Zumiez's Q2 2025 Earnings: A Tale of Revenue Growth and Margin Struggles

Zumiez, the skate and surf apparel retailer, delivered its Q2 2025 earnings report this week, revealing a stark contrast between its top-line performance and bottom-line results. While revenue comfortably beat expectations, the company's EPS fell sharply short of estimates, sparking questions about its operational health and future growth potential. Let's unpack the numbers to assess whether this disconnect signals a buying opportunity or a warning sign.

The Revenue Surprise: A North American Triumph
Zumiez reported Q2 revenue of $210.5 million, comfortably above the $211 million consensus estimate. The company's North American segment was the star, with comparable sales rising 5.5% year-over-year—marking the fourth consecutive quarter of positive growth. Management attributed this to strong merchandise assortments and improved store experiences. Notably, private label sales now account for 30% of revenue, up from 23% in 2023, a strategic move that should boost margins over time.

The EPS Miss: Tariffs, Europe, and One-Time Costs
Despite the revenue beat, Zumiez's EPS came in at -$0.21, far below the $0.06 consensus. The miss was driven by several factors:
1. Tariff Headaches: Increased tariffs on imported goods—particularly from China—have pressured cost of goods sold (COGS). While the company is diversifying its supply chain (reducing China exposure from 50% to ~20% by year-end), the transition isn't yet fully reflected in margins.
2. European Stagnation: International sales, especially in Europe, declined 14.8% in May. Management admitted the region remains “tough,” with weak demand and operational inefficiencies.
3. Cost Inflation: A one-time legal settlement of $2.9 million (from a wage-and-hour lawsuit) dragged down Q1 results, but ongoing SG&A expenses also rose due to store expansions and marketing investments.

The Disconnect: What Does It Mean for Investors?
The gap between revenue growth and EPS underperformance highlights two critical issues:
- Margin Pressure: Zumiez's gross margin compressed to 30% in Q1 (from 29.3% in 2024), and further tariff hikes could worsen this trend. The company's focus on private labels and supply chain diversification should eventually help, but the benefits are still months away.
- Geographic Imbalance: The North American success contrasts with European struggles. Until Zumiez stabilizes its international operations—perhaps through store closures or product simplification—the drag will persist.

Investment Takeaway: A Wait-and-See Approach
Zumiez's Q2 results are a mixed bag. On one hand, the North American turnaround and cash-rich balance sheet ($101M in cash) offer reasons for optimism. The company also has a $15M stock buyback program, signaling confidence.

On the other hand, the EPS miss underscores execution risks. Investors should monitor:
- Tariff Mitigation: How quickly the supply chain shift reduces COGS.
- European Turnaround: Any signs of stabilization in Q3/Q4.
- Margin Recovery: Gross and operating margins must stabilize to justify the stock's valuation.

Final Verdict
Zumiez is not yet out of the woods. The stock's ~$13 price reflects skepticism about its ability to reconcile growth in North America with margin pressures and European woes. While the company has the liquidity to navigate near-term challenges, investors should wait for clearer signs of margin expansion or international progress before taking a position. For now, the disconnect between revenue and EPS suggests patience is warranted.

Disclosure: This analysis is for informational purposes only and not a recommendation to buy or sell securities.