Shares of the specialty retailer have seen a dramatic recovery, but a closer look at its revenue forecasts compared to its industry peers suggests the rally may be on shaky ground.
Investors in Zumiez Inc. (NASDAQ:ZUMZ) have reason to celebrate a stellar month, with the company’s share price rocketing up 25%. The surge marks a significant recovery from previous weakness, offering a much-needed boost to shareholders.
However, the recent jubilation is tempered by a wider perspective. Despite the impressive monthly gain, Zumiez stock remains down a disappointing 26% over the last twelve months, highlighting a longer-term struggle.
This rally has pushed the company’s valuation to a price-to-sales (P/S) ratio of 0.3x. While this figure might seem low, it is now nearly in line with the median P/S ratio for the U.S. Specialty Retail industry, which sits around 0.4x. The key question for investors is whether this “average” valuation is justified given the company’s performance.
A Disconnect Between Price and Performance
A deeper dive into Zumiez’s financial health reveals a potential disconnect. According to analysts, the company’s revenue growth has been lackluster and is projected to remain so. While Zumiez managed a modest 3.0% revenue increase last year, this followed a difficult period that saw total revenue shrink by 20% over the last three years.
The outlook appears even more challenging. The three analysts covering the company forecast revenue to grow by just 0.8% in the coming year. This projection stands in stark contrast to the broader Specialty Retail industry, which is expected to see an average revenue growth of 5.6%.
This disparity is at the heart of the debate: Why is Zumiez being valued similarly to its peers when its growth prospects are significantly weaker? The market’s recent buying frenzy suggests many investors are more optimistic than analysts, betting on a turnaround that isn’t yet reflected in the forecasts. This optimism, however, could be setting shareholders up for future disappointment if the company’s performance doesn’t improve to match its valuation.
The Final Word for Investors
The 25% price jump has restored Zumiez’s P/S ratio to industry norms, but the fundamentals tell a story of caution. When a company’s revenue outlook is materially weaker than its industry, its stock price may be at risk of a downward correction.
Before investing, it is critical to consider all potential risks. Further analysis has identified 2 warning signs with Zumiez that potential investors should understand as part of their due diligence process. Ultimately, for the current valuation to be sustainable, Zumiez will need to deliver a positive shift in its growth trajectory that can justify the market’s renewed, but perhaps fragile, confidence.
