Should You Sell Zumiez Inc (NASDAQ:ZUMZ) At This PE Ratio?

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Zumiez Inc (NASDAQ:ZUMZ).

Zumiez Inc (NASDAQ:ZUMZ) trades with a trailing P/E of 22.6x, which is higher than the industry average of 19.8x. While this makes ZUMZ appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Zumiez

Breaking down the Price-Earnings ratio

NasdaqGS:ZUMZ PE PEG Gauge June 30th 18
NasdaqGS:ZUMZ PE PEG Gauge June 30th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for ZUMZ

Price per share = $26.15

Earnings per share = $1.158

∴ Price-Earnings Ratio = $26.15 ÷ $1.158 = 22.6x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ZUMZ, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

Since ZUMZ’s P/E of 22.6x is higher than its industry peers (19.8x), it means that investors are paying more than they should for each dollar of ZUMZ’s earnings. This multiple is a median of profitable companies of 25 Specialty Retail companies in US including Lentuo International, Appliance Recycling Centers of America and Folli-Follie Commercial Manufacturing and Technical Societe Anonyme. As such, our analysis shows that ZUMZ represents an over-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to sell your ZUMZ shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to ZUMZ. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with ZUMZ, then investors would naturally value ZUMZ at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with ZUMZ, investors would also value ZUMZ at a higher price since it is a higher growth investment. Both scenarios would explain why ZUMZ has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing ZUMZ to are fairly valued by the market. If this does not hold, there is a possibility that ZUMZ’s P/E is higher because firms in our peer group are being undervalued by the market.

NasdaqGS:ZUMZ Future Profit June 30th 18
NasdaqGS:ZUMZ Future Profit June 30th 18

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in ZUMZ. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for ZUMZ’s future growth? Take a look at our free research report of analyst consensus for ZUMZ’s outlook.
  2. Past Track Record: Has ZUMZ been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ZUMZ’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.