Zumiez, Inc.

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Zumiez, Inc.

6300 Merrill Creek Parkway, Suite B
Everett, Washington 98203
U.S.A.
Telephone: (425) 551-1500
Toll Free: (877) 828-6929
Fax: (425) 551-1555
Web site: http://www.zumiez.com

Public Company
Incorporated: 1978 as Above the Belt
Employees: 2,135
Sales: $153.6 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: ZUMZ
NAIC: 448110 Men's Clothing Stores; 448120 Women's Clothing Stores; 448210 Shoe Stores; 451110 Sporting Goods Stores; 448150 Clothing Accessories Stores

Zumiez, Inc. operates a chain of more than 170 stores in about 20 states that sell clothing, footwear, equipment, and accessories to young people interested in "extreme sports" including skateboarding, snowboarding, surfing, and bicycle motocross racing. The firm's outlets offer well-known brands as well as Zumiez's own private labels, and are staffed with employees drawn from its target demographic and laid out to mimic the chaotic bedroom of a teen, complete with thrift-store couches and video game stations. Zumiez went public in 2005, but cofounder and Chairman Tom Campion and CEO Richard Brooks retained sizable stakes.

BEGINNINGS

Zumiez was founded in 1978 by Thomas Campion and Gary Haakenson as Above the Belt, a young men's and women's clothing store located in Northgate Mall in Seattle, Washington. Both were graduates of Seattle University, Campion in political science and Haakenson in business administration, and both had worked for J.C. Penney in a variety of management positions. Their new venture was soon declared a success, and over the next few years several additional outlets were added.

In 1988 Campion sensed a new opportunity in the area of "extreme sports," which was a broadly defined category that included skateboarding, snowboarding, and surfing. These sports were becoming especially popular among teenagers, and clothing associated with them was developing a distinctive, somewhat edgy look. As more and more of his customers began seeking out such fashions, he decided to shift the stores' focus to offer these styles exclusively. His intuition paid off, and by 1990 the company was successfully operating eight stores in the Seattle area.

In 1993 cofounder Haakenson left the firm (he would later become the mayor of Edmonds, Washington) and new CFO Richard Brooks bought part of his stake, with Campion retaining controlling interest. The following year the company changed its corporate name to Zumiez, Inc. and began using the new name for its latest stores while gradually renaming the old ones. Zumiez (pronounced "zoomies") was intended to evoke the excitement of the sports the company's customers enjoyed. The year 1994 also saw the firm move into a new 49,000-square-foot headquarters and distribution center in Everett, Washington.

By 1995 the rapidly expanding Zumiez had a total of 25 stores in shopping malls in the Pacific Northwest. Their offerings were considered a bit too trendy for malls by some observers, but Campion saw this as an asset, telling SportStyle magazine, "Up here, there aren't a lot of hip shopping districts for kids to go to. They have to go to the mall. But they don't want to. So we give them a place that's theirs inside the mall."

The fact that the firm's products were not sold at any other stores in their immediate vicinity gave it a unique advantage, and same-store sales grew steadily year after year.

Zumiez outlets, typically 2,500 to 3,000 square feet in size, were designed with an edgy style that featured green-stained cement floors, industrial-looking fixtures, thrift-store sourced furniture, video screens, and eye-catching displays from vendors. The eclectic, intentionally chaotic look was intended to evoke a teen's cluttered bedroom. The firm deliberately sought out sales employees who were actively engaged in the boarding lifestyle and dressed the part at work, though all had been extensively trained on customer service techniques.

Products were selected by Campion and the firm's buyer, Art Aquino, who went to great lengths to find the hottest trends among boarders. Because the company's employees were drawn from the subculture, their input was considered valuable, and store managers (who had typically been promoted from the ranks of sales staff) were given relative freedom in deciding how to arrange products and operate stores.

The company's promotional efforts were also different from those of many conventional retailers. Zumiez sponsored a team of 15 snowboarders who competed in four states, and each store hosted autograph parties and screenings of boarding films to draw in new customers. Ads were purchased in such publications as Transworld Snowboarder magazine and on MTV.

LAUNCHING A WEB SITE IN 1999

In 1999 Zumiez, now with 50 stores in nine states, launched a web site that offered more than 400 products for sale along with informational features. A national advertising campaign was introduced at the same time that featured a contest called "Day in the Life of," with prizes that included a day with one of ten participating athletes. Contestants could enter in stores or online. In 2000 the firm also signed a revenue-sharing pact with Internet content provider iFuse, which would enhance the content of the firm's web site in exchange for a percentage of online sales.

In 2000 CFO Richard Brooks was named president and CEO, with Campion retaining the post of chairman. The year also saw the debut of the Zumiez Couch Tour, which combined music acts and skating demonstrations. It would travel to as many as a dozen cities each year to promote the firm's stores to its target audience.

By the fall of 2000 Zumiez had 62 locations in ten states. Most were in the western and northwestern United States, but the firm had also recently begun expanding eastward into Minnesota and New York. Over the next several years a push was made to increase its presence in the latter state, with nearly ten outlets open there by mid-2002. For the fiscal year ended in 2001 the company recorded sales of $86 million.

Zumiez needed additional funds to continue its expansion efforts, and after looking at offers for more than a year, in November 2002 Campion and Brooks sold a 41 percent stake to Los Angeles-based investment firm Brentwood Associates for $25.3 million, after which two Brentwood managers were appointed to sit on the board. The company now had 102 stores in 12 states, and was planning to open as many as 300 more. Its outlets continued to do well, racking up 25 percent more sales per square foot than the $300-$350 average for all retailers.

COMPANY PERSPECTIVES

We are a leading specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. Our stores cater to young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, bicycle motocross (or "BMX") and motocross. We support the action sports lifestyle and promote our brand through a multifaceted marketing approach that is designed to integrate our brand image with our customers' activities and interests.

Zumiez's product mix now included brand names such as Billabong, Burton, DC Shoe, DVS Shoes, Element, Etnies, Hurley, Quiksilver, Roxy, and Volcom, along with its own private brands, which accounted for 12 percent of total sales. Although most stores offered the same items, those in snow-free or landlocked locations had a different mix, with some goods added or deleted as appropriate for the local environment. The firm made a good margin on its products, as they were not typically sold by discount chains and some lines were exclusive to Zumiez. In addition to clothing and related equipment, the company also sold Jones Soda, which was added to all of its outlets in 2004.

To continue to attract and retain the best possible employees, the company had over the years begun offering a variety of incentive programs, including the Zumiez 100K event, in which top sales and company management gathered in Colorado each winter for a snowboarding retreat that combined recreation and education. The firm also ran "Zumiez University" in Everett to train its store managers, who averaged 23 years of age.

SUCCESSFUL IPO IN 2005

In 2004 Zumiez opened 27 new outlets and recorded sales of $153.6 million and a profit of $7.3 million, and at the start of 2005 the company moved into a new headquarters/warehouse facility that doubled its distribution capacity and offered the possibility of further expansion. In February the firm also announced plans for an initial public stock offering (IPO) on the NASDAQ, which would help fund future growth.

From its debut in early May the stock rose swiftly, with the opening price of $18 increasing by almost $7 the first day and doubling by year's end. The offering raised $29.7 million for the firm and another $28.8 million for existing shareholders. After the offering Chairman Campion would own 29.1 percent of the company and Brooks about half that amount.

By mid-2005 the chain of stores had reached 150 in number, up from 53 at the end of 1999, and net sales per location increased from $882,000 to $1.2 million during the same period. Zumiez was constantly tweaking its stores to strengthen their appeal, seeking out locations near busy teen-friendly areas of malls such as food courts and movie theaters, as well as adding features including free video game stations that caused customers to linger. The company's market was a substantial one, with total U.S. sales of snowboard, skateboard, and surfing-related clothing and equipment put at $11.5 billion during 2003 by market research firm Board-Trac.

In addition to working on its retail stores, Zumiez continued to stock its web site with new features, though these were mostly of an informational and brand-building nature, intended to drive customers to the stores. Online sales were negligible, comprising less than 1 percent of total revenues.

During the latter half of 2005 the company continued to open new outlets, and by year's end the total had topped 170. Plans were in place to add 42 more during fiscal 2006, with some to be opened in southern states, including Texas. Zumiez management was now looking at a long-term goal of 800 stores, with 20 percent annual growth predicted for the foreseeable future. In November the firm, which had eliminated all of its outstanding debt, completed a secondary stock offering of 2.7 million shares, most of which came from existing shareholders.

More than 25 years after its founding, Zumiez, Inc. had become a leading retailer of clothing and equipment for bicycle motocross racers and snow-, skate-, and surfboarders. Future growth appeared certain as the company's management worked to make Zumiez a nationally known brand.

PRINCIPAL SUBSIDIARIES

Zumiez Nevada L.L.C.

KEY DATES

1978:: The first Above the Belt store opens in a Seattle, Washington, shopping mall.
1988:: The company begins shifting focus to teenage "extreme sports" enthusiasts.
1993:: Cofounder Tom Campion and CFO Richard Brooks buy Gary Haakenson's stake.
1994:: The corporate name is changed to Zumiez, Inc.; the firm begins renaming stores.
1995:: Expansion is ramped up; the 25th outlet opens.
2000:: Richard Brooks is named president and CEO.
2002:: Brentwood Associates buys 41 percent of the firm for $25.3 million.
2005:: An initial public offering raises $29.7 million; locations top 170.

PRINCIPAL COMPETITORS

Pacific Sunwear of California, Inc.; Abercrombie & Fitch Co.; American Eagle Outfitters, Inc.; Old Navy, Inc.; The Sports Authority; Big 5 Sporting Goods Corporation; Dick's Sporting Goods, Inc.