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Zumiez Surges on Analyst Upgrade to 'Buy'

NEW YORK (TheStreet) - Zumiez (ZUMZ) shares surged more than 8% on Friday after the teen action sportswear chain received an upgrade to "buy" from Bank of America Merrill Lynch.

BofA Merrill Lynch analyst Paul Alexander raised his rating to "buy" from "neutral." Alexander said he believes the Lynnwood, Wash.-based company is well positioned for 2014 as well as the longer term,  and said the recent pullback in stock performance is ignoring "solid sales trends."

Shares were rising 8.4% to $26.79 on Friday.

"A recent pullback in the shares has caused valuation to drop near historical lows and below the group average (14x versus peers at 16x)," Alexander wrote in a note on Friday. "We think the current valuation discount is unwarranted as we expect Zumiez to grow earnings faster than its specialty retail peers (13.5% over 2014-2015 versus 11.5% for the group) through consistent new store expansion and e-commerce growth. We also expect Zumiez's business to be resilient in the near term, as evidenced by solid November comps."

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The analyst raised his 2014 earnings expectations by 5 cents to $1.72 a share, which reflects a solid holiday sales season and good execution next year. He raised his 12-month price objective to $29.

Alexander's estimate is on the high-end of estimates. Consensus expectations call for the company to post earnings of $1.72 a share for the January 2015-ending year.

Zumiez's shares have pulled back 17% since Nov. 25, coinciding with "worrisome 4Q comp guidance from surf/skate competitor Tilly's (TLYS) of negative mid- to high-single-digits," Alexander wrote.

"However, Zumiez's shares remained depressed even as it reported decent November comps of +1.7% and issued its own more stable 4Q comp outlook of -1% to +2%. We see upside to Zumiez's 4Q comp guidance due to November's resilience and view the recent sell-off as a good buying opportunity," he wrote.

ZUMZ Chart
data by YCharts

Zumiez has more than 500 stores across the U.S., located mostly in malls. The stores cater to customers' ages 12 to 24 years old that are interested in skateboarding, surfing, snowboarding, BMX and other action-packed sports lifestyles.

Retailers that cater to the teen market, namely Abercrombie & Fitch (ANF), Aeropostale (ARO) and American Eagle Outfitters (AEO), have been particularly hard hit as mall traffic has suffered as consumers remain cautious economy and look for deals elsewhere. However, Zumiez and competitor Pacific Sunwear of California (PSUN) have managed to beat the trend.

"In our view, Zumiez is a good long term growth story with faster store growth and a longer runway for expansion than most specialty retailers, and an underpenetrated e-commerce business," the note said. "Zumiez's position as the leading incubator for new action-sports brands and trends should help the company to outperform as new labels and styles emerge in the future. In addition, we see less risk of sales and margin declines at Zumiez versus other teen retailers Zumiez has already avoided incremental promotions in 2013."

The analyst noted that recent channel checks indicate that the store's "discounting is under control" and "favorable calendar shifts should provide an incremental boost to December comps."

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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