Zumiez (Nasdaq:ZUMZ) saw its stock jump more than 13% April 10 on news its March same-store sales increased 2.1%. Analysts were expecting a 7.5% decrease. The action sports retailer has a very mercurial stock. I'll show you how to profit from its unpredictability.

Year-to-Date
Thanks to its big return April 10, its stock is now up 45.4% on the year more than double its specialty retail cohort. That's marked improvement from its 2012 return of -30.1%. Look at 10 years of annual returns and you'll notice that it's either badly outperforming or underperforming its peers along with the S&P 500. There doesn't seem to be a happy medium.

Perhaps volatile is a better word than mercurial. In the last six fiscal years its stock price has experienced a high/low spread of 185%, which means its high is almost triple the low. In terms of dollars, its average annual spread is slightly less than $21. A beta of 1.0 suggests a stock moves with the market and possesses average systematic risk. Zumiez's beta is 1.97, which means it's twice as volatile as the markets in general. ​Walmart (NYSE:WMT) and Tractor Supply (Nasdaq:TSCO) by comparison have beta's of 0.41 and 0.90 respectively, suggesting both aren't upset nearly as much by market gyrations. If you are fairly risk-averse you probably want to stick with Walmart or Tractor Supply.

SEE: Beta: Know The Risk

Financial Condition
Zumiez was hit by the recession just like every other retailer in America. Its current sales per square foot is $421, $74 less than in 2007, its last year of positive same-store sales growth before hitting the recession and two years of same-store sales contraction. With good management and loyal customers it pulled itself out of its tailspin and is working on a fourth consecutive year of rising comps. As of the end of January it was sitting with net cash of $54.7 million, double-digit operating margins and a European acquisition that eventually will reap big dividends once its economy recovers. Most importantly, its officers and directors own 30% of the company and are committed to building the business. There's not much to keep you up at night about this company.

What's the Play
Including this year, Zumiez has had 5 up years and three down since going public in 2005. The up years achieved an average annual return of 53.5% compared to 39% in the down years. Overall, its performance has been much better than the S&P 500, but not near as good as its specialty retail peers. So, even though it's generally performed well financially, its stock sometimes hasn't. This is when you need to strike.

Zumiez's best year in the past decade was 2010 when it gained 111.24%. To be fair, let's assume you acquired 100 shares of its stock at $33.13, the high that year. You then committed to buying another 100 shares every quarter thereafter whenever the stock finished below where it started the quarter. By April 11, 2013, you would have acquired 600 shares at an average cost of $24.86 for a 13.6% theoretical gain. If you'd simply bought and held the first 100 at $33.13, you would have a paper loss of 14.8%. That's almost a 200% difference by simply buying whenever its stock had a bad quarter. You can do this with any stock. It's a form of dollar cost averaging but in this case you're only buying on the downstroke.

Bottom Line
Zumiez's all-time high is $53.99. That was achieved in October 2007. Its margins back then were identical to where they are today; the only difference is the revenue in fiscal 2012 was $669 million, 76% higher than in fiscal 2007. EV/EBITDA tells you all you need to know, in 2007, its enterprise value was 13.3 times EBITDA. Today, it's half that at 6.1 times. Meanwhile, peers such as Hot Topic (Nasdaq:HOTT) and Gap ​(NYSE:GPS) are valued higher.
Tickers in this Article: ZUMZ, WMT, TSCO, HOTT, GPS,

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