Zumiez Inc 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis compares the change in the consolidated financial statements for years ended and February 3, 2024 and January 28, 2023 and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources. For comparisons of years ended January 28, 2023 and January 29, 2022, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Annual Report on Form 10-K for the year ended January 28,2023, filed with the SEC on March 20, 2023 and incorporated herein by reference. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled” Risk Factors” and in other parts of this Annual Report on Form 10-K. See also the section titled “Note Regarding Forward-Looking Statements” in this report. For Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) related to the year ended January 29, 2022, refer to this same section in our 2022 annual report on Form 10-K as filed with the Securities and Exchange Commission on March 20, 2023. Fiscal 2023—A Review of This Past Year After achieving record sales in fiscal 2021, we have now experienced two challenging years in a row. Though we ended the year down 8.6% in net sales, the sales trends improved each quarter throughout the year with sales down 17.1% in the first quarter, down 11.6% in the second quarter, down 8.9% in the third quarter, and turned positive in the fourth quarter with growth of 0.6% inclusive of the 53 rd week. Overall consolidated sales were down low single digits for the quarter excluding the 53 rd week.While inflation declined throughout the first half 2023 and moderated for the last half of the year, the multi-year inflationary impact on consumer discretionary income, particularly with our younger customer base, negatively affected sales. This coupled with higher competition for the discretionary dollar with consumers appearing to favor experiences vs. apparel and negative trends in the business around areas like Skate had a material impact on our results. The improvement in year-over-year sales trends throughout fiscal 2023 reflects positive momentum in emerging brands on the men’s side of the business as the men’s category had positive sales growth both in the back to school weeks of the third quarter and the entire fourth quarter. We are also beginning to see some of the more difficult categories over the past two years become less of a negative impact on total sales growth as we reach lower levels of sales and continue to try new things in these categories. In fiscal year 2023, product margin declined 70 basis points from the prior year, while fiscal 2022 had declined 80 basis points from fiscal 2021. The decline of 150 basis points in product margin over the past two years was driven largely by the difficult sales environment which necessitated discounting to maintain a healthy inventory position. In a more normalized sales environment, we believe that we can begin to recover and continue to grow product margins through existing initiatives in the business over time. In addition to the decline of 70 basis points in product margin in fiscal 2023, the 8.6% decrease in net sales created deleverage of other significant fixed costs included in gross margin such as occupancy and merchandising expenses, resulting in a decrease of 180 basis points in total Gross Margin from the prior year. Selling General and Administrative costs increased 17.7% in fiscal year 2023 inclusive of a one-time goodwill impairment charge of $41.1 million which represented 14.0% of the total growth for these expenses during the year. Our loss per share in fiscal 2023 of $3.25 includes a one-time goodwill impairment charge worth $2.14 cents per share was down from earnings per share in fiscal 2022 of $1.08. As a leading global lifestyle retailer, we continue to differentiate ourselves through our distinctive brand offering and diverse product selection, as well as the unique customer experience across all our platforms. We remain committed to serving the customer launching nearly 200 new brands in 2023, continuing to focus on our localized fulfillment platform that provides substantial improvements in the speed of delivery to our customers and connecting with our customers in a unique way through our events and digital communications. 27 The following table shows net sales, operating (loss) profit, operating margin and diluted (loss) earnings per share for fiscal 2023 compared to fiscal 2022: Fiscal 2023 Fiscal 2022 % Change Net sales (in thousands) (1) $ 875,486 $ 958,380 -8.6 % Operating profit (in thousands) $ (64,789 ) $ 31,100 -308.3 % Operating margin -7.4 % 3.2 % Diluted earnings per share $ (3.25 ) $ 1.08 -400.9 % (1) The decrease in net sales was primarily driven by continued inflationary pressures on the consumer, continued challenges in competition for the discretionary dollar, and tougher trends in certain categories of our business. The decrease in net sales resulted from a decrease in transactions, partially offset by an increase in dollars per transaction. The increase in dollars per transaction was driven by an increase in average unit retail, partially offset by a decrease in units per transaction. For the year, all categories were down in comparable sales to the prior year. The footwear category was our largest declining category followed by women’s, accessories, hardgoods and men’s. Fiscal 2024—A Look At the Upcoming Year In fiscal 2024, our focus will continue to be serving the customer with strategic investments focused on enhancing the customer experience while growing sales and market share to create operational efficiencies to drive long-term operating margin expansion. Though the last two years have been challenging, the balance sheet remains strong with $171.6 million in current cash and marketable securities at the end of fiscal 2023. We were able to minimize the decrease in current cash and marketable securities through this difficult sales cycle with diligent expense management and a reduction in inventory of 4.4% from fiscal 2022. We believe we have the balance sheet to manage through potential difficulties, while also investing strategically in important long-term initiatives and returning value to our shareholders. Following a difficult sales and earnings cycle through fiscal 2022 and fiscal 2023, the macro-economic environment in 2024 is unclear. While inflation is moderating from the peaks in 2022 and early 2023, the impact of multiple years of compounding growth in the cost of consumer goods continues to put pressure on the discretionary income of our customer base. Comparing fiscal 2023 quarterly performance to pre-pandemic fiscal 2019 which had more typical seasonality throughout the year, our sales in fiscal 2023 stabilized, but remained below 2019 levels. As we move through 2024, our focus will be to grow sales by building on the momentum we are seeing in emerging brands within the Men’s category during 2023, and continuing to showcase our growing private label offering while also testing new brands to drive sales growth across all of our categories. We also believe that we can achieve product margin expansion while also diligently controlling spending to drive back to profitability. As we turn our attention to same store sales, we plan to pull back on new unit growth, slowing new store openings to 10 throughout the year with our largest percentage decline in Europe as we focus on the profitability of the region and driving cash flow. From a total store count perspective, we expect to end 2024 with less stores than we had at the end of 2023 as we pair back underperforming stores. With our relentless focus on the customer, we believe we can win in our space as we move through the year despite significant macro challenges to the business. General Net sales constitute gross sales, net of actual and estimated returns and deductions for promotions, and shipping revenue. Net sales include our store sales and our ecommerce sales. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer. 28 We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce business which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any increase or decrease less than 25% in square footage of an existing comparable store, including remodels and relocations within the same mall, or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers. Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products. With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold. Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles, and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses. Key Performance Indicators Our management evaluates the following items, which we consider key performance indicators, in assessing our performance: Net sales. Net sales constitute gross sales, net of sales returns and deductions for promotions, and shipping revenue. Net sales includes comparable sales and new store sales for all our store and ecommerce businesses. We consider net sales to be an important indicator of our current performance. Net sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Net sales also have a direct impact on our operating profit, cash and working capital. Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations. 29 Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense. Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. We view diluted earnings per share as a key indicator of our success in increasing shareholder value. Results of Operations The following table presents selected items on the consolidated statements of (loss) income as a percent of net sales: Fiscal 2023 Fiscal 2022 Fiscal 2021 Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold 67.9 % 66.1 % 61.4 % Gross profit 32.1 % 33.9 % 38.6 % Selling, general and administrative expenses 39.5 % 30.7 % 25.3 % Operating profit -7.4 % 3.2 % 13.3 % Interest and other income, net 0.3 % 0.2 % 0.3 % Earnings before income taxes -7.1 % 3.4 % 13.6 % Provision for income taxes 0.1 % 1.2 % 3.5 % Net income -7.2 % 2.2 % 10.1 % Fiscal 2023 Results Compared With Fiscal 2022 Net Sales Net sales were $875.5 million for fiscal 2023 compared to $958.4 million for fiscal 2022, a decrease of $82.9 million or 8.6%. The decrease in sales was primarily driven by continued inflationary pressures on the consumer, continued challenges in competition for the discretionary dollar, and tougher trends in certain categories of our business. The decrease in net sales included a decrease in transactions, partially offset by an increase in dollars per transaction. The increase in dollars per transaction was driven by an increase in average unit retail, partially offset by a decrease in units per transaction. For the year, the footwear category was our largest declining category followed by women’s, accessories, hardgoods and men’s. By region, North America sales decreased $104.7 million or -13.1% and other international sales increased $21.8 million or 14.0% during fiscal 2023 compared to fiscal 2022. Net sales for the year ended February 3, 2024 included a $2.5 million increase due to the change in foreign exchange rates, which consisted of $4.7 million in Europe, which was offset by decrease of $1.2 million in Canada, and decrease of $1.1 million in Australia. Excluding the impact of changes in foreign exchange rates, North America sales decreased $103.5 million or -12.9% and other international sales increased $18.2 million or 11.8% during fiscal 2023 compared to fiscal 2022. Gross Profit Gross profit was $280.9 million for fiscal 2023 compared to $324.7 million for fiscal 2022, a decrease of $43.8 million, or 13.5%. As a percentage of net sales, gross profit decreased 180 basis points in fiscal 2023 to 32.1%, as we saw significant deleverage on lower sales across our fixed costs as well as rate increases in numerous areas. The decrease was primarily driven by a 130 basis points deleverage in store occupancy costs and, 70 basis points decrease in product margin. These decreases were partially offset by a 20 basis points of efficiencies in distribution costs. 30 Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $345.7 million for fiscal 2023 compared to $293.6 million for fiscal 2022, an increase of $52.1 million, or 17.7%. SG&A expenses as a percent of net sales increased 880 basis points in fiscal 2023 to 39.5%. The increase was primarily driven by 470 basis points due to impairment of goodwill worth $41.1 million, 180 basis points due to store wages tied to both deleverage on lower sales as well as rate increase that we could not offset by management of hours, 110 basis points due to store costs not tied to wages primarily impacted by deleverage on lower sales, 80 basis points in corporate costs, and 60 basis points in non-store wages. These increases were partially offset by a 20 basis points decrease in training events. Net (Loss) Income Net loss for fiscal 2023 was $62.6 million, or $3.25 per diluted share, compared with net income of $21.0 million, or $1.08 per diluted share, for fiscal 2022. Our effective income tax rate for fiscal 2023 was -1.2% compared to 35.2% for fiscal 2022. The change in effective income tax rate for fiscal 2023 compared to fiscal 2022 was primarily related to an increase in foreign losses in certain jurisdictions, including Blue Tomato goodwill impairment, which are subject to a valuation allowance. Due to cumulative and ongoing foreign losses in such jurisdictions, the realization of such deferred tax assets is uncertain and thus subject to a valuation allowance. The increase in the valuation allowance in fiscal 2023 resulted in $12.3 million of income tax expense when compared to fiscal 2022 of $3.0 million . Liquidity and Capital Resources Our cash requirements are subject to change as business conditions warrant and opportunities arise. Our primary uses of cash are for operational expenditures, inventory purchases, common stock repurchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Historically, our main source of liquidity has been cash flows from operations. The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors. At February 3, 2024 and January 28, 2023, cash, cash equivalents and current marketable securities were $171.6 million and $173.5 million. Working capital, the excess of current assets over current liabilities, was $182.5 million at the end of fiscal 2023, a decrease of 6.1% from $194.4 million at the end of fiscal 2022. The decrease in cash, cash equivalents and current marketable securities in fiscal 2023 was due primarily to cash provided by operating activities of $14.8 million, partially offset by capital expenditures of $20.3 million primarily related to the opening of 19 new stores and 4 remodels and relocations. The following table summarizes our cash flows from operating, investing and financing activities (in thousands): Fiscal 2023 Fiscal 2022 Fiscal 2021 Total cash (used in) provided by Operating activities $ 14,755 $ (379 ) $ 134,950 Investing activities (8,548 ) 54,209 101,643 Financing activities 704 (87,257 ) (191,409 ) Effect of exchange rate changes on cash and cash equivalents (1,080 ) (2,172 ) (1,822 ) Net (decrease) increase in cash, cash equivalents, and restricted cash $ 5,831 $ (35,599 ) $ 43,362 31 Operating Activities Net cash provided by operating activities increased by $15.1 million in fiscal 2023 to $14.8 million cash provided by operating activities from $0.4 million cash used in operating activities in fiscal 2022. Net cash provided by operating activities decreased by $135.3 million in fiscal 2022 to $0.4 million cash used in operating activities from $135.0 million cash provided by operating activities in fiscal 2021. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit and debit cards or cash to buy from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, impairment, amortization and accretion, deferred taxes, and changes to the components of working capital. Investing Activities Net cash used in investing activities was $8.5 million in fiscal 2023 related to $20.4 million of capital expenditures primarily for new store openings and existing store remodels or relocations primarily offset by $11.7 million in net sales of marketable securities. Net cash provided by investing activities was $54.2 million in fiscal 2022 related to $79.8 million in net sales of marketable securities and $25.6 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash provided by investing activities was $101.6 million in fiscal 2021 related to $117.4 million in net sales of marketable securities and $15.7 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Financing Activities Net cash provided by financing activities in fiscal 2023 was $0.7 million related to proceeds from the issuance and exercise of stock-based awards. Net cash used in financing activities in fiscal 2022 was $87.3 million related to $87.9 million used in the repurchase of common stock and $0.5 million in payments for tax withholding obligations upon vesting of restricted stock partially offset by $1.1 million in proceeds from the issuance and exercise of stock-based awards. Net cash used in financing activities in fiscal 2021 was $191.4 million related to $193.8 million used in the repurchase of common stock and $0.6 million in payments on tax withholding obligation upon vesting of restricted stock partially offset by $3.0 million in proceeds from the issuance and exercise of stock-based awards. Capital Expenditures Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. In that regard, our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future. During fiscal 2023, we spent $20.4 million on capital expenditures which consisted of $8.1 million of costs related to investment in 19 new stores and 4 remodeled or relocated stores, $8.0 million associated with improvements to our websites and $4.3 million in other improvements. During fiscal 2022, we spent $25.6 million on capital expenditures which consisted of $13.8 million of costs related to investment in 32 new stores and 2 remodeled or relocated stores, $6.6 million associated with improvements to our websites and $5.2 million in other improvements. During fiscal 2021, we spent $15.7 million on capital expenditures which consisted of $11.5 million of costs related to investment in 23 new stores and 3 remodeled or relocated stores, $1.1 million associated with improvements to our websites and $3.1 million in other improvements. 32 In fiscal 2024, we expect to spend approximately $14 million to $16 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 10 new stores we plan to open in fiscal 2024 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2024 will not be different from the number of stores we plan to open, or that actual fiscal 2024 capital expenditures will not differ from this expected amount. Other Material Cash Requirements Our material cash requirements include the following contractual and other obligations: (1) purchase obligations (for additional information, see Note 11 to the Consolidated Financial Statements); (2) supply and service arrangements entered in the normal course of business; (3) operating lease payments (for additional information, see Note 10 to the Consolidated Financial Statements); and (4) employee wages, benefits, and incentives; (5) commitments for capital expenditures; and (6) tax payables. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters. At February 3, 2024, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Sources of Liquidity Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders. As of February 3, 2024, we maintained a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility (“credit facility”) of up to $25.0 million through December 1, 2024. The credit facility is available for working capital and other general corporate purposes. The credit facility provides for the issuance of standby letters of credit in an amount not to exceed $17.5 million outstanding at any time and with a term not to exceed 365 days beyond the maturity of the credit facility. The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days beyond the maturity of the credit facility. The credit facility will mature on December 1, 2024. The credit facility is secured by a first-priority security interest in substantially all personal property (but not the real property) of the borrowers and guarantors. There were no borrowings or open commercial letters of credit outstanding under the secured credit facility at February 3, 2024 and January 28, 2023. We had $3.5 million and $0.6 million in issued, but undrawn, standby letters of credit at February 3, 2024 and January 28, 2023, respectively. On November 30, 2023, we entered a third amendment to our credit facility with Wells Fargo Bank, N.A. The amendment, among other things, (a) amended the credit limit to $25 million through December 1, 2024; (b) amended the EBITDA covenant to not less than $9 million for the quarter ending October 28, 2023, not less than $2.5 million for the quarter ending February 3, 2024, not less than $9 million in the quarter ending May 4, 2024, not less than $12 million for the quarter ending August 3, 2024, and not less than $20 million for the quarter ending November 2, 2024; (c) amended the borrowing rate to SOFR plus 1.75% per annum; (d) introduced an unused commitment fee of 0.50% per annum; and (e) disallows distribution of dividends or execution of stock buybacks through December 1, 2024 without bank approval. 33 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K. We believe that the following accounting estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements. Description Judgments and Uncertainties Effect If Actual Results Differ From Assumptions Valuation of Merchandise Inventories We value our inventory at the lower of average cost or net realizable value through the establishment of write-down and inventory loss reserves. Our write-down reserve represents the excess of the carrying value over the amount we expect to realize from the ultimate sales or other disposal of the inventory. Write-downs establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded write-downs or an increase in that newly established cost basis. Our inventory loss reserve represents anticipated physical inventory losses (“shrinkage reserve”) that have occurred since the last physical inventory. Our write-down reserve contains uncertainties because the calculation requires management to make assumptions based on the current rate of sales, the age and profitability of inventory and other factors. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including historical percentages that can be affected by changes in merchandise mix and changes in actual shrinkage trends. We have not made any material changes in the accounting methodology used to calculate our write-down and shrinkage reserves in the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates we use to calculate our inventory reserves. However, if actual results are not consistent with our estimates, we may be exposed to losses or gains that could be material. Our inventory reserves have decreased by $0.3 million in fiscal 2023. A 10% decrease in the sales price of our inventory at February 3, 2024 would have decreased net income by $0.7 million in fiscal 2023. A 10% increase in actual physical inventory shrinkage rate at February 3, 2024 would have decreased net income by less than $0.1 million in fiscal 2023. 34 Description Judgments and Uncertainties Effect If Actual Results Differ From Assumptions Valuation of Long-Lived Assets We review the carrying value of our long-lived assets, including fixed assets and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of such asset or asset group may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing the fair value of the asset to the asset carrying value. Events that may result in an impairment include the decision to close a store or facility or a significant decrease in the operating performance of a long-lived asset group. Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting future sales, gross profit, operating expenses, or sub-lease income. In addition to historical results, current trends and initiatives, and long-term macro-economic and industry factors are qualitatively considered. Additionally, management seeks input from store operations related to local economic conditions, including the impact of closures of selected co-tenants who occupy the mall. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected. Declines in projected cash flow of the assets could result in impairment. We recognized impairment losses of $2.9 million related to long-lived assets in fiscal 2023. A 10 basis point decrease in forecasted sales assumptions would have resulted in an additional impairment charge of $0.1 million in fiscal 2023. Right-of-use Assets and Lease Liabilities We determine if a contract contains a lease at inception. Our operating leases primarily consist of retail store locations, distribution centers and corporate office space. We do not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, net of lease incentives received and initial direct costs paid. Our retail store leases are generally for an initial period of 5-10 years, with some of our international leases structured to include renewal options at our election. We include renewal options that we are reasonably certain to exercise in the measurement of our lease liabilities and right-of-use assets. Significant judgment is required in determining our incremental borrowing rate and the expected lease term, both of which impact the determination of lease classification and the present value of lease payments. Generally, our lease contracts do not provide a readily determinable implicit rate and, therefore, we use an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments. The estimated incremental borrowing rate reflects considerations such as market rates for our outstanding collateralized debt and interpolations of rates for leases with terms that differ from our outstanding debt. Our lease terms include option periods to extend or terminate the lease when it is reasonably certain that those options will be exercised, which is generally through an initial period of 5-10 years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate right-of-use assets and lease liabilities. Given the significant operating lease assets and liabilities recorded, changes in the estimates made by management or the underlying assumptions could have a material impact on our consolidated financial statements. Total undiscounted future payments for lease liabilities were $256.4 million at February 3, 2024. If the incremental borrowing rate increased 10 basis points from the rate in effect at February 3, 2024, the lease liability balance would decrease by $0.2 million. 35 Description Judgments and Uncertainties Effect If Actual Results Differ From Assumptions Revenue Recognition Revenue is recognized upon purchase at our retail store locations. For our ecommerce sales, revenue is recognized upon shipment to the customer. Revenue is recorded net of sales returns and deductions for promotions. Revenue is not recorded on the sale of gift cards. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in proportion of the patterns used by the customer based on our historical redemption patterns. Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding future sales returns and the amount and timing of gift cards projected to be redeemed by gift card recipients. Our estimate of the amount and timing of sales returns and gift cards to be redeemed is based primarily on historical experience. We have not made any material changes in the accounting methodology used to measure future sales returns or gift card breakage in the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to recognize revenue. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material . Our sales return reserve has decreased by $0.1 million in fiscal 2023. A 10% increase in our sales return reserve at February 3, 2024 would have decreased net income by $0.3 million in fiscal 2023. Our gift card breakage reserve has increased by $1.8 million in fiscal 2023. A 1% increase in the estimated gift card redemption rate would have decreased net income by $0.1 million in fiscal 2023. Accounting for Income Taxes As part of the process of preparing the consolidated financial statements, income taxes are estimated for each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included on the consolidated balance sheets. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates. The assessment of whether we will realize the value of our deferred tax assets requires estimates and judgments related to amount and timing of future taxable income. Actual results may differ from those estimates. Additionally, changes in the relevant tax, accounting and other laws, regulations, principles and interpretations may adversely affect financial results. Although management believes that the income tax related judgments and estimates are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. At February 3, 2024 and January 28, 2023, we had valuation allowances on our deferred tax assets of $25 million and $12.8 million, respectively. Significant changes in performance or estimated taxable income may result in a change in our assessment of the valuation allowance. Upon income tax audit, any unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. 36 Description Judgments and Uncertainties Effect If Actual Results Differ From Assumptions Accounting for Contingencies We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency. Significant judgment is required in evaluating our claims and contingencies, including determining the probability that a liability has been incurred and whether such liability is reasonably estimable. The estimated accruals for claims and contingencies are made based on the best information available, which can be highly subjective. Although management believes that the contingency related judgments and estimates are reasonable, our accrual for claims and contingencies could fluctuate as additional information becomes known, thereby creating variability in our results of operations from period to period. Additionally, actual results could differ and we may be exposed to losses or gains that could be material. See Note 11, “Commitments and Contingencies,” in the Notes to the consolidated financial statements found in Part IV Item 15 of this Form 10-K. Goodwill and Indefinite-lived Intangible Assets We assess goodwill and indefinite-lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment arise. We perform this analysis at the reporting unit level. We have an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we choose not to perform the qualitative test or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we compare the carrying value of the reporting unit to its estimated fair value, which is based on the perspective of a market-participant. If the fair value of the reporting unit is lower than the carrying value, an impairment loss is recorded for the amount in which the carrying value exceeds the estimated fair value. The goodwill and indefinite-lived intangible assets impairment tests require management to make assumptions and judgments. Our quantitative goodwill analysis of fair value is determined using a combination of the income and market approaches. Key assumptions in the income approach include estimating future cash flows, long-term growth rates and weighted average cost of capital. Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions, operating performance and our business strategies. Key assumptions in the market approach include identifying companies and transactions with comparable business factors, such as earnings growth, profitability, business and financial risk. The fair value of the trade names and trademarks is determined using the relief from royalty method, which requires assumptions including forecasting future sales, discount rates and royalty rates. Based on the results of our annual impairment test for goodwill and indefinite-lived intangible assets, an impairment was recorded related to the goodwill from Blue Tomato acquisition of $41.1 million. No impairment was recorded for indefinite-lived intangible assets. If actual results are not consistent with our estimates or assumptions, or there are significant changes in any of these estimates, projections and assumptions, could have a material effect of the fair value of these assets in future measurement periods and result in an additional impairment, which could materially affect our results of operations. See Note 7 Goodwill and Intangible Assets for the details of the impairment. Recent Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K. 37 Item 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our earnings are affected by changes in market interest rates as a result of our short-term and long-term marketable securities, which are primarily invested in state and local municipal securities and variable-rate demand notes, which have long-term nominal maturity dates but feature variable interest rates that reset at short-term intervals. If our current portfolio average yield rate decreased by 10% in fiscal 2023, our net income would have decreased by $0.3 million. This amount is determined by considering the impact of the hypothetical yield rates on our cash, cash equivalents, short-term marketable securities and assumes no changes in our investment structure. During different times of the year, due to the seasonality of our business, we may borrow under our revolving credit facility. To the extent we borrow under this revolving credit facility, we are exposed to the market risk related to changes in interest rates. At February 3, 2024, we had no borrowings outstanding under the secured revolving credit facility. Foreign Exchange Rate Risk Our international subsidiaries operate with functional currencies other than the U.S. Dollar, including the Canadian Dollar, Euro, Australian Dollar, Norwegian Krone, Swedish Krona, and Swiss Franc. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. As a result, the fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. Assuming a 10% change in foreign exchange rates in fiscal 2023 our net income would have decreased or increased by $0.2 million. As we expand our international operations, our exposure to exchange rate fluctuations will continue to increase. To date, we have not used derivatives to manage foreign currency exchange risk. We import merchandise from foreign countries. As a result, any significant or sudden change in the financial, banking or currency policies and practices of these countries could have a material adverse impact on our financial position, results of operations and cash flows. Item 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA Information with respect to this item is set forth in “Index to the Consolidated Financial Statements,” found in Part IV Item 15 of this Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOU NTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROL S AND PROCEDURES Evaluation of Disclosure Controls and Procedures . We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)). Based on this evaluation, our CEO and CFO concluded that, as of February 3, 2024, our disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting . There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) during the quarter ended February 3, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 38 Management’s Annual Report on Internal Control over Financial Reporting . The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, because of changes in conditions, the effectiveness of internal control may vary over time. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of February 3, 2024. Management’s assessment was based on criteria described in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of February 3, 2024. The effectiveness of the Company’s internal control over financial reporting as of February 3, 2024 has been audited by Moss Adams LLP, the Company’s independent registered public accounting firm, as stated in their report, appearing herein under the heading “Report of Independent Registered Public Accounting Firm.” Item 9B. OTHE R INFORMATION Rule 10b5-1 Plan and Non-Rule 10b5-1 Trading Arrangement Adoptions, Terminations, and Modifications During the company’s fourth quarter ended February 3, 2024 , none of its directors or “officers” (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of SEC Regulation S-K. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 39 PART III Item 10. DIRECTORS, EXECUTIVE OF FICERS AND CORPORATE GOVERNANCE Information regarding our directors and nominees for directorship is presented under the headings “Election of Directors,” in our definitive proxy statement for use in connection with our 2023 Annual Meeting of Shareholders (the “Proxy Statement”) that will be filed within 120 days after our fiscal year ended February 3, 2024 and is incorporated herein by this reference thereto. Information concerning our executive officers is set forth under the heading “Executive Officers” in our Proxy Statement, and is incorporated herein by reference thereto. Information regarding compliance with Section 16(a) of the Exchange Act, our code of conduct and ethics and certain information related to the Company’s Audit Committee, Compensation Committee and Governance Committee is set forth under the heading “Corporate Governance” in our Proxy Statement, and is incorporated herein by reference thereto. Item 11. EXECUTI VE COMPENSATION Information regarding the compensation of our directors and executive officers and certain information related to the Company’s Compensation Committee is set forth under the headings “Executive Compensation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Report of the Compensation Committee of the Board of Directors” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement, and is incorporated herein by this reference thereto. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OW NERS, AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Information with respect to security ownership of certain beneficial owners and management is set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our Proxy Statement, and is incorporated herein by this reference thereto. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions and director independence is presented under the heading “Corporate Governance” in our Proxy Statement, and is incorporated herein by this reference thereto. Item 14. PRINCIPAL ACCOU NTANT FEES AND SERVICES The Company’s independent registered public accounting firm is Moss Adams LLP , Seattle, WA , PCAOB ID: 659 . Information concerning principal accounting fees and services is presented under the heading “Fees Paid to Independent Registered Public Accounting Firm for Fiscal 2023 and 2022” in our Proxy Statement, and is incorporated herein by this reference thereto. 40 PART IV Item 15. EXHIBITS AND FINAN CIAL STATEMENT SCHEDULES (a) (1) Consolidated Financial Statements (2) Consolidated Financial Statement Schedules: All financial statement schedules are omitted because the required information is presented either in the consolidated financial statements or notes thereto, or is not applicable, required or material. (3) Exhibits included or incorporated herein: See Exhibit Index. 41 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 43 Consolidated Balance Sheets 47 Consolidated statements of (loss) income 48 Consolidated statement of comprehensive (loss) income 49 Consolidated Statements of Changes in Shareholders’ Equity 50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements 52 42 Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Zumiez Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Zumiez Inc. (the “Company”) as of February 3, 2024 and January 28, 2023, the related consolidated statements of (loss) income, comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the three years in the period ended February 3, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of February 3, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of February 3, 2024 and January 28, 2023, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 3, 2024, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A . Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 43 Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill and Intangible Assets Impairment As described in Note 7 to the consolidated financial statements, the Company’s consolidated goodwill and intangible assets balances were $15.4 million and $14.2 million, respectively, as of February 3, 2024. For the year ended February 3, 2024, the Company recorded a full impairment of the Europe reporting unit goodwill, as disclosed in Notes 7 and 12, amounting to $41.1 million. As described in Note 2 to the consolidated financial statements, the Company has an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than it’s carrying amount. If management chooses not to perform the qualitative test or determines that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the Company’s evaluation of impairment of goodwill and intangible assets requires a comparison of the reporting unit’s and intangible asset’s fair value to their carrying value. If the fair value of the reporting unit or intangible asset is lower than the carrying value, then the Company records an impairment in the amount equal to the excess, not to exceed the carrying value. 44 The determination of the fair value of the reporting unit and intangible assets requires management to make significant estimates, complex judgments, and assumptions. These assumptions include forecasts of future cash flows, long-term growth rates, weighted average cost of capital, valuation ratios derived from market transactions of similar companies, and royalty rates. Given the Company’s evaluation of impairment of goodwill and intangible assets requires management to make significant assumptions, performing audit procedures to evaluate whether management appropriately determined the fair value of the reporting unit and intangible assets required a high degree of auditor judgment. In addition, our audit effort included the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. The primary procedures we performed to address this critical audit matter included: • Testing the effectiveness of internal controls relating to management’s goodwill and intangible assets impairment tests, including controls over the determination of the fair value of the Europe reporting unit and related intangible assets. • Testing management’s process for determining the fair value of the Europe reporting unit and related intangible assets. We evaluated the reasonableness of management’s forecasts of future cash flows, including store growth, and long-term growth rates by comparing these forecasts to historical operating results of the Company and performing a retrospective review of the accuracy of management’s prior forecasts. • Utilizing a valuation specialist to assist in testing management’s income and market approach models for the Europe reporting unit and relief from royalty method for intangible assets and certain related significant assumptions. • Evaluating whether the assumptions used were reasonable by considering the past performance of the reporting unit and third-party market data, and whether such assumptions were consistent with evidence obtained in other areas of the audit. Store Assets Impairment As described in Note 6 to the consolidated financial statements, the Company’s consolidated fixed assets, net balance was $90.5 million and operating lease right-of-use assets was $196.8 million as of February 3, 2024. For the year ended February 3, 2024, the Company recognized store asset impairment losses of $2.9 million, as disclosed in Note 12, which consists of impairment charges for fixed assets of $1.6 million and impairment charges for operating right-of-use assets of $1.3 million. As described in Note 2 to the consolidated financial statements, the Company evaluates the carrying value of long-lived assets or asset groups (defined as a store, corporate facility or distribution center) for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. Events that result in a store asset impairment review include plans to close a store or facility or a significant decrease in the operating performance of a store. When such an indicator occurs, the Company evaluates the store assets for impairment by comparing the undiscounted future cash flows expected to be generated by the store to the carrying amount. If the carrying amount exceeds the estimated undiscounted future cash flows, an analysis is performed to estimate the fair value of the assets. An impairment is recorded if the fair value of the store’s assets is less than the carrying amount. 45 The evaluation of store assets for possible indications of impairment and the determination of the fair value of a store requires management to make significant estimates, complex judgments, and assumptions. These assumptions include estimated future cash flows, sublease income, and the discount rate. Given the Company’s evaluation of impairment of store assets requires management to make significant assumptions, performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of store assets may not be recoverable and determine store fair value required a high degree of auditor judgment. In addition, our audit effort included the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. The primary procedures we performed to address this critical audit matter included: • Testing the effectiveness of internal controls relating to management’s identification of indicators of impairment, the assessment of the projected undiscounted cash flows to be generated by stores with indicators of impairment, the determination of the fair value of the stores, and the measurement of any resulting impairment. • Evaluating management’s store asset impairment analysis, including inspecting the Company’s analysis of historical results by store to determine if contrary evidence existed as to the completeness of the population of potentially impaired stores. • Testing management’s process for determining the projected undiscounted cash flows to be generated by the stores. We evaluated the reasonableness of management’s assumptions used to forecast future cash flows, including forecasted growth rates by comparing these forecasts to historical operating results of the Company. • Evaluating management’s assumptions used to estimate the fair value of the stores by performing a sensitivity analysis to evaluate the changes in the fair value of the individual stores that would result from changes in the underlying assumptions. • Utilizing a valuation specialist to assist in our evaluation of the current market rents and market participant real estate data, and related assumptions used to estimate store fair value. /s/ Moss Adams LLP Seattle, Washington March 14, 2024 We have served as the Company’s auditor since 2006. 46 ZUMIEZ INC. CONSOLIDATED B ALANCE SHEETS (In thousands) February 3, 2024 January 28, 2023 Assets Current assets Cash and cash equivalents $ 88,875 $ 81,503 Marketable securities 82,704 91,986 Receivables 13,780 20,613 Inventories 128,827 134,824 Prepaid expenses and other current assets 12,401 11,252 Total current assets 326,587 340,178 Fixed assets, net 90,508 93,746 Operating lease right-of-use assets 196,775 222,240 Goodwill 15,374 56,566 Intangible assets, net 14,200 14,443 Deferred tax assets, net 8,623 8,205 Other long-term assets 12,159 12,525 Total long-term assets 337,639 407,725 Total assets $ 664,226 $ 747,903 Liabilities and Shareholders’ Equity Current liabilities Trade accounts payable $ 38,885 $ 40,379 Accrued payroll and payroll taxes 18,431 16,321 Operating lease liabilities 60,885 65,460 Other current liabilities 25,886 23,649 Total current liabilities 144,087 145,809 Long-term operating lease liabilities 159,877 188,835 Other long-term liabilities 7,052 5,931 Total long-term liabilities 166,929 194,766 Total liabilities 311,016 340,575 Commitments and contingencies (Note 11) Shareholders’ equity Preferred stock, no par value, 20,000 shares authorized; none issued and outstanding — — Common stock, no par value, 50,000 shares authorized; 19,833 shares issued and outstanding at February 3, 2024 and 19,489 shares issued and outstanding at January 28, 2023 196,144 188,418 Accumulated other comprehensive loss ( 19,027 ) ( 19,793 ) Retained earnings 176,093 238,703 Total shareholders’ equity 353,210 407,328 Total liabilities and shareholders’ equity $ 664,226 $ 747,903 See accompanying notes to consolidated financial statements. 47 ZUMIEZ INC. CONSOLIDATED STAT EMENTS OF (LOSS) INCOME (In thousands, except per share amounts) Fiscal Year Ended February 3, January 28, January 29, 2024 2023 2022 Net sales $ 875,486 $ 958,380 $ 1,183,867 Cost of goods sold 594,596 633,702 727,137 Gross profit 280,890 324,678 456,730 Selling, general and administrative expenses 345,679 293,578 298,920 Operating (loss) profit ( 64,789 ) 31,100 157,810 Interest income, net 3,522 1,924 3,592 Other expense, net ( 611 ) ( 557 ) ( 891 ) (Loss) Earnings before income taxes ( 61,878 ) 32,467 160,511 Provision for income taxes 732 11,433 41,222 Net (loss) income $ ( 62,610 ) $ 21,034 $ 119,289 Basic (loss) earnings per share $ ( 3.25 ) $ 1.10 $ 4.93 Diluted (loss) earnings per share $ ( 3.25 ) $ 1.08 $ 4.85 Weighted average shares used in computation of earnings per share: Basic 19,290 19,208 24,187 Diluted 19,290 19,428 24,593 See accompanying notes to consolidated financial statements. 48 ZUMIEZ INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Net (loss) income $ ( 62,610 ) $ 21,034 $ 119,289 Other comprehensive (loss) income, net of tax and reclassification adjustments: Foreign currency translation $ ( 1,045 ) $ ( 2,596 ) ( 11,098 ) Net change in unrealized gain (loss) on available-for-sale debt securities 1,811 ( 3,734 ) ( 3,304 ) Other comprehensive income (loss), net 766 ( 6,330 ) ( 14,402 ) Comprehensive (loss) income $ ( 61,844 ) $ 14,704 $ 104,887 See accompanying notes to consolidated financial statements. 49 ZUMIEZ INC. CONSOLIDATED STATEMENTS OF CHA NGES IN SHAREHOLDERS’ EQUITY (In thousands) Accumulated Other Common Stock Comprehensive Retained Shares Amount Income (Loss) Earnings Total Balance at January 30, 2021 25,599 $ 171,628 $ 939 $ 380,029 $ 552,596 Net income — — — 119,289 119,289 Other comprehensive loss, net — — ( 14,402 ) — ( 14,402 ) Issuance and exercise of stock-based awards 197 2,380 — — 2,380 Stock-based compensation expense — 6,816 — — 6,816 Repurchase of common stock ( 4,581 ) — — ( 198,361 ) ( 198,361 ) Balance at January 29, 2022 21,215 180,824 ( 13,463 ) 300,957 468,318 Net income — — — 21,034 21,034 Other comprehensive loss, net — — ( 6,330 ) — ( 6,330 ) Issuance and exercise of stock-based awards 188 603 — — 603 Stock-based compensation expense — 6,991 — — 6,991 Repurchase of common stock ( 1,914 ) — — ( 83,288 ) ( 83,288 ) Balance at January 28, 2023 19,489 188,418 ( 19,793 ) 238,703 407,328 Net loss — — — ( 62,610 ) ( 62,610 ) Other comprehensive income, net — — 766 — 766 Issuance and exercise of stock-based awards 344 704 — — 704 Stock-based compensation expense — 7,022 — — 7,022 Balance at February 3, 2024 19,833 $ 196,144 $ ( 19,027 ) $ 176,093 $ 353,210 See accompanying notes to consolidated financial statements. 50 ZUMIEZ INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS (In thousands) Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Cash flows from operating activities: Net (loss) income $ ( 62,610 ) $ 21,034 $ 119,289 Adjustments to reconcile net income to net cash provided (used in) by operating activities: Depreciation, amortization and accretion 22,763 21,626 22,930 Noncash lease expense 68,164 67,394 64,466 Deferred taxes ( 1,050 ) 2,485 2,374 Stock-based compensation expense 7,022 6,991 6,816 Impairment of goodwill and long-lived assets 43,904 2,081 2,229 Other 206 1,176 2,728 Changes in operating assets and liabilities: Receivables 6,859 ( 1,716 ) 2,884 Inventories 5,809 ( 5,279 ) 2,587 Prepaid expenses and other assets ( 1,817 ) ( 1,082 ) ( 2,824 ) Trade accounts payable ( 907 ) ( 15,484 ) ( 14,060 ) Accrued payroll and payroll taxes 2,170 ( 14,895 ) 3,649 Income taxes payable 2,090 ( 2,320 ) ( 5,101 ) Operating lease liabilities ( 78,983 ) ( 76,605 ) ( 77,657 ) Other liabilities 1,135 ( 5,785 ) 4,640 Net cash provided by (used in) operating activities 14,755 ( 379 ) 134,950 Cash flows from investing activities: Additions to fixed assets ( 20,350 ) ( 25,627 ) ( 15,749 ) Purchases of marketable securities and other investments ( 38,348 ) ( 1,914 ) ( 160,328 ) Sales and maturities of marketable securities and other investments 50,150 81,750 277,720 Net cash (used in) provided by investing activities ( 8,548 ) 54,209 101,643 Cash flows from financing activities: Proceeds from revolving credit facilities 49,440 22,688 248 Payments on revolving credit facilities ( 49,440 ) ( 22,688 ) ( 248 ) Proceeds from issuance and exercise of stock-based awards 704 1,111 3,001 Payments for tax withholdings on equity awards — ( 508 ) ( 621 ) Common stock repurchased — ( 87,860 ) ( 193,789 ) Net cash provided by (used in) financing activities 704 ( 87,257 ) ( 191,409 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 1,080 ) ( 2,172 ) ( 1,822 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 5,831 ( 35,599 ) 43,362 Cash, cash equivalents, and restricted cash, beginning of period 88,453 124,052 80,690 Cash, cash equivalents, and restricted cash, end of period $ 94,284 $ 88,453 $ 124,052 Supplemental disclosure on cash flow information: Cash paid during the period for income taxes $ 2,065 $ 11,309 $ 42,767 Accrual for repurchase of common stock — — 4,572 Accrual for purchases of fixed assets 800 1,433 984 See accompanying notes to consolidated financial statements. 51 ZUMIEZ INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Basis of Presentation Nature of Business —Zumiez Inc., including its wholly-owned subsidiaries, (“Zumiez”, the “Company,” “we,” “us,” “its” and “our”) is a global leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear and other unique lifestyles. We operate under the names Zumiez, Blue Tomato and Fast Times. We operate ecommerce websites at zumiez.com , zumiez.ca, blue-tomato.com and fasttimes.com.au. Fiscal Year— We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. The fiscal year ended February 3, 2024 has 53-week period. The fiscal years ended January 28, 2023 and January 29, 2022 were 52-week periods. Basis of Presentation— The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. On April 1, 2022, we received 3.2 million Euro ($ 3.6 million) as a taxable subsidy from the German government related to our European business for costs incurred during fiscal 2020 and fiscal 2021 related to the COVID-19 pandemic. The subsidy was granted free of future obligations to repay and was accounted for using IAS 20, Accounting for Government Grants and Disclosure of Government Assistance by analogy. The amount was recorded as a reduction to expense in selling, general and administrative expenses on the consolidated statement of (loss) income in the first quarter of fiscal 2022. 2. Summary of Significant Accounting Policies Use of Estimates —The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. Actual results could differ from these estimates and assumptions. Fair Value of Financial Instruments —We disclose the estimated fair value of our financial instruments. Financial instruments are generally defined as cash, evidence of ownership interest in an entity or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. Our financial instruments, other than those presented in Note 12, “Fair Value Measurements,” include cash and cash equivalents, receivables, payables and other liabilities. The carrying amounts of cash and cash equivalents, receivables, payables and other liabilities approximate fair value because of the short-term nature of these instruments. Our policy is to present transfers into and transfers out of hierarchy levels as of the actual date of the event or change in circumstances that caused the transfer. Cash and Cash Equivalents —We consider all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. Concentration of Risk —We maintain our cash and cash equivalents in accounts with major financial institutions in the form of demand deposits, money market accounts, and corporate debt securities. Deposits in these financial institutions may exceed the amount of federal deposit insurance provided on such deposits. 52 Restricted Cash— Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash in other long-term assets on our consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balanc e sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows (in thousands): February 3, 2024 January 28, 2023 January 29, 2022 Cash and cash equivalents $ 88,875 $ 81,503 $ 117,223 Restricted cash included in other long-term assets 5,409 6,950 6,829 Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 94,284 $ 88,453 $ 124,052 Restricted cash included in other long-term assets represents amounts held as insurance collateral and collateral for bank guarantees on certain store operating leases. Marketable Securities —Our marketable securities primarily consist of U.S treasury and government agency securities, corporate debt securities, state and local municipal securities and variable-rate demand notes. Variable-rate demand notes are considered highly liquid. Although the variable-rate demand notes have long-term nominal maturity dates, the interest rates generally reset weekly. Despite the long-term nature of the underlying securities of the variable-rate demand notes, we have the ability to quickly liquidate these securities, which have an embedded put option that allows the bondholder to sell the security at par plus accrued interest. Investments are considered to be impaired when a decline in fair value is determined to be other-than-temporary. If the cost of an investment exceeds its fair value, we evaluate information about the underlying investment that is publicly available such as analyst reports, applicable industry data and other pertinent information and assess our intent and ability to hold the security. For fixed-income securities, we also evaluate whether we have plans to sell the security or it is more likely than not we will be required to sell the security before recovery. The investment would be written down to its fair value at the time the impairment is deemed to have occurred and a new cost basis is established. Future adverse changes in market conditions, poor operating results of underlying investments or other factors could result in losses that may not be reflected in an investment’s current carrying value, possibly requiring an impairment charge in the future. Inventories —Merchandise inventories are valued at the lower of cost or net realizable value. The cost of merchandise inventories is based upon an average cost methodology. Merchandise inventories may include items that have been written down to our best estimate of their net realizable value. Our decisions to write-down our merchandise inventories are based on their current rate of sale, the age of the inventory, the profitability of the inventory and other factors. The inventory related to this reserve is not marked up in subsequent periods. Inventory is at net realizable value which factors in a reserve for inventory whose selling price is below cost and an estimate for inventory shrinkage. Shrinkage refers to a reduction in inventory due to shoplifting, employee theft and other matters. We estimate an inventory shrinkage reserve for anticipated losses and a write down for our merchandise inventories at February 3, 2024 and January 28, 2023 in the amounts of $ 2.8 million and $ 2.5 million, respectively. Fixed Assets— Fixed assets primarily consist of leasehold improvements, fixtures, land, buildings, computer equipment, software and store equipment. Fixed assets a re stated at cost less accumulated depreciation utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of fixed assets are as follows: Leasehold improvements Lesser of 10 years or the term of the lease Fixtures 3 to 7 years Buildings, land, and building and land improvements 15 to 39 years Computer equipment, software, store equipment & other 3 to 5 years 53 The cost and related accumulated depreciation of assets sold or otherwise disposed of is removed from fixed assets and the related gain or loss is recorded in selling, general and administrative expenses on the consolidated statements of (loss) income. Asset Retirement Obligations— An asset retirement obligation (“ARO”) represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. Our AROs are associated with leasehold improvements that, at the end of a lease, we are contractually obligated to remove in order to comply with certain lease agreements. The ARO balance at February 3, 2024 and January 28, 2023 was $ 4.8 million and $ 3.4 million and is recorded in other liabilities and other long-term liabilities on the consolidated balance sheets and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. Valuation of Long-Lived Assets— We review the carrying value of long-lived assets or asset groups (generally defined as a store, corporate facility or distribution center) for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing the fair value of the assets or asset group to the carrying values. The estimation of future cash flows from operating activities requires significant judgments of factors that include forecasting future sales, gross profit and operating expenses. In addition to historical results, current trends and initiatives, long-term macro-economic and industry factors are qualitatively considered. Additionally, management seeks input from store operations related to local economic conditions. Impairment charges for operating lease right-of-use assets are included in cost of goods sold and impairment charges for fixed assets are included in selling, general and administrative expenses on the consolidated statements of (loss) income. Goodwill— Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible net assets. We test goodwill for impairment on an annual basis or more frequently if indicators of impairment are present. We perform our annual impairment measurement test on the first day of the fourth quarter. Events that may trigger an early impairment review include significant changes in the current business climate, future expectations of economic conditions, declines in our operating results of our reporting units, or an expectation that the carrying amount may not be recoverable. We have an option to test goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If we choose not to perform the qualitative test or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we compare the carrying value of the reporting unit to its estimated fair value, which is based on the perspective of a market-participant. If the carrying amount of the reporting unit’s goodwill exceeds the estimated fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. We generally determine the fair value of each of our reporting units based on a combination of the income approach and the market valuation approaches. Key assumptions in the income approach include estimating future cash flows, long-term growth rates and weighted average cost of capital. Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions, operating performance and our business strategies. Key assumptions in the market approaches include identifying companies and transactions with comparable business factors, such as earnings growth, profitability, business and financial risk. We recorded a full impairment of Blue Tomato goodwill amounting to $ 41.1 million. See Note 7 Goodwill and Intangible Assets for the details of the impairment. Intangible Assets— Our intangible assets consist of trade names and trademarks with indefinite lives and certain definite-lived intangible assets. We test our indefinite-lived intangible assets for impairment on an annual basis, or more frequently if indicators of impairment are present. We test our indefinite-lived assets by estimating the fair value of the asset and comparing that to the carrying value, an impairment loss is recorded for the amount that carrying value exceeds the estimated fair value. The fair value of the trade names and trademarks is determined 54 using the relief from royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. The assumptions used in this method requires management judgment and estimates in forecasting future revenue growth, discount rates, and royalty rates. Definite-lived intangible assets, which consist of developed technology, customer relationships and non-compete agreements, are amortized using the straight-line method over their estimated useful lives. Additionally, we test the definite-lived intangible assets when facts and circumstances indicate that the carrying values may not be recoverable. We first assess the recoverability of our definite-lived intangible assets by comparing the undiscounted cash flows of the definite-lived asset less its carrying value. If the undiscounted cash flows are less than the carrying value, we then determine the estimated fair value of our definite-lived asset by taking the estimated future operating cash flows derived from the operation to which the asset relates over its remaining useful life, using a discounted cash flow analysis and comparing it to the carrying value. Any impairment would be measured as the difference between the carrying amount and the estimated fair value. Changes in any of these estimates, projections and assumptions could have a material effect of the fair value of these assets in future measurement periods and result in an impairment which could materially affect our results of operations. Leases – We determine at inception if a contract is or contains a lease. The lease classification is determined at the commencement date. The majority of our leases are operating leases for our retail store locations. We do not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement. Upon modification of a contract, we reassess if a contract is or contains a lease. For contracts that contain both lease and non-lease components, such as common area maintenance, we allocate the consideration to the components based on the relative standalone price. At the commencement date of a lease, we recognize (1) a right-of-use asset representing our right to use the underlying asset during the lease term and (2) a lease liability for the present value of the lease payments not yet made. The lease term includes the options to extend the lease, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The majority of our store operating leases include ongoing co-tenancy requirements or early termination option that reduce lease payments, permit lease termination, or both, in the event that co-tenants cease to operate for specific periods or if stated sales levels are not met in specific periods. As the rate implicit in the lease is not readily determinable for our leases, we discount our lease payments using our incremental borrowing rate. Our incremental borrowing rate is based on information available at commencement date and represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The right-of-use asset is measured at the present value of fixed lease payments not yet made with adjustments for initial direct costs, lease prepayments and lease incentives received. The right-of-use asset is reduced over time by the recognition of straight-line expense less the accretion of the lease liability under the effective interest method. The lease liability is measured at the present value of fixed lease payments not yet made. We evaluate the carrying value of right-of-use assets for indicators of impairment and perform an analysis of the recoverability of the related asset group. If the carrying value of the asset group is determined to be in excess of the estimated fair value, we record an impairment loss in our consolidated statements of (loss) income. Additionally, we review the carrying value of the right-of-use assets for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable, require reassessment of the leases, and remeasurement if needed. Our store operating leases may include fixed minimum lease payments, as contractually stated in the lease agreement or variable lease payments, which are generally based on a percentage of the store’s net sales in excess of a specified threshold or are dependent on changes in an index. Operating lease expense relating to fixed lease payments is recognized on a straight-line basis over the lease term and lease expense relating to variable payments is expensed as incurred. Operating lease expense is recorded in the cost of goods sold expenses on the consolidated statements of (loss) income. 55 Claims and Contingencies— We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency. Revenue Recognition— Revenue is recognized upon purchase at our retail store locations. For our ecommerce sales, revenue is recognized when control passes to the customer upon shipment. Taxes collected from our customers are recorded on a net basis. We accrue for estimated sales returns by customers based on historical return experience. The allowance for sales returns at February 3, 2024 and January 28, 2023 was $ 3.0 million and $ 3.1 million, respectively. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. The current liability for gift cards w as $ 4.3 million at February 3, 2024 and $ 4.9 million at January 28, 2023. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in proportion of the patterns used by the customer based on our historical redemption patterns. For the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022, we recorded net sales related to gift card breakage income of $ 1.8 million, $ 1.9 million and $ 1.7 million, respectively. Loyalty Program— We have a customer loyalty program, the Zumiez STASH, which allows members to earn points for purchases or performance of certain activities. The points can be redeemed for a broad range of rewards, including product and experiential rewards. Points earned for purchases are recorded as a current liability and a reduction of net sales based on the relative fair value of the points at the time the points are earned and estimated redemption rates. Revenue is recognized upon redemption of points for rewards. Points earned for the performance of activities are recorded as a current liability based on the estimated cost of the points and as marketing expense when redeemed. The deferred revenue related to our customer loyalty program at February 3, 2024 and January 28, 2023 wa s $ 1.0 million an d $ 1.2 million, respectively. Cost of Goods Sold— Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products. Shipping Revenue and Costs— We include shipping revenue related to ecommerce sales in net sales and the related freight cost is charged to cost of goods sold. Selling, General and Administrative Expense— Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at the home office and stores, facility expenses, training expenses, advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles assets and other miscellaneous operating costs are also included in selling, general and administrative expenses. Advertising— We expense advertising costs as incurred, except for catalog costs, which are expensed once the catalog is mailed. Advertising expenses are net of sponsorships and vendor reimbursements. Advertising expense was $ 11.5 million, $ 10.4 million and $ 13.5 million for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 , respectively. Stock-Based Compensation— We account for stock-based compensation by recording the estimated fair value of stock-based awards granted as compensation expense over the vesting period, net of estimated forfeitures. Stock-based compensation expense is attributed using the straight-line method. We estimate forfeitures of stock-based awards based on historical experience and expected future activity. The fair value of restricted stock awards and units is measured based on the closing price of our common stock on the date of grant. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. 56 Common Stock Share Repurchases— We may repurchase shares of our common stock under authorizations made from time to time by our Board of Directors. Under applicable Washington State law, shares repurchased are retired and not presented separately as treasury stock on the consolidated financial statements. Instead, the value of repurchased shares is deducted from retained earnings. Income Taxes— We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recorded based on the differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that we expect to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that it is more likely than not that all or some portion of the deferred tax benefit will not be realized. We regularly evaluate the likelihood of realizing the benefit of income tax positions that we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized. Interest and penalties related to income tax matters are classified as a component of income tax expense. Unrecognized tax benefits of $ 2.6 million and $ 2.5 million are recorded in other long-term liabilities on the consolidated balance sheets at February 3, 2024 and January 28, 2023, respectively. Our tax provision for interim periods is determined using an estimate of our annual effective rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the fiscal year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual rate. Earnings per Share— Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. The dilutive effect of stock options and restricted stock is applicable only in periods of net income. Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options, employee stock purchase plan funds held to acquire stock and non-vested restricted stock. Potentially anti-dilutive securities not included in the calculation of diluted earnings per share are options to purchase common stock where the option exercise price is greater than the average market price of our common stock during the period reported. Foreign Currency Translation— Our international subsidiaries operate with functional currencies other than the U.S. Dollar, including the Canadian Dollar, Australian Dollar, Euro, Norwegian Krone, Swedish Krona, and Swiss Franc. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the balance sheet date. Revenue and expenses denominated in foreign currencies are translated into U.S. dollars at the monthly average exchange rate for the period and the translation adjustments are reported as an element of accumulated other comprehensive loss on the consolidated balance sheets. Segment Reporting— We identify our operating segments according to how our business activities are managed and evaluated. Our operating segments have been aggregated and are reported as one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers and economic characteristics. Recent Accounting Standards— In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment's profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an 57 explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. This ASU will likely result in us including the additional required disclosures when adopted. We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024. In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted. 3. Revenue The following table disaggregate net sales by geographic region (in thousands): Fiscal Year Ended February 3, January 28, January 30, 2024 2023 2022 United States $ 654,153 $ 753,761 $ 978,438 Canada 43,477 48,610 52,244 Europe 152,869 132,216 134,988 Australia 24,987 23,793 18,197 Net sales $ 875,486 $ 958,380 $ 1,183,867 Net sales for the year ended February 3, 2024 included a $ 2.5 million increase due to the change in foreign exchange rates, which consisted of $ 4.7 million in Europe, which was offset by decrease of $ 1.2 million in Canada, and decrease of $ 1.0 million in Australia. 4. Cash, Cash Equivalents and Marketable Securities The following tables summarize the estimated fair value of our cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands): February 3, 2024 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value Cash and cash equivalents: Cash $ 38,188 $ — $ — $ 38,188 Money market funds 11,322 — — 11,322 Corporate debt securities 39,374 — ( 9 ) 39,365 Total cash and cash equivalents 88,884 — ( 9 ) 88,875 Marketable securities: U.S. treasury and government agency securities 17,610 — ( 2,834 ) 14,776 Corporate debt securities 41,218 1 ( 948 ) 40,271 Certificates of deposit 16,607 — — 16,607 State and local government securities 6,525 — ( 105 ) 6,420 Variable-rate demand notes 4,630 — — 4,630 Total marketable securities $ 86,590 $ 1 $ ( 3,887 ) $ 82,704 58 January 28, 2023 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Estimated Fair Value Cash and cash equivalents: Cash $ 30,587 $ — $ — $ 30,587 Money market funds 22,121 — — 22,121 Corporate debt securities 28,802 — ( 7 ) 28,795 Total cash and cash equivalents 81,510 — ( 7 ) 81,503 Marketable securities: U.S. treasury and government agency securities 20,973 — ( 2,891 ) 18,082 Corporate debt securities 60,832 — ( 2,848 ) 57,984 State and local government securities 16,490 — ( 570 ) 15,920 Total marketable securities $ 98,295 $ — $ ( 6,309 ) $ 91,986 All of ou r available-for-sale debt securities have an effective maturity date of five years or less and may be liquidated, at our discretion, prior to maturity. The following tables summarize the gross unrealized holding losses and fair value for investments in an unrealized loss position, and the length of time that individual securities have been in a continuous loss position (in thousands): February 3, 2024 Less Than Twelve Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Cash and cash equivalents: Corporate debt securities $ 29,093 $ ( 9 ) $ — $ — $ 29,093 $ ( 9 ) Total cash and cash equivalents $ 29,093 $ ( 9 ) $ — $ — $ 29,093 $ ( 9 ) Marketable securities: U.S. treasury and government agency securities $ — $ — $ 14,777 $ ( 2,834 ) $ 14,777 $ ( 2,834 ) Corporate debt securities - - 37,878 ( 948 ) 37,878 ( 948 ) State and local government securities - - 6,420 ( 105 ) 6,420 ( 105 ) Total marketable securities $ — $ — $ 59,075 $ ( 3,887 ) $ 59,075 $ ( 3,887 ) January 28, 2023 Less Than Twelve Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Cash and cash equivalents: Corporate debt securities $ 27,099 $ ( 7 ) $ — $ — $ 27,099 $ ( 7 ) Total cash and cash equivalents $ 27,099 $ ( 7 ) $ — $ — $ 27,099 $ ( 7 ) Marketable securities: U.S. treasury and government agency securities $ 3,682 $ ( 229 ) $ 14,399 $ ( 2,662 ) $ 18,081 $ ( 2,891 ) Corporate debt securities 12,044 ( 604 ) 45,940 ( 2,244 ) 57,984 ( 2,848 ) State and local government securities 2,434 ( 50 ) 13,487 ( 520 ) 15,921 ( 570 ) Total marketable securities $ 18,160 $ ( 883 ) $ 73,826 $ ( 5,426 ) $ 91,986 $ ( 6,309 ) 59 We did no t record a realized loss for other-than-temporary impairments during the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 . 5. Receivables Receivables consisted of the following (in thousands): February 3, 2024 January 28, 2023 Credit cards receivable $ 6,530 $ 7,840 Vendor receivable 4,302 6,345 Tax-related receivable 1,521 3,727 Interest receivable 409 327 Other receivables 795 1,686 Tenant allowances receivable 223 688 Receivables $ 13,780 $ 20,613 6. Fixed Assets Fixed assets consisted of the following (in thousands): February 3, 2024 January 28, 2023 Leasehold improvements 211,537 $ 205,850 Fixtures 91,818 91,954 Buildings, land, and building and land improvements 29,602 28,179 Computer equipment, software, store equipment and other 68,152 56,707 Fixed assets, at cost 401,109 382,690 Less: Accumulated depreciation ( 310,601 ) ( 288,944 ) Fixed assets, net $ 90,508 $ 93,746 Depreciation expense on fixed assets is recognized on our consolidated income statement as follows (in thousands): Fiscal Year Ended February 3, 2024 January 29, 2022 January 30, 2021 Cost of goods sold $ 1,687 $ 1,670 $ 1,203 Selling, general and administrative expenses 20,958 19,649 20,226 Depreciation expense $ 22,645 $ 21,319 $ 21,429 Impairment of Fixed Assets— We recorded $ 1.6 million, $ 1.7 million and $ 0.1 million of impa irment of fixed assets in selling, general and administrative expenses on the consolidated statements of (loss) income for the years ended February 3, 2024, January 28, 2023 and January 29, 2022 . 7. Goodwill and Intangible Assets The following tables summarize the changes in the carrying amount of goodwill (in thousands): Balance as of January 29, 2022 $ 57,560 Impairment $ - Effects of foreign currency translation ( 994 ) Balance as of January 28, 2023 56,566 Impairment ( 41,135 ) Effects of foreign currency translation ( 57 ) Balance as of February 3, 2024 $ 15,374 60 The company performs annual impairment test over goodwill and intangible assets to determine if fair value exceeds carrying value. The fair value of the reporting unit was determined using a combination of an income-based approach (discounted cash flows) and a market-based approach (guideline transaction method and guideline public company method). The discounted cash flow method involved subjective estimates and assumptions such as projected revenue growth, operating profit, and the discount rate. The guideline transaction method involved actual transactions that have occurred in the company’s industry or related industries to arrive at an indication of value. The guideline public company method involved calculations based on operating data from comparable publicly traded companies. We recorded a full impairment of Blue Tomato goodwill amounting to $ 41.1 million for the fiscal year ended February 3, 2024 . Though sales at Blue Tomato continued a trend of year-over-year growth, the trend has been more closely tied to store growth than comparable sales trends needed to keep up with the cost of doing business. As such, we have experienced increasing operating losses with the current fiscal year having the largest loss at Blue Tomato since acquisition. The macroeconomic climate conditions continue to indicate economic instability. Factors include consumer trends, higher costs of doing business, lingering COVID-19 impacts, war in Ukraine, energy challenges and inflation/interest rate pressures. These pressures and the continued lack of scalability in the business lead the Board and Company management to prioritize positive cash flow and operating profit in the annual budget cycle and the resulting 5 and 10-year plans that reduced expected store count by 50 % to align with lower levels of capital and attempt to focus on profitability rather than growth. This change in store growth directly impacts the future revenue expectations of the business and related present value valuation technique used in our annual impairment test. Furthermore, we have reduced growth rates going forward to more closely align with historical trends as well as factor in the impact of less maturing stores. There was no impairment of goodwill for the fiscal years ended January 28, 2023 and January 29, 2022. The following table summarizes the gross carrying amount, accumulated amortization and the net carrying amount of intangible assets (in thousands): February 3, 2024 January 28, 2023 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net Gross Carrying Amount Accumulated Amortization Intangible Assets, Net Intangible assets not subject to amortization: Trade names and trademarks $ 14,200 $ — $ 14,200 $ 14,443 $ — $ 14,443 Intangible assets subject to amortization: Developed technology 3,252 3,252 — 3,262 3,262 — Customer relationships 2,410 2,410 — 2,417 2,417 — Non-compete agreements 197 197 — 213 213 — Total intangible assets $ 20,059 $ 5,859 $ 14,200 $ 20,335 $ 5,892 $ 14,443 There was no impairment of intangible assets for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022. All amounts in the tables above are denominated in a foreign currency and subject to foreign exchange fluctuation. 61 We re corded no amortization expense for intangible assets for the year ended February 3, 2024 and January 28, 2023. We recorded $ 0.1 million of amortization expense for intangible assets for the year ended January 29, 2022 . Amortization expense of intangible assets is recorded in selling, general and administrative expense on the consolidated statements of (loss) income. 8. Other Current Liabilities Other current liabilities consisted of the following (in thousands): February 3, 2024 January 28, 2023 Accrued indirect taxes $ 7,366 $ 5,210 Accrued payables 7,098 6,499 Unredeemed gift cards 4,280 4,916 Allowance for sales returns 2,984 3,089 Income taxes payable 1,675 1,037 Other current liabilities 1,372 1,667 Deferred revenue 1,111 1,231 Other current liabilities $ 25,886 $ 23,649 9. Revolving Credit Facilities and Debt On October 14, 2021, we amended our credit agreement with Wells Fargo Bank, N.A. (previously entered into December 7, 2018), which provided us with a senior secured credit facility (“credit facility”) of up to $ 25.0 million through December 1, 2023, and up to $ 35.0 million after December 1, 2023 and through December 1, 2024. The secured revolving credit facility is available for working capital and other general corporate purposes. The senior secured credit facility provides for the issuance of standby letters of credit in an amount not to exceed $ 17.5 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed $ 10.0 million and with terms not to exceed 120 days. The amount of borrowings available at any time under our credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. The credit facility will mature on December 1, 2024 . All obligations under the credit facility are joint and several with Zumiez Services and guaranteed by certain of our subsidiaries. The credit facility is secured by a first-priority security interest in substantially all of the personal property (but not the real property) of the borrowers and guarantors. Amounts borrowed under the credit facility bear interest at a daily simple SOFR rate plus a margin of 1.35 % per annum. The credit facility contains various representations, warranties and restrictive covenants that, among other things and subject to specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. The credit facility contains certain financial maintenance covenants that generally require the Registrant to have net income after taxes of at least $ 5.0 million on a trailing four-quarter basis and a quick ratio of 1.25 :1.0 at the end of each fiscal quarter. The credit facility contains certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances. The credit facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control. 62 On November 30, 2023, we entered into a third amendment to our credit facility with Wells Fargo Bank, N.A. The amendment, among other things, (a) amended the credit limit to $ 25 million through December 1, 2024; (b) amended the EBITDA covenant to not less than $ 9 million for the quarter ending October 28, 2023, not less than $ 2.5 million for the quarter ending February 3, 2024, not less than $ 9 million in the quarter ending May 4, 2024, not less than $ 12 million for the quarter ending August 3, 2024, and not less than $ 20 million for the quarter ending November 2, 2024; (c) amended the borrowing rate to SOFR plus 1.75 % per annum; (d) introduced an unused commitment fee of 0.50 % per annum; and (e) disallows distribution of dividends or execution of stock buybacks through December 1, 2024 without bank approval. The re were no borrowings outstanding under the credit facility at February 3, 2024 or January 28, 2023 . We had no open commercial letters of credit outstanding under our secured revolving credit facility at February 3, 2024 or January 28, 2023 . We had $ 3.4 million in issued, but undrawn, standby letters of credit at February 3, 2024 , and $ 0.6 million in issued, but undrawn, standby letters of credit at January 28, 2023 . 10. Leases At February 3, 2024 , we had operating leases for our retail stores, certain distribution and fulfillment facilities, vehicles and equipment. Our remaining lease terms vary from one month to eleven years , with varying renewal and termination options. At February 3, 2024 and January 28, 2023, the weighted-average of the remaining lease term was 5.0 years and the weighted-average operating lease discount rate was 3.4 % and 2.5 %, respectively. The following table presents components of lease expense (in thousands): Year Ended February 23, 2024 January 28, 2023 Operating lease expense $ 76,434 $ 74,316 Variable lease expense 6,694 7,882 Total lease expense (1) $ 83,128 $ 82,198 (1) Total lease expense does not include common area maintenance charges and other non-lease components. Supplemental cash flow information related to leases is as follows (in thousands): February 3, 2024 January 28, 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ ( 78,983 ) $ ( 76,605 ) Right-of-use assets obtained in exchange for new operating lease liabilities 51,883 61,371 At February 3, 2024, the maturities of our operating leases liabilities are as follows (in thousands): Fiscal 2024 $ 61,503 Fiscal 2025 55,652 Fiscal 2026 36,950 Fiscal 2027 28,699 Fiscal 2028 19,334 Thereafter 37,969 Total minimum lease payments 240,107 Less: interest ( 19,345 ) Present value of lease obligations 220,762 Less: current portion ( 60,885 ) Long-term lease obligations (2) $ 159,877 63 (2) Amounts in the table do not include contingent rent, common area maintenance charges and other non-lease components. At February 3, 2024 , we have excluded from the table above $ 2.0 million of operating leases that were contractually executed, but have not yet commenced. These operating leases are expected to commence in fiscal 2024. 11. Commitments and Contingencies Purchase Commitments— At February 3, 2024 and January 28, 2023, we had outstanding purchase orders to acquire merchandise from vendors of $ 180.9 million and $ 174.3 million, respectively. We have an option to cancel these commitments with no notice prior to shipment, except for certain private label, packaging supplies and international purchase orders in which we are obligated to repay contractual amounts upon cancellation. Litigation— We are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We have made accruals with respect to these matters, where appropriate, which are reflected in our consolidated financial statements. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. We may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if we believe settlement is in the best interest of our shareholders. On October 14, 2022, former employee Seana Neihart filed a representative action under California’s Private Attorneys General Act, California Labor Code section 2698 et seq (“PAGA”), against us. An answer to the complaint was filed on December 8, 2022. A first amended complaint was filed on February 8, 2023 adding Jessica King as a plaintiff. The lawsuit alleges a series of wage and hour violations under California’s Labor Code. Zumiez has answered the complaint. We are in the process of investigating the claims and we intend to vigorously defend ourselves. Insurance Reserves— We use a combination of third-party insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability and employee-related health care benefits. We maintain reserves for our self-insured losses, which are estimated based on actuarial based analysis of historical claims experience. The self-insurance reserve, which is recorded under Accrued payroll and payroll taxes in the consolidated balance sheets, was $ 1.7 million and $ 2.8 million for fiscal years ended February 3, 2024 and January 28, 2023, respectively . 12. Fair Value Measurements We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: • Level 1—Quoted prices in active markets for identical assets or liabilities; • Level 2—Quoted prices for similar assets or liabilities in active markets or inputs that are observable; and • Level 3—Inputs that are unobservable. 64 The following tables summarize assets measured at fair value on a recurring basis (in thousands): February 3, 2024 Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 11,322 $ — $ — Corporate debt securities — 39,365 — Marketable securities: U.S. treasury and government agency securities — 14,776 — Corporate debt securities — 40,271 — Certificates of deposit — 16,607 — State and local government securities — 6,420 — Variable-rate demand notes — 4,630 — Long-term other assets: Money market funds 5,409 — — Total $ 16,731 $ 122,069 $ — January 28, 2023 Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 22,121 $ — $ — Corporate debt securities $ - $ 28,795 $ — Marketable securities: U.S. treasury and government agency securities — 18,082 — Corporate debt securities — 57,984 — State and local government securities — 15,920 — Long-term other assets: Money market funds 6,950 — — Total $ 29,071 $ 120,781 $ — The Level 2 marketable securities primarily include U.S treasury and government agency securities, corporate debt securities, state and local municipal securities, variable-rate demand notes, and certificates of deposit. Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use readily observable market data that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. We review the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believe that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. We monitor security-specific valuation trends and we make inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing. Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as fixed assets, operating lease right-of-use-assets, goodwill, other intangible assets and other assets. These assets are measured at fair value if determined to be impaired. We recorded impairment charges for operating lease right-of-use assets of $ 1.3 million in cost of sales. We recorded impairment charges for fixed assets and goodwill of $ 1.6 million and $ 41.1 million, respectively, in selling, general and administrative expenses on the consolidated statement of (loss) income for the year ended February 3, 2024. We recorded impairment charges for operating right-of-use assets of $ 0.4 million in costs of sales and impairment charges for fixed assets of $ 1.7 million in selling, general and administrative expenses on the consolidated statement of (loss) income for the year ended January 28, 2023 . 65 13. Stockholders’ Equity Share Repurchase— In December 2021, our Board of Directors approved the repurchase of up to an aggregate of $ 150 million of common stock. This repurchase program superseded all previously approved and authorized stock repurchase programs. The December 2021 stock repurchase program was completed in March 2022. The following table summarizes common stock repurchase activity (in thousands, except per share amounts): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Number of shares repurchased — 1,914 4,581 Average price per share of repurchased shares (with commission) $ — $ 43.51 $ 43.30 Total cost of shares repurchased $ — $ 83,288 $ 198,361 Accumulated Other Comprehensive (Loss) Income — The component of accumulated other comprehensive (loss) income and the adjustments to other comprehensive income (loss) for amounts reclassified from accumulated other comprehensive (loss) income into net income is as follows (in thousands): Foreign currency translation adjustments (4) Net unrealized gains (losses) on available-for- sale investments Accumulated other comprehensive (loss) income Balance at January 30, 2021 $ ( 1,407 ) $ 2,346 $ 939 Other comprehensive loss, net (3) ( 11,098 ) ( 3,304 ) ( 14,402 ) Balance at January 29, 2022 $ ( 12,505 ) $ ( 958 ) $ ( 13,463 ) Other comprehensive loss, net (2) ( 2,596 ) ( 3,734 ) ( 6,330 ) Balance at January 28, 2023 $ ( 15,101 ) $ ( 4,692 ) $ ( 19,793 ) Other comprehensive (loss) income, net (1) ( 1,045 ) 1,811 766 Balance at February 3, 2024 $ ( 16,146 ) $ ( 2,881 ) $ ( 19,027 ) (1) Other comprehensive loss before reclassifications was $ 1.8 million, net of taxes for net unrealized losses on available-for-sale investments for the fiscal year ended February 3, 2024 . There were no unrealized losses, net of taxes reclassified from accumulated other comprehensive loss for the year ended February 3, 2024. (2) Other comprehensive loss before reclassifications was $ 3.8 million, net of taxes for net unrealized losses on available-for-sale investments for the fiscal year ended January 28, 2023. There were $ 0.1 million net unrealized losses, net of taxes reclassified from accumulated other comprehensive loss for the year ended January 28, 2023. (3) Other comprehensive loss be fore reclassification was $ 4.4 million, net of taxes for net unrealized losses on available-for-sale securities for the fiscal year ended January 29, 2022 . There were $ 1.1 million net unrealized losses, net of taxes reclassified from accumulated other comprehensive loss for the year ended January 29, 2022. (4) Foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in our international securities. 14. Equity Awards General— We maintain several equity incentive plans under which we may grant incentive stock options, nonqualified stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights to employees (including officers), non-employee directors and consultants. 66 Stock-Based Compensation— Total stock-based compensation expense is recognized on our consolidated income statements as follows (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Cost of goods sold $ 1,745 $ 1,464 $ 1,451 Selling, general and administrative expenses 5,277 5,527 5,365 Total stock-based compensation expense $ 7,022 $ 6,991 $ 6,816 At February 3, 2024, there was $ 8.6 million of total unrecognized compensation cost related to unvested stock options and restricted stock. This cost has a weighted-average recognition period of 1.1 years. Restricted Equity Awards — The following table summarizes the activity of restricted stock awards and restricted stock units, collectively defined as “restricted equity awards” (in thousands, except grant date weighted-average fair value): Restricted Equity Awards Grant Date Weighted- Average Fair Value Intrinsic Value Outstanding at January 30, 2021 600 $ 21.41 Granted 142 $ 45.24 Vested ( 247 ) $ 21.95 Forfeited ( 52 ) $ 25.30 Outstanding at January 29, 2022 443 $ 28.31 Granted 178 $ 38.81 Vested ( 198 ) $ 27.01 Forfeited ( 26 ) $ 33.41 Outstanding at January 28, 2023 397 $ 33.34 Granted 334 $ 20.06 Vested ( 202 ) $ 29.37 Forfeited ( 34 ) $ 31.18 Outstanding at February 3, 2024 495 $ 26.14 $ 8,762 The following table summarizes additional information related to restricted equity awards activity (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Vest date fair value of restricted stock vested $ 3,795 $ 8,076 $ 11,146 Stock Options —We h ad 0.4 million stock options outstanding at February 3, 2024 , and 0.4 million stock options outstanding at January 28, 2023 and January 29, 2022 with a grant date weighted average exercise price of $ 26.51 , $ 29.30 and $ 26.37 , respectively. Employee Stock Purchase Plan— We offer an Employee Stock Purchase Plan (“ESPP”) for eligible employees to purchase our common stock at a 15 % discount of the lesser of fair market value of the stock on the first business day or the last business day of the offering period, subject to maximum contribution thresholds. The number of shares issued under our ESPP was less than 0.1 million for each of the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022 . 67 15. Income Taxes The components of earnings before income taxes are (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 United States $ ( 4,269 ) $ 40,632 $ 166,999 Foreign ( 57,609 ) ( 8,165 ) ( 6,488 ) Total earnings before income taxes $ ( 61,878 ) $ 32,467 $ 160,511 The components of the provision for income taxes are (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Current: Federal $ ( 270 ) $ 5,897 $ 31,231 State and local 242 1,613 6,521 Foreign 1,810 1,508 1,273 Total current 1,782 9,018 39,025 Deferred: Federal ( 1,485 ) 1,663 1,328 State and local ( 413 ) 340 873 Foreign 848 412 ( 4 ) Total deferred ( 1,050 ) 2,415 2,197 Provision for income taxes $ 732 $ 11,433 $ 41,222 The reconciliation of the income tax provision at the U.S. federal statutory rate to our effective income tax rate is as follows: Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal effect 0.3 5.5 3.9 Change in valuation allowance ( 19.9 ) 9.3 1.4 Foreign earnings, net 3.0 3.3 ( 0.2 ) Stock-based compensation ( 0.9 ) ( 2.3 ) ( 1.1 ) Tax credits 1.0 ( 1.3 ) ( 0.4 ) Goodwill impairment ( 4.3 ) - - Foreign tax audit ( 1.2 ) - - Other ( 0.2 ) ( 0.3 ) 1.1 Effective tax rate ( 1.2 %) 35.2 % 25.7 % 68 The components of deferred income taxes are (in thousands): February 3, 2024 January 28, 2023 Deferred tax assets: Lease Liability $ 55,940 $ 65,237 Net operating losses 25,827 20,347 Employee benefits, including stock-based compensation 3,201 2,410 Deferred losses 1,631 2,263 Other 1,875 1,282 Accrued liabilities 353 1,605 Inventory — 884 Total deferred tax assets 88,827 94,028 Deferred tax liabilities: Right of Use Asset ( 48,049 ) ( 55,441 ) Goodwill and other intangibles ( 4,323 ) ( 10,771 ) Prepaid expenses ( 1,101 ) ( 1,131 ) Other ( 925 ) ( 1,031 ) Property and equipment ( 846 ) ( 4,699 ) Total deferred tax liabilities ( 55,244 ) ( 73,073 ) Net valuation allowances ( 24,960 ) ( 12,750 ) Net deferred tax assets $ 8,623 $ 8,205 At February 3, 2024 and January 28, 2023, we had foreign net operating loss carryovers that could be utilized to reduce future years’ tax liabilities of $ 111.2 million and $ 88.1 million, respectively. The tax-effected foreign net operating loss carryovers were $ 25.6 million and $ 20.3 million at February 3, 2024 and January 28, 2023, respectively. The net operating loss carryovers have an indefinite carryforward period and currently will not expire. At February 3, 2024 and January 28, 2023 , we had state net operating loss carryovers that could be utilized to reduce future year's tax liabilities of $ 16.8 million and $ 0 , respectively, which, if unused will expire in years 2028 through 2043 . The tax-effected state net operating loss carryovers were $ 0.3 million and $ 0 at February 3, 2024 and January 28, 2023, respectively. At February 3, 2024 and January 28, 2023, we had tax credit carryovers that could be utilized to reduce future year's tax liabilities of $ 0.7 million and $ 0.3 million, respectively, which if unused will expire in years 2028 through 2043 . At February 3, 2024 and January 28, 2023, we had capital loss and charitable deduction limitation carryovers that could be utilized to reduce future year's tax liabilities of $ 0.7 million and $ 0.4 million, which if unused will expire in years 2026-2028 . At February 3, 2024 and January 28, 2023, we had valuation allowances on our deferred tax assets of $ 25.0 million and $ 12.8 million, respectively, primarily due to the uncertainty of the realization of certain deferred tax assets related to foreign net operating loss carryovers. The following table summarizes the activity related to our unrecognized tax benefits (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Beginning unrecognized tax benefits $ 2,522 $ 1,743 $ 1,143 Increase related to prior year tax positions 17 818 — Increase related to current year tax positions 721 446 796 Decrease related to lapsing of statute of limitations ( 674 ) ( 485 ) ( 196 ) Ending unrecognized tax benefits $ 2,586 $ 2,522 $ 1,743 69 At February 3, 2024 we had $ 2.6 million of gross unrecognized tax benefits of which $ 1.6 million, if recognized, would affect our effective tax rate. We recognized an expense of $ 0.01 million, an expense of $ 0.12 million and an expense of $ 0.09 million of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2023, 2022 and 2021, respectively. As of February 3, 2024 and January 28, 2023, we had accrued interest and penalties of $ 0.3 million and $ 0.3 million, respectively, within our consolidated balance sheets. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Our U.S. federal income tax returns are no longer subject to examination for years before fiscal 2020, and we are no longer subject to U.S. state and local examinations for years before fiscal 2019. We are no longer subject to examination for all foreign income tax returns before fiscal 2018. 16. Earnings per Share, Basic and Diluted The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Net (loss) income $ ( 62,610 ) $ 21,034 $ 119,289 Weighted average common shares for basic earnings per share 19,290 19,208 24,187 Dilutive effect of stock options and restricted stock — 220 406 Weighted average common shares for diluted earnings per share 19,290 19,428 24,593 Basic (loss) earnings per share $ ( 3.25 ) $ 1.10 $ 4.93 Diluted (loss) earnings per share $ ( 3.25 ) $ 1.08 $ 4.85 Total anti-dilutive common stock options not included in the calculation of diluted earnings per share was 0.5 million for the fiscal year ended February 3, 2024 and 0.1 million for fiscal years ended January 28, 2023 and January 29, 2022 . 17. Related Party Transactions The Zumiez Foundation is a charitable based nonprofit organization focused on meeting various needs of the under-privileged. Our Chairman of the Board is also the President of the Zumiez Foundation. We committed charitable contributions to the Zumiez Foundation of $ 0.1 million , $ 0.9 million and $ 1.6 million for the fiscal years ended February 3, 2024, January 28, 2023, and January 29, 2022, respectively. There were no accruals for charitable contributions payable to the Zumiez Foundation as of February 3, 2024. Accrued charitable contributions payable to the Zumiez Foundation amounted to $ 0.5 million as of January 28, 2023. 70 18. Segment Reporting Our operating segments have been aggregated and are reported as one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers and economic characteristics. The following table is a summary of product categories as a percentage of merchandise sales: Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Men's Apparel 47 % 43 % 43 % Hardgoods 12 % 13 % 16 % Accessories 17 % 18 % 17 % Footwear 14 % 15 % 13 % Women's Apparel 10 % 11 % 11 % Total 100 % 100 % 100 % The following tables present summarized geographical information (in thousands): Fiscal Year Ended February 3, 2024 January 28, 2023 January 29, 2022 Net sales (1): United States $ 654,153 $ 753,761 $ 978,438 Foreign 221,333 204,619 205,429 Total net sales $ 875,486 $ 958,380 $ 1,183,867 February 3, 2024 January 29, 2022 Long-lived assets (2): United States $ 167,204 $ 186,433 Foreign 120,079 129,553 Total long-lived assets $ 287,283 $ 315,986 (1) Net sales are allocated based on the location in which the sale was originated. Store sales are allocated based on the location of the store and ecommerce sales are allocated to the U.S. for sales on zumiez.com and to foreign for sales on zumiez.ca, blue-tomato.com and fasttimes.com.au . (2) Long-lived assets include fixed assets, net and operating lease right-of-use assets. 71 EXHIBIT INDEX 3.1 Articles of Incorporation. [Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (file No. 333-122865)] 3.2 Bylaws, as amended and restated May 21, 2014 and Amendment No.1, dated as of May 21, 2015, to Bylaws of Zumiez Inc. (as previously Amended and Restated as of May 21, 2014 [Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 23, 2014 and Exhibit to the Company’s Form 8-K filed on May 22, 2015] 4.1 Form of Common Stock Certificate of Zumiez Inc. [Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (file No. 333-122865)] 10.15 Zumiez Inc. 2005 Equity Incentive Plan, as amended and restated effective May 27, 2009. [Incorporated by reference from Exhibit 10.15 to the Form 8-K filed by the Company on June 1, 2009] 10.20 Zumiez Inc. 2014 Equity Incentive Plan. [Incorporated by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K filed on May 23, 2014] 10.21 Form of Restricted Stock Award Agreement and Terms and Conditions. [Incorporated by reference to Exhibit 10.21 to the Company’s Current Report on Form 8-K filed on May 23, 2014] 10.22 Form of Stock Option Award Agreement and Terms and Conditions. [Incorporated by reference to Exhibit 10.22 to the Company’s Current Report on Form 8-K filed on May 23, 2014] 10.23 Zumiez Inc. 2014 Employee Stock Purchase Plan. [Incorporated by reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K filed on May 23, 2014] 10.24 Form of Indemnification Agreement. [Incorporated by reference to Exhibit 10.24 to the Company’s Current Report on Form 8-K filed on May 23, 2014] 10.28 Credit Agreement dated as of December 7, 2018 by and among Zumiez Inc., Zumiez Services Inc. and Wells Fargo Bank, National Association. [Incorporated by reference to Exhibit 10.28 to the Form 8-K filed by the Company on December 7, 2018] 10.29 First Amendment to Credit Agreement dated as of October 14, 2021 by and among Zumiez Inc., Zumiez Services Inc. And Wells Fargo Bank, National Association. [Incorporated by reference to Exhibit 10.29 to the Company’s Current Report on Form 8-K filed on October 18, 2021] 10.30 Zumiez Inc. 2023 Equity Incentive Plan [Incorporated by reference to Exhibit 10.30 to the Company's Current Report on Form 8-K filed by the Company on June 2, 2023] 10.31 Form of Restricted Stock Award Agreement and Terms and Conditions [Incorporated by reference to Exhibit 10.31 to the Company's Current Report on Form 8-K filed on June 2, 2023] 10.32 Form of Restricted Stock Unit Award Agreement and Terms and Conditions [Incorporated by reference to Exhibit 10.32 to the Company's Current Report on Form 8-K filed on June 2, 2023] 10.33 Form of Stock Option Award Agreement and Terms and Conditions [Incorporated by reference to Exhibit 10.33 to the Company's Current Report on Form 8-K filed on June 2, 2023] 10.34 Zumiez Inc. 2023 Employee Stock Purchase Plan [Incorporated by reference to Exhibit 10.34 to the Company's Current Report on Form 8-K filed by the Company on June 2, 2023] 10.35 Second Amendment to Credit Agreement dated effective as of July 27, 2023 by and among Zumiez Inc., Zumiez Services Inc. and Wells Fargo Bank, National Association. 10.36 Third Amendment to Credit Agreement dated effective as of November 30, 2023 by and among Zumiez Inc., Zumiez Services Inc. and Wells Fargo Bank, National Association. 72 21.1 Subsidiaries of the Company. 23.1 Consent of Moss Adams LLP, Independent Registered Public Accounting Firm. 31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Principal Financial Officer (Principal Accounting Officer) pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of the Principal Executive Officer and Principal Financial Officer (Principal Accounting Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 97.1 Policy for Recovery of Erroneously Awarded Compensation 101 The following materials from Zumiez Inc.’s Annual Report on Form 10-K for the annual period ended February 3, 2024, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at February 3, 2024 and January 28, 2023; (ii) Consolidated statements of (loss) income for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022; (iii) Consolidated statement of comprehensive (loss) income for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022; (v) Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2024, January 28, 2023 and January 29, 2022; and (vi) Notes to Consolidated Financial Statements. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) Copies of Exhibits may be obtained upon request directed to the attention of our Chief Legal Officer and Secretary, 4001 204 th Street SW, Lynnwood, Washington 98036, and are available at the SEC’s website found at www.sec.gov. 73 SIGNA TURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZUMIEZ INC. / S / R ICHARD M. B ROOKS March 14, 2024 Signature Date By: Richard M. Brooks Chief Executive Officer and Director (Principal Executive Officer) / S / C HRISTOPHER C . W ORK March 14, 2024 Signature Date By: Christopher C. Work, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. / S / T HOMAS D. C AMPION March 14, 2024 / S / S TEVEN P. L OUDEN March 14, 2024 Signature Date Signature Date Thomas D. Campion, Chairman Steven P. Louden, Director / S / J AMES P. M URPHY March 14, 2024 / S /T RAVIS D. S MITH March 14, 2024 Signature Date Signature Date James P. Murphy, Director Travis D. Smith, Director / S / CARMEN R. BAUZA March 14, 2024 / S / S COTT A. B AILEY March 14, 2024 Signature Date Signature Date Carmen R. Bauza, Director Scott A. Bailey, Director / S / L ILIANA G IL V ALLETTA March 14, 2024 / S / G UY H ARKLESS March 14, 2024 Signature Date Signature Date Liliana Gil Valletta, Director Guy Harkless, Director 74