other Information

	Item 1.	Legal Proceedings	29

	Item 1A.	Risk Factors	29

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 3.	Defaults Upon Senior Securities	29

	Item 4.	Mine Safety Disclosures	29

	Item 5.	Other Information	29

	Item 6.	Exhibits

Signature

ZUMIEZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	August 2, 2014		February 1, 2014
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	22,037	$	19,634
Marketable securities		91,408		97,521
Receivables		16,611		10,294
Inventories		119,916		87,182
Prepaid expenses and other		12,365		10,021
Deferred tax assets		6,901		5,194

Total current assets		269,238		229,846
Fixed assets, net		138,972		127,343
Goodwill		63,701		64,195
Intangible assets, net		16,630		17,970
Long-term other assets		7,515		4,049

Total long-term assets		226,818		213,557
Total assets	$	496,056	$	443,403

Liabilities and Shareholders’ Equity
Current liabilities
Trade accounts payable	$	66,636	$	18,343
Accrued payroll and payroll taxes		10,899		10,581
Income taxes payable		2,147		4,696
Deferred rent and tenant allowances		7,091		6,478
Other liabilities		26,247		21,276

Total current liabilities		113,020		61,374
Long-term deferred rent and tenant allowances		43,627		37,658
Long-term deferred tax liabilities		2,826		4,649
Long-term debt and other liabilities		3,977		4,068

Total long-term liabilities		50,430		46,375

Total liabilities		163,450		107,749

Commitments and contingencies (Note 4)
Shareholders’ equity
Preferred stock, no par value, 20,000 shares authorized; none issued and outstanding		—		—
Common stock, no par value, 50,000 shares authorized; 29,204 shares issued and outstanding at August 2, 2014, 29,619 shares issued and outstanding at February 1, 2014		120,060		114,983
Accumulated other comprehensive income		4,078		4,710
Retained earnings		208,468		215,961

Total shareholders’ equity		332,606		335,654

Total liabilities and shareholders’ equity	$	496,056	$	443,403

See accompanying notes to condensed consolidated financial statements

ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended					Six Months Ended
	August 2, 2014		August 3, 2013			August 2, 2014		August 3, 2013
Net sales	$	176,709	$	157,858		$	339,641	$	306,354
Cost of goods sold		115,797		102,738			228,196		203,262

Gross profit		60,912		55,120			111,445		103,092
Selling, general and administrative expenses		49,307		47,285			96,127		91,228

Operating profit		11,605		7,835			15,318		11,864
Interest income, net		146		158			328		373
Other income (expense), net		203		(174	)		289		(320	)

Earnings before income taxes		11,954		7,819			15,935		11,917
Provision for income taxes		4,498		3,080			5,983		4,680

Net income	$	7,456	$	4,739		$	9,952	$	7,237

Basic earnings per share	$	0.26	$	0.16		$	0.35	$	0.24

Diluted earnings per share	$	0.26	$	0.16		$	0.34	$	0.24

Weighted average shares used in computation of earnings per share:
Basic		28,776		29,842			28,819		29,770
Diluted		29,057		30,232			29,182		30,221

See accompanying notes to condensed consolidated financial statements

ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
Net income	$	7,456		$	4,739		$	9,952		$	7,237
Other comprehensive (loss) income, net of tax and reclassification adjustments:
Foreign currency translation		(2,937	)		760			(644	)		(2,645	)
Net change in unrealized gain/loss on available-for-sale investments		4			(110	)		12			(127	)

Other comprehensive (loss) income, net		(2,933	)		650			(632	)		(2,772	)

Comprehensive income	$	4,523		$	5,389		$	9,320		$	4,465

See accompanying notes to condensed consolidated financial statements

ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Stock					Accumulated Other Comprehensive			Retained
	Shares			Amount		Income			Earnings			Total
Balance at February 1, 2014		29,619		$	114,983	$	4,710		$	215,961		$	335,654
Net income		—			—		—			9,952			9,952
Other comprehensive loss, net		—			—		(632	)		—			(632	)
Issuance and exercise of stock-based compensation, including net tax shortfall of $26		343			2,971		—			—			2,971
Stock-based compensation expense		—			2,106		—			—			2,106
Repurchase of common stock		(758	)		—		—			(17,445	)		(17,445	)

Balance at August 2, 2014		29,204		$	120,060	$	4,078		$	208,468		$	332,606


	Common Stock					Accumulated Other Comprehensive			Retained
	Shares			Amount		Income			Earnings			Total
Balance at February 2, 2013		30,114		$	108,360	$	6,010		$	189,051		$	303,421
Net income		—			—		—			7,237			7,237
Other comprehensive loss, net		—			—		(2,772	)		—			(2,772	)
Issuance and exercise of stock-based compensation, including net tax benefit of $1,168		302			2,044		—			—			2,044
Stock-based compensation expense		—			3,165		—			—			3,165
Repurchase of common stock		(165	)		—		—			(3,680	)		(3,680	)

Balance at August 3, 2013		30,251		$	113,569	$	3,238		$	192,608		$	309,415

See accompanying notes to condensed consolidated financial statements

ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	August 2, 2014			August 3, 2013
Cash flows from operating activities:
Net income	$	9,952		$	7,237
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		14,099			12,694
Deferred taxes		(3,659	)		(1,384	)
Stock-based compensation expense		2,106			3,165
Excess tax benefit from stock-based compensation		(474	)		(1,168	)
Other		251			282
Changes in operating assets and liabilities:
Receivables		(5,641	)		(5,457	)
Inventories		(32,791	)		(36,064	)
Prepaid expenses and other		(5,685	)		(3,057	)
Trade accounts payable		47,953			35,315
Accrued payroll and payroll taxes		320			(1,344	)
Income taxes payable		(3,255	)		(6,415	)
Deferred rent and tenant allowances		6,523			5,263
Other liabilities		816			809

Net cash provided by operating activities		30,515			9,876

Cash flows from investing activities:
Additions to fixed assets		(18,301	)		(14,505	)
Purchases of marketable securities and other investments		(36,547	)		(38,991	)
Sales and maturities of marketable securities and other investments		41,762			47,760

Net cash used in investing activities		(13,086	)		(5,736	)

Cash flows from financing activities:
Proceeds from revolving credit facilities		2,044			—
Payments on long-term debt and revolving credit facilities		(1,040	)		(153	)
Repurchase of common stock		(19,557	)		(4,310	)
Proceeds from exercise of stock-based compensation, net of withholding tax payments		2,997			876
Excess tax benefit from stock-based compensation		474			1,168

Net cash used in financing activities		(15,082	)		(2,419	)

Effect of exchange rate changes on cash and cash equivalents		56			(202	)
Net increase in cash and cash equivalents		2,403			1,519
Cash and cash equivalents, beginning of period		19,634			17,579

Cash and cash equivalents, end of period	$	22,037		$	19,098

Supplemental disclosure on cash flow information:
Cash paid during the period for income taxes	$	12,840		$	12,428
Accrual for purchases of fixed assets		6,929			7,514

See accompanying notes to condensed consolidated financial statements

ZUMIEZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business—Zumiez Inc., including its wholly owned subsidiaries, (the “Company,” “we,” “us,” “its” and “our”) is a leading multi-channel specialty retailer of action sports related apparel, footwear, accessories and hardgoods, focusing on skateboarding, snowboarding, surfing, motocross and bicycle motocross for young men and women. At August 2, 2014, we operated 582 stores; 535 in the United States (“U.S.”), 33 in Canada and 14 in Europe. We operate under the names Zumiez and Blue Tomato. Additionally, we operate ecommerce websites at www.zumiez.com and www.blue-tomato.com.

Fiscal Year—We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. The six months ended August 2, 2014 and August 3, 2013 were 26-week periods.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

In our opinion, the unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheets, operating results and cash flows for the periods presented.

The financial data at February 1, 2014 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 1, 2014, and should be read in conjunction with the audited consolidated financial statements and notes thereto. Interim results are not necessarily indicative of results for the full fiscal year due to seasonality and other factors.

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. Actual results could differ from these estimates and assumptions.

Segment Reporting—We identify our operating segments according to how our business activities are managed and evaluated. Our operating segments have been aggregated and are reported as one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers and economic characteristics.

Recent Accounting Standards—In June 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The guidance allows for a prospective adoption to all awards granted or modified after the effective date or retrospective adoption to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statement and to all new or modified awards thereafter. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. We early adopted this guidance for the fiscal quarter ended August 2, 2014 and the adoption did not have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard allows for a full retrospective approach to transition or a modified retrospective approach. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We will adopt this guidance for the fiscal quarter ending April 29, 2017. We are currently evaluating the method of adoption we plan to use and the effect the standard is expected to have on our financial position, results of operations and cash flows.

In April 2014, the FASB issued guidance that changes the criteria for reporting discontinued operations, as well as requiring new disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued operations reporting. This guidance is effective for fiscal years beginning after December 15, 2014, with early adoption permitted for disposals that have not been reported in financial statements previously issued. We will adopt this guidance for the fiscal quarter ending May 2, 2015 and we do not expect the adoption will have a material impact on our condensed consolidated financial statements.

2. Business Combination

Blue Tomato—On July 4, 2012, we acquired 100% of the outstanding stock of Blue Tomato for cash consideration of 59.5 million Euros ($74.8 million). Blue Tomato is a leading European multi-channel retailer for board sports and related apparel and footwear and the acquisition allows us to enter into the European marketplace. In addition, there is the possibility of future incentive payments to the sellers and certain employees of Blue Tomato in an aggregate amount of up to 22.1 million Euros ($29.6 million, using the exchange rate as of August 2, 2014) to the extent that certain financial metrics are met for the fiscal year ending April 30, 2015 and the sellers and certain employees remain employed with Blue Tomato through April 30, 2015. Of the 22.1 million Euros future incentive payments, 17.1 million Euros ($22.9 million) is payable in cash, while 5.0 million Euros ($6.7 million) is payable in shares of our common stock. We account for the estimated future incentive payments as compensation expense, which is included in selling, general and administrative expense on the condensed consolidated statements of income, and recognize this amount ratably over the term of service through April 2015. At August 2, 2014, we estimated we will not be obligated for future incentive payments. For the three and six months ended August 3, 2013, we recorded an expense for future incentive payments of $1.0 million and $2.1 million based on our previous estimates.

3. Cash, Cash Equivalents and Marketable Securities

The following tables summarize the estimated fair value of our cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):


	August 2, 2014
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	20,480	$	—	$	—		$	20,480
Money market funds		1,557		—		—			1,557

Total cash and cash equivalents		22,037		—		—			22,037

Marketable securities:
State and local government securities		75,654		88		(194	)		75,548
Variable-rate demand notes		16,685		—		—			16,685

Total marketable securities	$	92,339	$	88	$	(194	)	$	92,233

Less: Long-term marketable securities (1)									(825	)

Total current marketable securities								$	91,408


	February 1, 2014
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	17,973	$	—	$	—		$	17,973
Money market funds		1,211		—		—			1,211
State and local government securities		450		—		—			450

Total cash and cash equivalents		19,634		—		—			19,634

Marketable securities:
State and local government securities		72,968		64		(191	)		72,841
Variable-rate demand notes		25,505		—		—			25,505

Total marketable securities	$	98,473	$	64	$	(191	)	$	98,346

Less: Long-term marketable securities (1)									(825	)

Total current marketable securities								$	97,521

(1)	At August 2, 2014 and February 1, 2014, we held one auction rate security, classified as available-for-sale marketable securities and included in long-term other assets on the condensed consolidated balance sheets.

All of our available-for-sale securities, excluding our auction rate security, have an effective maturity date of two years or less and may be liquidated, at our discretion, prior to maturity.

The following tables summarize the gross unrealized holding losses and fair value for investments in an unrealized loss position, and the length of time that individual securities have been in a continuous loss position (in thousands):


	August 2, 2014
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Marketable securities:
State and local government securities		20,081		(16	)		2,819		(178	)		22,900		(194	)

Total marketable securities	$	20,081	$	(16	)	$	2,819	$	(178	)	$	22,900	$	(194	)


	February 1, 2014
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Marketable securities:
State and local government securities		26,637		(15	)		2,081		(176	)		28,718		(191	)

Total marketable securities	$	26,637	$	(15	)	$	2,081	$	(176	)	$	28,718	$	(191	)

We did not record a realized loss for other-than-temporary impairments during the six months ended August 2, 2014 or August 3, 2013.

4. Commitments and Contingencies

Leases—We lease our stores and certain corporate and other operating facilities under operating leases. Total rent expense is as follows (in thousands):


	Three Months Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Minimum rent expense	$	15,441	$	13,498	$	30,198	$	26,407
Contingent rent expense		316		378		669		681

Total rent expense (1)	$	15,757	$	13,876	$	30,867	$	27,088

(1)

Total rent expense does not include real estate taxes, insurance, common area maintenance charges and other executory costs, which were $8.6 million and $17.1 million for the three and six months ended August 2, 2014 and $7.9 million and $15.5 million for the three and six months ended August 3, 2013.

A majority of our leases provide for ongoing co-tenancy requirements or early cancellation clauses that would further lower rental rates, or permit lease terminations, or both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent and a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold, as well as real estate taxes, insurance, common area maintenance charges and other executory costs. Future minimum lease payments at August 2, 2014 are as follows (in thousands):


Fiscal 2014	$	29,337
Fiscal 2015		57,659
Fiscal 2016		55,498
Fiscal 2017		51,143
Fiscal 2018		45,337
Thereafter		159,857

Total (1)	$	398,831

(1)	Amounts in the table do not include contingent rent and real estate taxes, insurance, common area maintenance charges and other executory costs obligations.

Purchase Commitments—At August 2, 2014, we had outstanding purchase orders to acquire merchandise from vendors of $154.8 million. We have an option to cancel these commitments with no notice prior to shipment, except for certain private label and international purchase orders in which we are obligated to repay contractual amounts upon cancellation.

Litigation—We are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We have made accruals with respect to these matters, where appropriate, which are reflected in our condensed consolidated financial statements. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. We may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if we believe settlement is in the best interest of our shareholders.

On February 15, 2013, a putative class action lawsuit, Robert Steele v. Zumiez Inc., was filed against the Company in the Superior Court of the State of California, County of San Francisco. The lawsuit purports to be brought on behalf of a class of all persons who are employed, or who have worked as, assistant store managers for the Company in the State of California from February 15, 2009 through the date of certification of the class in the lawsuit. The lawsuit alleges causes of action for failure to pay overtime wages, failure to pay wages for work done off-the-clock, failure to provide meal periods and rest breaks (and to pay meal and rest period premiums), failure to pay terminated employees all wages due at the time of termination, failure to provide employees with accurate itemized wage statements, failure to reimburse employees for business expenses and unfair business practices and declaratory relief. The Court has not set a date for a hearing on class certification and has not set a trial date. A second putative class action lawsuit, Ruben Hernandez v. Zumiez Inc., was filed on September 3, 2013, alleging overlapping causes of action. On or about October 22, 2013, the class action allegations for the Hernandez case were dismissed without prejudice. On November 12, 2013, the parties in the Steele case agreed to a conditional settlement in the amount of $1.3 million which is contingent upon the preliminary and final approval of the Court (the “Conditional Settlement”). The parties have negotiated and executed a formal settlement agreement that is subject to the Court’s approval. A motion for preliminary approval of the settlement was held on May 22, 2014 and was granted by the Court. On September 10, 2014, a hearing will be held for final approval of the settlement. The settlement was recorded in selling, general and administrative expenses on the condensed consolidated statements of income for the fiscal year ended February 1, 2014.

Insurance Reserves—We use a combination of third-party insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability and employee-related health care benefits. We maintain reserves for our self-insured losses, which are estimated based on historical claims experience and actuarial and other assumptions. The self-insurance reserve at August 2, 2014 and February 1, 2014 was $2.3 million and $1.7 million.

5. Fair Value Measurements

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•

Level 1— Quoted prices in active markets for identical assets or liabilities;

•

Level 2— Quoted prices for similar assets or liabilities in active markets or inputs that are observable; and

•

Level 3— Inputs that are unobservable.

The following tables summarize assets measured at fair value on a recurring basis (in thousands):


	August 2, 2014
	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	1,557	$	—	$	—
Marketable securities:
State and local government securities		—		74,723		—
Variable-rate demand notes		—		16,685		—
Long-term other assets:
Money market funds		2,210		—		—
State and local government securities		—		—		825

Total	$	3,767	$	91,408	$	825


	February 1, 2014
	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	1,211	$	—	$	—
State and local government securities		—		450		—
Marketable securities:
State and local government securities		—		72,016		—
Variable-rate demand notes		—		25,505		—
Long-term other assets:
State and local government securities		—		—		825

Total	$	1,211	$	97,971	$	825

The Level 2 marketable securities primarily include state and local municipal securities and variable-rate demand notes. Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use readily observable market data that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. We review the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believe that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. We monitor security-specific valuation trends and we make inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing.

There were no material assets measured at fair value on a nonrecurring basis for the six months ended August 2, 2014 and August 3, 2013.

6. Stockholders’ Equity

Share Repurchase—In December 2013, the Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $30.0 million of outstanding common stock. The December 2013 stock repurchase program was completed in April 2014. In March 2014, the Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $30.0 million of outstanding common stock through the fiscal year ending January 31, 2015.

The following table summarizes common stock repurchase activity during the six months ended August 2, 2014 (in thousands except average price per repurchased shares):


Number of shares repurchased		758
Average price per share of repurchased shares (with commission)	$	23.03
Total cost of shares repurchased	$	17,445

At August 2, 2014, there remains $27.2 million available to repurchase shares under the share repurchase program.

Accumulated Other Comprehensive Income—The component of accumulated other comprehensive income and the adjustments to other comprehensive income for amounts reclassified from accumulated other comprehensive income into net income is as follows (in thousands):


	Foreign currency translation adjustments			Net unrealized gains (losses) on available-for-sale investments			Accumulated other comprehensive income
Three months ended August 2, 2014:
Balance at May 3, 2014	$	7,083		$	(72	)	$	7,011
Other comprehensive loss, net (1)		(2,937	)		4			(2,933	)

Balance at August 2, 2014	$	4,146		$	(68	)	$	4,078

Three months ended August 3, 2013:
Balance at May 4, 2013	$	2,616		$	(28	)	$	2,588
Other comprehensive income before reclassifications, net of tax (1)		760			(123	)		637
Reclassifications recorded in:
Other income (expense), net		—			18			18
Provision for income taxes		—			(5	)		(5	)

Total reclassifications from accumulated other comprehensive income, net of taxes		—			13			13

Other comprehensive income, net		760			(110	)		650

Balance at August 3, 2013	$	3,376		$	(138	)	$	3,238


	Foreign currency translation adjustments			Net unrealized gains (losses) on available-for-sale investments			Accumulated other comprehensive income
Six months ended August 2, 2014:
Balance at February 1, 2014	$	4,790		$	(80	)	$	4,710
Other comprehensive loss, net (1)		(644	)		12			(632	)

Balance at August 2, 2014	$	4,146		$	(68	)	$	4,078

Six months ended August 3, 2013:
Balance at February 2, 2013	$	6,021		$	(11	)	$	6,010
Other comprehensive loss before reclassifications, net of tax (1)		(2,645	)		(132	)		(2,777	)
Reclassifications recorded in:
Other income (expense), net		—			4			4
Provision for income taxes		—			1			1

Total reclassifications from accumulated other comprehensive income, net of taxes		—			5			5

Other comprehensive loss, net		(2,645	)		(127	)		(2,772	)

Balance at August 3, 2013	$	3,376		$	(138	)	$	3,238

(1)

Other comprehensive income (loss) before reclassifications is net of immaterial taxes for the three and six months ended August 2, 2014 and August 3, 2013 for both net unrealized gains (losses) on available-for-sale investments and accumulated other comprehensive income. Foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in our international subsidiaries.

7. Equity Awards

We maintain several equity incentive plans under which we may grant incentive stock options, nonqualified stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights to employees (including officers), non-employee directors and consultants.

We account for stock-based compensation by recording the estimated fair value of stock-based awards granted as compensation expense over the vesting period, net of estimated forfeitures. Stock-based compensation expense is attributed to earnings using an accelerated method for stock options and a straight-line method for restricted stock. We estimate forfeitures of stock-based awards based on historical experience and expected future activity.

The fair value of restricted stock awards is measured based on the closing price of our common stock on the date of grant. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to estimate the fair value of stock options granted:


	Six Months Ended
	August 2, 2014			August 3, 2013
Dividend yield		0.0	%		0.0	%
Volatility rate		63.7	%		66.4	%
Weighted-average expected life (in years)		6.3			6.3
Weighted-average risk-free interest rate		1.9	%		1.1	%
Weighted-average fair value per share of stock options granted	$	15.26		$	15.07

Total stock-based compensation expense is recognized on our condensed consolidated income statements as follows (in thousands):


	Three Months Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Cost of goods sold	$	271	$	271	$	515	$	485
Selling, general and administrative expenses		887		1,381		1,591		2,680

Total stock-based compensation expense	$	1,158	$	1,652	$	2,106	$	3,165

At August 2, 2014, there was $7.9 million of total unrecognized compensation cost related to unvested stock options and restricted stock. This cost has a weighted-average recognition period of 1.2 years.

The following table summarizes restricted stock activity (in thousands except grant date weighted-average fair value):


	Restricted Stock			Grant Date Weighted- Average Fair Value		Intrinsic Value (1)
Outstanding at February 1, 2014		361		$	26.91
Granted		172		$	25.59
Vested		(150	)	$	26.36
Forfeited		(21	)	$	27.21

Outstanding at August 2, 2014		362		$	26.49	$	10,219

(1)	Intrinsic value for restricted stock is defined as the market value of the outstanding restricted stock on the last business day of the quarter.

The following table summarizes stock option activity (in thousands except grant date weighted-average exercise price and weighted-average remaining contractual life):


	Stock Options			Grant Date Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in Years)		Intrinsic Value (1)
Outstanding at February 1, 2014		691		$	19.86
Granted		31		$	25.49
Exercised		(185	)	$	15.57
Forfeited		(27	)	$	27.40

Outstanding at August 2, 2014		510		$	21.35		4.1	$	4,553

Exercisable at August 2, 2014		433		$	20.47		3.3	$	4,373

(1)	Intrinsic value for stock options is defined as the difference between the market price of our common stock on the last business day of the quarter and the weighted average exercise price of in-the-money options outstanding at the end of the quarter.

8. Earnings per Share, Basic and Diluted

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Net income	$	7,456	$	4,739	$	9,952	$	7,237
Weighted average common shares for basic earnings per share		28,776		29,842		28,819		29,770
Dilutive effect of stock options and restricted stock		281		390		363		451

Weighted average common shares for diluted earnings per share		29,057		30,232		29,182		30,221

Basic earnings per share	$	0.26	$	0.16	$	0.35	$	0.24

Diluted earnings per share	$	0.26	$	0.16	$	0.34	$	0.24

Total anti-dilutive common stock options not included in the calculation of diluted earnings per share were 0.2 million for the three and six months ended August 2, 2014 and 0.2 million and 0.3 million for the three and six months ended August 3, 2013.

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in “Item 1A Risk Factors” in our Form 10-K filed with the SEC on March 18, 2014 and in this Form 10-Q.

Forward-looking statements relate to our expectations for future events and future financial performance. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described below under the heading “Risk Factors” and in “Item 1A Risk Factors” of our Form 10-K referred to in the preceding paragraph. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

Fiscal 2014 is the 52-week period ending January 31, 2015. Fiscal 2013 was the 52-week period ending February 1, 2014. The first six months of fiscal 2014 was the 26-week period ended August 2, 2014. The first six months of fiscal 2013 was the 26-week period ended August 3, 2013.

“Zumiez,” the “Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.

General

Net sales constitute gross sales (net of actual and estimated returns and deductions for promotions) and shipping revenue. Net sales include our store sales and our ecommerce sales. Net sales are allocated between store and ecommerce based on the location where the sale is fulfilled, which does not always represent where the customer originated the sale. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in net sales after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.

We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce businesses which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any change in square footage of an existing comparable store, including remodels and relocations, does not eliminate that store from inclusion in the calculation of comparable sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.

Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products.

With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.

Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Key Performance Indicators

Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:

Comparable sales. As previously described in detail under the caption “General,” comparable sales provide a measure of sales growth for stores and ecommerce businesses open at least one year over the comparable prior year period.

We consider comparable sales to be an important indicator of our current performance. Comparable sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Comparable sales also have a direct impact on our total net sales, operating profit, cash and working capital.

Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are comparable sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.

Results of Operations

The following table presents selected items on the condensed consolidated statements of income as a percent of net sales:


	Three Months Ended						Six Months Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		65.5			65.1			67.2			66.3

Gross profit		34.5			34.9			32.8			33.7
Selling, general and administrative expenses		27.9			29.9			28.3			29.8

Operating profit		6.6			5.0			4.5			3.9
Interest and other income, net		0.2			0.0			0.2			0.0

Earnings before income taxes		6.8			5.0			4.7			3.9
Provision for income taxes		2.6			2.0			1.8			1.5

Net income		4.2	%		3.0	%		2.9	%		2.4	%

Three Months (13 weeks) Ended August 2, 2014 Compared With Three Months (13 weeks) Ended August 3, 2013

Net Sales

Net sales were $176.7 million for the three months ended August 2, 2014 compared to $157.9 million for the three months ended August 3, 2013, an increase of $18.8 million or 11.9%. The increase reflected the net addition of 53 stores (58 new stores offset by five store closures) subsequent to August 3, 2013 and a comparable sales increase of 3.4% for the three months ended August 2, 2014.

The 3.4% increase in comparable sales was a result of a 22.2% increase in our comparable ecommerce sales and a 1.5% increase in our comparable store sales. Total ecommerce sales represented 9.6% of net sales for the three months ended August 2, 2014, compared to 8.8% of net sales for the three months ended August 3, 2013. The increase in comparable sales was

primarily driven by an increase in comparable transactions and an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction and an increase in average unit retail. Comparable sales increases in accessories, hardgoods, men’s clothing and junior’s clothing were partially offset by comparable sales decreases in footwear and boy’s clothing. For information as to how we define comparable sales, see “General” above.

Gross Profit

Gross profit was $60.9 million for the three months ended August 2, 2014 compared to $55.1 million for the three months ended August 3, 2013, an increase of $5.8 million, or 10.5%. As a percent of net sales, gross profit decreased 40 basis points for the three months ended August 2, 2014 to 34.5%. The decrease was primarily driven by a 60 basis points decrease in our product margin, partially offset by efficiencies in our supply chain.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $49.3 million for the three months ended August 2, 2014 compared to $47.3 million for the three months ended August 3, 2013, an increase of $2.0 million, or 4.3%. SG&A expenses as a percent of net sales decreased by 200 basis points for the three months ended August 2, 2014 to 27.9%. The decrease was primarily driven by a 100 basis points impact due to the leveraging of our corporate costs, a 70 basis points impact of expense recorded in the three months ended August 3, 2013 associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, as we did not record an expense associated with the future incentive payments in the three months ended August 2, 2014, and a 30 basis points impact due to the leveraging of our store operating expenses.

Provision for Income Taxes

Our effective income tax rate for the three months ended August 2, 2014 was 37.6% compared to 39.4% for the three months ended August 3, 2013. The decrease in the effective tax rate was primarily driven by the impact of non-taxable acquisition related expenses incurred in the three months ended August 3, 2013, a reduction of state and local income taxes and the impact of the valuation allowance related to net operating losses and other deferred tax assets of foreign subsidiaries recorded in the three months ended August 3, 2013.

Net Income

Net income for the three months ended August 2, 2014 was $7.5 million, or $0.26 per diluted share, compared with net income of $4.7 million, or $0.16 per diluted share, for the three months ended August 3, 2013.

Six Months (26 weeks) Ended August 2, 2014 Compared With Six Months (26 weeks) Ended August 3, 2013

Net Sales

Net sales were $339.6 million for the six months ended August 2, 2014 compared to $306.4 million for the six months ended August 3, 2013, an increase of $33.2 million or 10.9%. The increase reflected the net addition of 53 stores (58 new stores offset by five store closures) subsequent to August 3, 2013 and a comparable sales increase of 2.6% for the six months ended August 2, 2014.

The 2.6% increase in comparable sales was a result of a 18.0% increase in our comparable ecommerce sales and a 0.8% increase in our comparable store sales. Total ecommerce sales represented 10.9% of net sales for the six months ended August 2, 2014, compared to 10.2% of net sales for the six months ended August 3, 2013. The increase in comparable sales was primarily driven by an increase in comparable transactions and an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction, partially offset by a decrease in average unit retail. Comparable sales increases in accessories, hardgoods, junior’s clothing and men’s clothing were partially offset by comparable sales decreases in footwear and boy’s clothing. For information as to how we define comparable sales, see “General” above.

Gross Profit

Gross profit was $111.4 million for the six months ended August 2, 2014 compared to $103.1 million for the six months ended August 3, 2013, an increase of $8.3 million, or 8.1%. As a percent of net sales, gross profit decreased 90 basis points for the six months ended August 2, 2014 to 32.8%. The decrease was primarily driven by a 90 basis points decrease in our product margin.

Selling, General and Administrative Expenses

SG&A expenses were $96.1 million for the six months ended August 2, 2014 compared to $91.2 million for the six months ended August 3, 2013, an increase of $4.9 million, or 5.4%. SG&A expenses as a percent of net sales decreased by 150 basis points for the six months ended August 2, 2014 to 28.3%. The decrease was primarily driven by a 70 basis points impact of expense recorded in the six months ended August 3, 2013 associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, as we did not record an expense associated with the future incentive payments in the six months ended August 2, 2014, and a 60 basis points impact due to the leveraging of our corporate costs.

Provision for Income Taxes

Our effective income tax rate for the six months ended August 2, 2014 was 37.5% compared to 39.3% for the six months ended August 3, 2013. The decrease in the effective tax rate was primarily driven by the impact of non-taxable acquisition related expenses incurred in the six months ended August 3, 2013, a reduction of state and local income taxes and the impact of the valuation allowance related to net operating losses and other deferred tax assets of foreign subsidiaries recorded in the six months ended August 3, 2013.

Net Income

Net income for the six months ended August 2, 2014 was $10.0 million, or $0.34 per diluted share, compared with net income of $7.2 million, or $0.24 per diluted share, for the six months ended August 3, 2013.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures, inventory purchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Additionally, we may use cash for the repurchase of our common stock. Historically, our main source of liquidity has been cash flows from operations.

The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable, accrued payroll and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.

Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. In that regard, our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future.

During fiscal 2014, we expect to spend approximately $38 million to $40 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the 56 new stores we plan to open in fiscal 2014 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2014 will not be different from the number of stores we plan to open, or that actual fiscal 2014 capital expenditures will not differ from this expected amount.

Operating Activities

Net cash provided by operating activities increased by $20.6 million to $30.5 million for the six months ended August 2, 2014 from $9.9 million for the six months ended August 3, 2013. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and excess tax benefit from stock-based compensation, and changes to the components of working capital.

Investing Activities

Net cash used in investing activities was $13.1 million for the six months ended August 2, 2014, related to $18.3 million of capital expenditures primarily for new store openings and existing store remodels or relocations, partially offset by $5.2 million in net sales of marketable securities. Net cash used in investing activities was $5.7 million for the six months ended August 3, 2013, related to $14.5 million of capital expenditures primarily for new store openings and existing store remodels or relocations, partially offset by $8.8 million in net sales of marketable securities.

Financing Activities

Net cash used in financing activities for the six months ended August 2, 2014 was $15.1 million, primarily related to $19.6 million cash paid for the repurchase of common stock, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $3.5 million. Net cash used in financing activities for the six months ended August 3, 2013 was $2.4 million, primarily related to $4.3 million cash paid for the repurchase of common stock, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $2.0 million.

Sources of Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which provides us with a secured revolving credit facility until September 1, 2016 of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion. The secured revolving credit facility provides for the issuance of a standby letter of credit in an amount not to exceed $5.0 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of a commercial letter of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. There were no borrowings outstanding under the secured revolving credit facility at August 2, 2014 and February 1, 2014. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.5 million and $0.3 million at August 2, 2014 and February 1, 2014. The secured revolving credit facility bears interest either at a fluctuating rate per annum equal to 1% above the Daily Three Month LIBOR rate or at a fixed rate of 1% above LIBOR in effect on the first day of an applicable fixed rate term.

Additionally, we have revolving lines of credit of up to 9.0 million Euro and other long-term debt, the proceeds of which are used to fund certain international operations. There was $1.1 million of borrowings outstanding under these revolving lines of credit at August 2, 2014 and no borrowings outstanding at February 1, 2014. The amount of borrowings under the other long-term debt was $1.8 million and $1.9 million at August 2, 2014 and February 1, 2014.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Contractual Obligations and Commercial Commitments

There were no material changes outside the ordinary course of business in our contractual obligations during the three months ended August 2, 2014. The following table summarizes the total amount of future payments due under our contractual obligations at August 2, 2014 (in thousands):


	Total		Fiscal 2014		Fiscal 2015 and Fiscal 2016		Fiscal 2017 and Fiscal 2018		Thereafter
Operating lease obligations (1)	$	398,831	$	29,337	$	113,157	$	96,480	$	159,857
Purchase obligations (2)		154,847		154,847		—		—		—
Debt principal and interest (3)		3,000		1,324		629		491		556

Total (4)	$	556,678	$	185,508	$	113,786	$	96,971	$	160,413

(1)

Amounts do not include contingent rent and real estate taxes, insurance, common area maintenance charges and other executory costs obligations. See Note 4, “Commitments and Contingencies,” in the Notes to Condensed Consolidated Financial Statements found in Item 1 of this Form 10-Q, for additional information related to our operating leases.

(2)	We have an option to cancel these commitments with no notice prior to shipment, except for certain private label purchase orders in which we are obligated to repay contractual amounts upon cancellation.

(3)	Amounts include long-term debt principal and scheduled interest payments and borrowings outstanding under our revolving lines of credit.

(4)

The table above excludes the potential future incentive payments to the sellers and certain employees of Blue Tomato in an aggregate amount of up to 22.1 million Euros ($29.6 million, using the exchange rate as of August 2, 2014) to the extent that certain financial metrics are met and the sellers and certain employees remain employed with Blue Tomato through April 2015. At August 2, 2014, we estimated that we will not be obligated for future incentive payments. See Note 2, “Business Combination,” in the Notes to Condensed Consolidated Financial Statements found in Item 1 of this Form 10-Q, for additional information related to the future incentive payments. Also excluded from the table above are unrecognized tax benefits of $0.3 million, as we are unable to reasonably estimate the timing of future cash payments, if any, for these liabilities.

Off-Balance Sheet Arrangements

At August 2, 2014, we did not have any off-balance sheet arrangements.

Impact of Inflation/Deflation

We do not believe that inflation has had a material impact on our net sales or operating results for the past three fiscal years. However, substantial increases in costs, including the price of raw materials, labor, energy and other inputs used in the production of our merchandise, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and operating results.

Risk Factors

Investing in our securities involves a high degree of risk. The following risk factors, issues and uncertainties should be considered in evaluating our future prospects. In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.

Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in customer traffic in those malls could cause our sales to be less than expected.

In order to generate customer traffic we depend heavily on locating many of our stores in prominent locations within successful shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of a mall’s other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. Our sales volume and mall traffic generally may be adversely affected by, among other things, economic downturns in a particular area, competition from ecommerce retailers, non-mall retailers and other malls, increases in

gasoline prices and the closing or decline in popularity of other stores in the malls in which we are located. An uncertain economic outlook could curtail new shopping mall development, decrease shopping mall traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely. A reduction in mall traffic as a result of these or any other factors could have a material adverse effect on our business, results of operations and financial condition.

Our growth strategy depends on our ability to open and operate new stores each year, which could strain our resources and cause the performance of our existing stores to suffer.

Our growth largely depends on our ability to open and operate new stores successfully. However, our ability to open new stores is subject to a variety of risks and uncertainties, and we may be unable to open new stores as planned, and any failure to successfully open and operate new stores could have a material adverse effect on our results of operations. We intend to continue to open new stores in future years while remodeling a portion of our existing store base annually. In addition, our proposed expansion will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores and our overall business. To the extent our new store openings are in markets where we already have stores, we may experience reduced net sales in existing stores in those markets. In addition, successful execution of our growth strategy may require that we obtain additional financing, and we cannot assure you that we will be able to obtain that financing on acceptable terms or at all.

In addition, we plan to open new stores in regions of the U.S. or international locations in which we currently have few, or no, stores. The expansion into these markets may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business and results of operations.

Failure to successfully integrate any businesses or stores that we acquire could have an adverse impact on our results of operations and financial performance.

We may, from time to time, acquire other retail stores or businesses, such as our acquisition of Blue Tomato, a leading European multi-channel retailer for board sports and related apparel and footwear, which was completed in fiscal 2012. We may experience difficulties in integrating any stores or businesses we may acquire, including their facilities, personnel, financial systems, distribution, operations and general operating procedures, and any such acquisitions may also result in the diversion of our capital and our management’s attention from other business issues and opportunities. If we experience difficulties in integrating acquisitions or if such acquisitions do not provide the benefits that we expect to receive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and overall financial performance.

Our plans for international expansion include risks that could have a negative impact on our results of operations.

In fiscal 2011, we opened our first store locations in Canada and we plan to continue to open new stores in Canada. During fiscal 2012, we acquired Blue Tomato, which operates primarily in the European market, and we plan to open new stores in Europe in the future. We may continue to expand internationally, either organically, or through additional acquisitions. International markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing U.S. market. As a result, operations in international markets may be less successful than our operations in the U.S. Additionally, consumers in international markets may not be familiar with our brands, and we may need to build brand awareness in the markets. Furthermore, we have limited experience with the legal and regulatory environments and market practices outside of the U.S. and cannot guarantee that we will be able to penetrate or successfully operate in international markets. We also expect to incur additional costs in complying with applicable foreign laws and regulations as they pertain to both our products and our operations.

Additionally, the results of operations of our international subsidiaries are exposed to foreign exchange rate fluctuations. Upon translation, operating results may differ materially from expectations. As we expand our international operations, our exposure to exchange rate fluctuations will increase.

Our business is dependent upon our being able to anticipate, identify and respond to changing fashion trends, customer preferences and other fashion-related factors; failure to do so could have a material adverse effect on us.

Customer tastes and fashion trends in the action sports lifestyle market are volatile and tend to change rapidly. Our success depends on our ability to effectively anticipate, identify and respond to changing fashion tastes and consumer preferences, and to translate market trends into appropriate, saleable product offerings in a timely manner. If we are unable to successfully anticipate, identify or respond to changing styles or trends and misjudge the market for our products or any new product lines,

our sales may be lower than predicted and we may be faced with a substantial amount of unsold inventory or missed opportunities. In response to such a situation, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our results of operations.

The current uncertainty surrounding the U.S. and global economies, including the European economy, coupled with cyclical economic trends in action sports retailing could have a material adverse effect on our results of operations.

The action sports retail industry historically has been subject to substantial cyclicality. As the U.S. and global economic conditions change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. When discretionary consumer spending is reduced, purchases of action sports apparel and related products may decline. The current uncertainty in the U.S. and global economies and increased government debt may have a material adverse impact on our results of operations and financial position.

Because of this cycle, we believe the “value” message has become more important to consumers. As a retailer that sells approximately 80% to 85% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers.

Our sales and inventory levels fluctuate on a seasonal basis, leaving our operating results particularly susceptible to changes in back-to-school and winter holiday shopping patterns. Accordingly, our quarterly results of operations are volatile and may fluctuate significantly.

Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back-to-school and winter holiday shopping seasons. Sales during these periods cannot be used as an accurate indicator of annual results. As a result of this seasonality, any factors negatively affecting us during the last half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations for the entire year. In addition, in order to prepare for the back-to-school and winter holiday shopping seasons, we must order and keep in stock significantly more merchandise than we carry during other times of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, results of operations and financial condition.

Our quarterly results of operations are affected by a variety of other factors, including:

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the timing of new store openings and the relative proportion of our new stores to mature stores;

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whether we are able to successfully integrate any new stores that we acquire and the presence of any unanticipated liabilities in connection therewith;

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fashion trends and changes in consumer preferences;

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calendar shifts of holiday or seasonal periods;

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changes in our merchandise mix;

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timing of promotional events;

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general economic conditions and, in particular, the retail sales environment;

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actions by competitors or mall anchor tenants;

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weather conditions;

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the level of pre-opening expenses associated with our new stores; and

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inventory shrinkage beyond our historical average rates.

Significant fluctuations and volatility in the price of cotton, foreign labor costs and other raw materials used in the production of our merchandise may have a material adverse effect on our business, results of operations and financial conditions.

Increases in the cost of cotton, other raw materials, foreign labor costs and transportation costs used in the production of our merchandise can result in higher costs in the price we pay for this merchandise. The costs for cotton are affected by weather, consumer demand, speculation on the commodities market and other factors that are generally unpredictable and beyond our control. Our gross profit and results of operations could be adversely affected to the extent that the selling prices of our products do not increase proportionately with the increases in the costs of cotton or other materials. Increasing labor costs and oil-related product costs, such as manufacturing and transportation costs, could also adversely impact gross profit. Additionally, significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs, which could also adversely impact gross profit.

Most of our merchandise is produced by foreign manufacturers; therefore, the availability and costs of these products may be negatively affected by risks associated with international trade and other international conditions.

Most of our merchandise is produced by manufacturers around the world. Some of these facilities are located in regions that may be affected by natural disasters, political instability or other conditions that could cause a disruption in trade. Trade restrictions such as increased tariffs or quotas, or both, could also increase the cost and reduce the supply of merchandise available to us. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have a material adverse effect on our results of operations. Although the prices charged by vendors for the merchandise we purchase are primarily denominated in U.S. dollars, a decline in the relative value of the U.S. dollar to foreign currencies could lead to increased merchandise costs, which could negatively affect our competitive position and our results of operations.

Required disclosures regarding conflict minerals could have a negative impact on our results of operations.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of certain minerals (tantalum, tin, gold and tungsten) known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. These new requirements will require continued due diligence efforts and there may be costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our private label merchandise, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. We may also face reputational challenges if we are unable to verify the origins for any or all conflict minerals used in our private label merchandise, or if we are unable to certify that our products are “conflict free.”

Our business is susceptible to weather conditions that are out of our control, including the potential risks of unpredictable weather patterns and any weather patterns associated with naturally occurring global climate change, and the resultant unseasonable weather could have a negative impact on our results of operations.

Our business is susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season (including any weather patterns associated with global warming and cooling) could render a portion of our inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could have a material adverse effect on our business and results of operations.

We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our competitors, our sales could decrease.

The teenage and young adult retail apparel, footwear, accessories and hardgoods industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates and management personnel. Some of our competitors are larger than we are and have substantially greater financial, marketing, including advanced ecommerce marketing capabilities, and other resources than we do. Additionally, some of our competitors may offer more options for free and/or expedited shipping for ecommerce sales. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices and could result in the loss of our customers. Current and increased competition could have a material adverse effect on our business, results of operations and financial condition.

If we fail to maintain good relationships with vendors or if a vendor is otherwise unable or unwilling to supply us with adequate quantities of their products at acceptable prices, our business and financial performance could suffer.

Our business is dependent on continued good relations with our vendors. In particular, we believe that we generally are able to obtain attractive pricing and other terms from vendors because we are perceived as a desirable customer, and deterioration in our relationship with our vendors could have a material adverse effect on our business. There can be no assurance that our

vendors will provide us with an adequate supply or quality of products or acceptable pricing. Our vendors could discontinue selling to us, raise the prices they charge at any time or allow their merchandise to be discounted by other retailers. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. In addition, certain of our vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future. There can be no assurance that such vendors will not decide to discontinue supplying their products to us, supply us only less popular or lower quality items, raise the prices they charge us or focus on selling their products directly. In addition, a number of our vendors are smaller, less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies. These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted. Any inability to acquire suitable merchandise at acceptable prices, or the loss of one or more key vendors, could have a material adverse effect on our business, results of operations and financial condition.

Our ecommerce operations subject us to numerous risks that could have an adverse effect on our results of operations.

Our ecommerce operations subject us to certain risks that could have an adverse effect on our operational results, including:

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diversion of traffic and sales from our stores;

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rapid technological change;

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liability for online content; and

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risks related to the computer systems that operate our website and related support systems, including computer viruses, electronic break-ins and similar disruptions.

In addition, risks beyond our control, such as governmental regulation of ecommerce, entry of our vendors in the ecommerce business in competition with us, online security breaches and general economic conditions specific to ecommerce could have an adverse effect on our results of operations.

If we lose key executives or are unable to attract and retain the talent required for our business, our financial performance could suffer.

Our performance depends largely on the efforts and abilities of our key executives. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth objectives. As our business grows, we will need to attract and retain additional qualified personnel in a timely manner and we may not be able to do so.

Our failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees who understand and appreciate our culture based on a passion for the action sports lifestyle and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber, skills and number needed to fill these positions may be in short supply in some areas, and the employee turnover rate in the retail industry is high. Competition for qualified employees could require us to pay higher wages to attract a sufficient number of suitable employees. If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected. We are also dependent upon temporary personnel to adequately staff our stores and distribution and ecommerce fulfillment centers particularly during busy periods such as the back-to-school and winter holiday seasons. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of temporary personnel. Although none of our employees are currently covered by collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future, which could increase our labor costs and could subject us to the risk of work stoppages and strikes. Any such failure to meet our staffing needs, any material increases in employee turnover rates, any increases in labor costs or any work stoppages, interruptions or strikes could have a material adverse effect on our business or results of operations.

Our business could suffer with the closure or disruption of our home office or our distribution or ecommerce fulfillment centers.

Domestically, we rely on a single distribution center located in Corona, California to receive, store and distribute the vast majority of our merchandise to our domestic stores and we primarily rely on a single ecommerce fulfillment center located in Edwardsville, Kansas to ship merchandise purchased on the www.zumiez.com website. Internationally, we operate a combined distribution and ecommerce fulfillment center located in Graz, Austria that support our Blue Tomato ecommerce and store operations in Europe and we operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores. Additionally, we are headquartered in Lynnwood, Washington. As a result, a natural disaster or other catastrophic event that affects one of the regions where we operate these centers could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.

We are required to make substantial rental payments under our operating leases and any failure to make these lease payments when due could have a material adverse effect on our business and growth plans.

Payments under operating leases account for a significant portion of our operating expenses and has historically been our third largest expense behind cost of sales and our employee related costs. Total rent expense, including contingent rent based on sales of some of our stores, was $30.9 million and $27.1 million for the six months ended August 2, 2014 and August 3, 2013. Total rent expense amounts do not include real estate taxes, insurance, common area maintenance charges and other executory costs, which were $17.1 million and $15.5 million for the six months ended August 2, 2014 and August 3, 2013.

At August 2, 2014, we were committed to property owners for minimum lease payments of $398.8 million. In addition to minimum lease payments, substantially all of our store leases provide for contingent rent payments based on sales of the respective stores, as well as real estate taxes, insurance, common area maintenance charges and other executory costs. These amounts generally escalate each year. We expect that any new stores we open will also be leased by us under operating leases, which will further increase our operating lease expenses and obligations.

Our substantial operating lease obligations could have significant negative consequences, including:

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increasing our vulnerability to general adverse economic and industry conditions;

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limiting our ability to obtain additional financing;

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requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes; and

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limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete, and placing us at a disadvantage with respect to some of our competitors.

We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could have a material adverse effect on our business.

The terms of our primary credit facility impose operating and financial restrictions on us that may impair our ability to respond to changing business and economic conditions. These restrictions could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which provides us with a secured revolving credit facility until September 1, 2016 of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion. The credit agreement contains a number of restrictions and covenants that generally limit our ability to, among other things, (1) incur additional debt, (2) undergo a change in ownership and (3) enter into certain transactions. The credit agreement also contains financial covenants that require us to meet certain specified financial tests and ratios, including, a maximum net income after taxes of not less than one dollar on a trailing four-quarter basis provided, that, there shall be added to net income all charges for impairment of goodwill and other intangibles and up to an aggregate of $5.0 million of store asset impairment, and a minimum quick ratio of 1.25. The quick ratio is defined as our cash plus cash equivalents, marketable securities and accounts receivable divided by the borrowings outstanding. Our accounts receivable and other rights to payment, general intangibles, inventory and equipment have been pledged to secure our obligations under the credit agreement. We must also provide financial information and statements to our lender. We were in compliance with all such covenants at August 2, 2014. There were no borrowings outstanding under the secured revolving credit facility at August 2, 2014 and February 1, 2014. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.5 million and $0.3 million at August 2, 2014 and February 1, 2014.

A breach of any of these restrictive covenants or our inability to comply with the required financial tests and ratios could result in a default under the credit agreement. If a default occurs, the lender may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay borrowings outstanding when due, whether at their maturity or if declared due and payable by the lender following a default, the lender has the right to proceed against the collateral granted to it to secure the indebtedness. As a result, any breach of these covenants or failure to comply with these tests and ratios could have a material adverse effect on us. There can be no assurance that we will not breach the covenants or fail to comply with the tests and ratios in our credit agreement or any other debt agreements we may enter into in the future and, if a breach occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders.

The restrictions contained in our credit agreement could: (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.

Additionally, in the current economic environment, we cannot be assured that our borrowing relationship with our lenders will continue or that our lenders will remain able to support their commitments to us in the future. If our lenders fail to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.

Our business could suffer if a manufacturer fails to use acceptable labor practices.

We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor practices of our vendors and these manufacturers. The violation of labor or other laws by any of our vendors or these manufacturers, or the divergence of the labor practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the U.S., could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. In that regard, most of the products we sell are manufactured overseas, primarily in Asia and Central America, which may increase the risk that the labor practices followed by the manufacturers of these products may differ from those considered acceptable in the U.S.

Additionally, our products are subject to regulation of and regulatory standards set by various governmental authorities with respect to quality and safety. Regulations and standards in this area are currently in place. These regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.

Our failure to adequately anticipate a correct mix of private label merchandise may have a material adverse effect on our business.

Sales from private label merchandise account for approximately 15% to 20% of our net sales and generally carry higher gross margins than our other merchandise. We may take steps to increase the percentage of net sales of private label merchandise in the future, although there can be no assurance that we will be able to achieve increases in private label merchandise sales as a percentage of net sales. Our failure to anticipate, identify and react in a timely manner to fashion trends with our private label merchandise, could have a material adverse effect on our comparable sales, financial condition and results of operations.

If our information systems hardware or software fails to function effectively or does not scale to keep pace with our planned growth, our operations could be disrupted and our financial results could be harmed.

We are continuing to make investments to improve our information systems infrastructure. If our information systems and software do not work effectively, this could adversely impact the promptness and accuracy of our transaction processing, financial accounting and reporting and our ability to manage our business and properly forecast operating results and cash requirements. Additionally, we rely on third-party service providers for certain information systems functions. If a service provider fails to provide the data quality, communications capacity or services we require, the failure could interrupt our services and could have a material adverse effect on our business, financial condition and results of operations. To manage the anticipated growth of our operations and personnel, we may need to continue to improve our operational and financial systems, transaction processing, procedures and controls, and in doing so could incur substantial additional expenses that could impact our financial results.

The security of our databases that contain personal information of our retail customers could be breached, which could subject us to adverse publicity, litigation and expenses. In addition, if we are unable to comply with security standards created by the credit card industry, our operations could be adversely affected.

Database privacy, network security and identity theft are matters of growing public concern. In an attempt to prevent unauthorized access to our network and databases containing confidential, third-party information, we have installed privacy protection systems, devices and activity monitoring on our networks. Nevertheless, if unauthorized parties gain access to our networks or databases, they may be able to steal, publish, delete or modify our private and sensitive third-party information. In such circumstances, we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules and we may be exposed to reputation damage and loss of customers’ trust and business. This could result in costly investigations and litigation, civil or criminal penalties and adverse publicity that could adversely affect our financial condition, results of operations and reputation. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect our retail operations.

Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on our operating results.

We believe that our trademarks and domain names are valuable assets that are critical to our success. The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the Zumiez or Blue Tomato brands, our store concepts, our private label brands or our goodwill and cause a decline in our net sales. Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the U.S., there are certain countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks or at all. Also, the efforts we have taken to protect our trademarks may not be sufficient or effective. Therefore, we may not be able to prevent other persons from using our trademarks or domain names outside of the U.S., which also could adversely affect our business. We are also subject to the risk that we may infringe on the intellectual property rights of third parties. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees. As a result, any such claim could have a material adverse effect on our operating results.

The effects of war or acts of terrorism, or other types of mall violence, could adversely affect our business.

Most of our stores are located in shopping malls. Any threat of terrorist attacks or actual terrorist events, or other types of mall violence, such as shootings in malls, particularly in public areas, could lead to lower customer traffic in shopping malls. In addition, local authorities or mall management could close shopping malls in response to security concerns. Mall closures, as well as lower customer traffic due to security concerns, could result in decreased sales. Additionally, the armed conflicts in the Middle East, or the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales for us. Decreased sales could have a material adverse effect on our business, financial condition and results of operations.

The outcome of litigation could have a material adverse effect on our business, and may result in substantial costs and could divert management’s attention.

We are involved, from time to time, in litigation incidental to our business including complaints filed by investors. This litigation could result in substantial costs, and could divert management’s attention and resources, which could harm our business. Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time. There can be no assurance that the actual outcome of pending or future litigation will not have a material adverse effect on our results of operations or financial condition. Additionally, while we maintain director and officer liability insurance for litigation surrounding investor lawsuits, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured.

Our operations expose us to the risk of litigation, which could lead to significant potential liability and costs that could harm our business, financial condition or results of operations.

We employ a substantial number of full-time and part-time employees, a majority of whom are employed at our store locations. As a result, we are subject to a large number of federal, state and foreign laws and regulations relating to employment. This creates a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. We are also subject to other types of claims in the ordinary course of our business. Some or all of these claims may give rise to litigation, which could be time-consuming for our management team, costly and harmful to our business.

In addition, we are exposed to the risk of class action litigation. The costs of defense and the risk of loss in connection with class action suits are greater than in single-party litigation claims. Due to the costs of defending against such litigation, the size of judgments that may be awarded against us, and the loss of significant management time devoted to such litigation, we cannot assure you that such litigation will not disrupt our business or impact our financial results.

Our failure to comply with federal, state, local or foreign laws, or changes in these laws, could have an adverse impact on our results of operations and financial performance.

Our business is subject to a wide array of laws and regulations. Changes in the regulations, the imposition of additional regulations, or the enactment of any new legislation including those related to health care, taxes, privacy, environmental issues and trade, could adversely affect our results of operations or financial condition.

Our business could be adversely affected by increased labor costs, including costs related to an increase in the minimum wage and new health care laws.

Labor is a primary component in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, employee benefits costs or otherwise, may adversely impact our operating expenses. A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses. Additionally, we are self-insured with respect to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss coverage, which helps limit the cost of large claims. In March 2010, The Patient Protection and Affordable Care Act was enacted requiring employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. The most significant increases in cost will occur in fiscal 2014 and fiscal 2015. We continue to evaluate the impact the new law will have on us, and although we cannot predict with certainty the financial and operational impacts the new law will have, we expect to be required to provide health benefits to more employees than we currently do, which could raise our labor costs. While the majority of these costs will begin in fiscal 2014 and fiscal 2015, there is no assurance that we will be able to absorb and/or pass through the costs of such legislation in a manner that will not adversely impact our results or operations.

We have incurred and will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance.

We completed our initial public offering in May 2005 and we have incurred and could continue to incur significant legal, accounting, insurance and other expenses as a result of being a public company. Rules and regulations implemented by Congress, the SEC and the Nasdaq Global Select Market have required changes in corporate governance practices of public companies. Compliance with these laws could cause us to incur significant costs and expenses, including legal and accounting costs, and could make some compliance activities more time-consuming and negatively impact our financial performance. Additionally, these rules and regulations may make it more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.

Reporting obligations as a public company and our anticipated growth, both domestically and internationally, are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify as to the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting on an annual basis. This process requires us to document our internal controls over financial reporting and to potentially make significant changes thereto, if applicable. As a result, we have incurred and expect to continue to incur substantial expenses to test our financial controls and systems, and we have been and in the future may be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to make such improvements and to hire additional personnel. If our management is ever unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are ever identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital.

Changes to accounting rules or regulations could significantly affect our financial results.

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations, such as changes to lease accounting guidance or a requirement to convert to international financial reporting standards, could negatively affect our results of operations and financial condition through increased cost of compliance.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is traded publicly and various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own independent opinions and can be different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In December 2007, a securities class action litigation and associated derivative lawsuits were brought against us and such actions are frequently brought against other companies following a decline in the market price of their securities. These lawsuits were dismissed with prejudice in March 2009. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

The value of our investments may fluctuate.

We have our excess cash primarily invested in state and local municipal securities and variable-rate demand notes. These investments have historically been considered very safe investments with minimal default rates. At August 2, 2014, we had $91.4 million of investments in state and local government securities and variable-rate demand notes. These securities are not guaranteed by the U.S. government and are subject to additional credit risk based upon each local municipality’s tax revenues and financial stability. As a result, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition.

A decline in the market price of our stock and/or our performance may trigger an impairment of the goodwill and other indefinite-lived intangible assets recorded on the condensed consolidated balance sheets.

Goodwill and other indefinite-lived intangible assets are required to be tested for impairment at least annually or more frequently if management believes indicators of impairment exist. Any reduction in the carrying value of our goodwill or other indefinite-lived intangible assets as a result of our impairment analysis could result in a non-cash impairment charge, which could have a significant impact on our results of operations.

Reduced operating results and cash flows may cause us to incur impairment charges.

We review the carrying value of our fixed assets for impairment whenever events or changes in circumstances indicate that the carrying value of such asset may not be recoverable. The review could result in a non-cash impairment charge related to underperforming stores, which could impact our results of operations.

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

Our market risk profile at August 2, 2014 has not significantly changed since February 1, 2014. Our market risk profile at February 1, 2014 is disclosed in our Annual Report on Form 10-K.

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)). Based on this evaluation, our CEO and CFO concluded that, as of August 2, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) during the quarter ended August 2, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved from time to time in litigation incidental to our business. We are unable to predict the outcome of litigated cases. A court determination in any of litigation actions against us could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

See Note 4 to the Notes to Condensed Consolidated Financial Statements found in Item 1 of this Form 10-Q (listed under “Litigation” under Commitments and Contingencies).

Item 1A.

Risk Factors

Please refer to the Risk Factors set forth in Item 2 of Part I of this Form 10-Q as well as the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended February 1, 2014. There have been no material changes in the risk factors set forth in our Annual Report on Form 10-K for the year ended February 1, 2014.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to purchases of our common stock made during the thirteen weeks ended August 2, 2014 (in thousands, except average price paid per share):


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Dollar Value of Shares that May Yet Be Repurchased Under the Plans or Programs (1)
May 4, 2014—May 31, 2014 (2)		—	$	24.33		—	$	27,197
June 1, 2014—July 5, 2014		—		—		—		27,197
July 6, 2014—August 2, 2014		—		—		—		27,197

Total		—				—

(1)

The share repurchase program is conducted under authorizations made from time to time by our Board of Directors. In December 2013, the Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $30.0 million of outstanding common stock. The December 2013 stock repurchase program was completed in April 2014. In March 2014, the Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $30.0 million of outstanding common stock through the fiscal year ending January 31, 2015.

(2)	Less than 1,000 shares were repurchased during the May 4, 2014 through May 31, 2014 period.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

Item 6.

Exhibits


Exhibit No.		Description of Exhibits

3.2		Bylaws, as amended and restated May 21, 2014. [Incorporated by reference to Exhibit 3.2 to the Form 8-K filed by the Company on May 23, 2014]

10.20		Zumiez Inc. 2014 Equity Incentive Plan. [Incorporated by reference to Exhibit 10.20 to the Form 8-K filed by the Company on May 23, 2014]

10.21		Form of Restricted Stock Award Agreement and Terms of Conditions. [Incorporated by reference to Exhibit 10.21 to the Form 8-K filed by the Company on May 23, 2014]

10.22		Form of Stock Option Award Agreement and Terms and Conditions. [Incorporated by reference to Exhibit 10.22 to the Form 8-K filed by the Company on May 23, 2014]

10.23		Zumiez Inc. 2014 Employee Stock Purchase Plan. [Incorporated by reference to Exhibit 10.23 to the Form 8-K filed by the Company on May 23, 2014]

10.24		Form of Indemnification Agreement. [Incorporated by reference to Exhibit 10.24 to the Form 8-K filed by the Company on May 23, 2014]

10.25		Credit Agreement, including Revolving Line of Credit Note, with Wells Fargo Bank, N.A. dated July 9, 2014. [Incorporated by reference to Exhibit 10.25 to the Form 8-K filed by the Company on July 11, 2014]

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

101		The following materials from Zumiez Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at August 2, 2014 and February 1, 2014; (ii) Condensed Consolidated Statements of Income for the three and six months ended August 2, 2014 and August 3, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended August 2, 2014 and August 3, 2013; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended August 2, 2014 and August 3, 2013; (v) Condensed Consolidated Statements of Cash Flows for the six months ended August 2, 2014 and August 3, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	ZUMIEZ INC.

Dated: September 10, 2014	By:	/s/ Christopher C. Work
		Christopher C. Work
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Large accelerated filer

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Non-accelerated filer

Smaller reporting company