Zumiez recently released its 10Q for the quarter ending August 28th. (To see the full report, click HERE.)Their balance sheet is strong. They made money, and their sales grew a bit, but earnings per share fell compared to the prior periods last year. For the six months ended August 2nd, the decline was from $0.16 to $0.14 cents per share. For the quarter, it fell from $0.11 to $0.09.

Gross profit margins fell slightly, from 33.1% to 32% for the six months, and from 34.4% to 32.6% for the three months period. Comparable store net sales fell by 1.7% for the quarter. Well, why should Zumiez be any different from other retailers? So Zumiez is doing just fine, though they aren?t immune to difficult economic times any more than other companies.

But I wanted to focus on a couple of their footnotes; ?Summary of Significant Accounting Policies- Marketable Securities? on page eight and ?Fair Value Measurements? on page 13. These footnotes are particularly noteworthy in light of the last ten day?s action in the markets.

At August 2, 2008, Zumiez had $60.4 million in marketable securities. Of that, $2 million was in auction rate securities and they had to take a $200,000 impairment charge against that $2 million. Now, obviously this isn?t a meaningful amount of money to Zumiez. They didn?t do anything wrong in buying those securities, they are probably going to get the whole $2 million back, and I imagine that other companies will be having similar footnotes in the near future if they haven?t already. I just saw this one first.

Zumiez says they had more of these securities, but reduced their holding during 2007. Good for them.

It?s important that you understand this, because it?s all part of what we have generally called ?the subprime crisis,? which I guess has now become the more general financial markets crisis. Many of you have probably never heard of auction rate securities. Zumiez describes them and the current market conditions for these securities as follows:

?Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals. This mechanism generally allows existing investors to rollover their holdings and continues to own their respective securities or liquidate their holdings by selling their securities at par value?.However, the recent uncertainties in the credit markets have prevented us and other investors from liquidating holdings of auction rate securities in recent auctions for these securities because the amount of securities submitted for sale has exceeded the amount of purchase orders. Should the auctions continue to fail, we anticipate we have the ability to hold these securities until the liquidity in the market improves. These investments are fully collateralized by the United States government and are insured against loss of principal and interest by a bond insurer whose current credit rating is AA. Although we are uncertain as to when the liquidity issues relating to these investments will improve, we consider these issues to be only temporary. It is possible that further declines in fair value may occur, and those declines, if any, would be recognized in other comprehensive loss. We continue to monitor the market for auction rate securities and consider its impact, if any, on the fair market value of the investments.?

Sorry about the long boring quote.

Under the Fair Value Measurement footnote, we find that in applying the Financial Accounting Standards Board Statement of Fair Accounting Standards No. 157, they classified this $2 million in auction rate securities as level 3. That is, there are no quotes and it isn?t trading so they don?t know what the securities are worth. The rest of their $60 million in investments is classified as level 2, which means they know the value because there are good quotes available.

Kudos to Zumiez for seeing the writing on the wall and apparently getting out from under other investments like this. The point I wanted to use their report to make is that there are credit markets out there that companies depend on to operate in the ordinary course of business, and they ain?t operating. Until that changes (and it isn?t just a factor in the auction rate security market), it?s hard to see how we get strong, renewed, economic growth.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line.

For more information, visit www.jeffharbaugh.com