UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended: January 29, 2011

OR

Commission File Number: 000-51300

ZUMIEZ INC.

(Exact name of Registrant as specified in its charter)

Registrant's(425) 551-1500

(Registrant’s telephone number, including area code:(425) 551-1500code)

Securities registered under Section 12(b) of the Act:Common Stock

Name of each exchange on which registered:The NASDAQ Global Select Market

Securities registered under Section 12(g) of the Act:None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o¨    No  ýx

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o¨    No  ýx

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last ninety days.    Yes  ýx    No  o¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.10–K.    o¨

Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer,"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No ýx

As of the last business day of the second fiscal quarter, August 3, 2007,July 30, 2010, the aggregate market value of the Registrant'sRegistrant’s voting and non-voting stock held by non-affiliates of the Registrant was approximately $660,800,435$386,823,680 using the closing sales price on that day of $36.48.$18.30.

         As ofAt March 25, 2008,15, 2011, there were 29,002,85230,989,173 shares outstanding of the Registrant's common stock outstanding.

stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report is incorporated by reference from the Registrant'sRegistrant’s definitive proxy statement, relating to the Annual Meeting of Shareholders scheduled to be held May 28, 2008,25, 2011, which definitive proxy statement will be filed not later than 120 days after the end of the fiscal year to which this report relates.

ZUMIEZ INC.

FORM 10-K

PART I.

TABLE OF CONTENTS

ZUMIEZ INC.

FORM 10-K

PART I.

This Form 10-K contains forward-looking statements. These statements relate to our expectations for future events and future financial performance. Generally, the words "anticipate," "expect," "intend"“anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described in Item 1A below and in Item 7 of Part II of this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward- lookingforward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

Comment regarding ourWe use a fiscal calendar widely used by the retail industry that results in a fiscal year end: The Company's fiscal year is based onconsisting of a⁵²/53-week year 52- or 53-week period ending on the Saturday closest to January 31. This change first became effective forEach fiscal year 2003, whichconsists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Fiscal 2010 was the 52-week period ending January 29, 2011. Fiscal 2009 was the 52-week period ended onJanuary 30, 2010. Fiscal 2008 was the 52-week period ended January 31, 2004.2009.

"“Zumiez,"” the "Company," "we," "us," "our"“Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.

Item 1.    BUSINESS

        We areZumiez Inc., a mall basedWashington corporation, is a leading specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of February 2, 2008At January 29, 2011, we operated 285400 stores primarily located in shopping malls, giving us a presence in 2737 states. We were founded in 1978 by Thomas D. Campion, our Chairman. Our current President and Chief Executive Officer, Richard M. Brooks joined us as Chief Financial Officer in 1993. Our stores cater to young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMXbicycle motocross (or “BMX”) and motocross. We support the action sports lifestyle and promote our brand through a multi-faceted marketing approach that is designed to integrate our brand image with our customers'customers’ activities and interests. This approach, combined with our differentiated merchandising strategy, store design, comprehensive training programs and passionate employees, allows us to provide an experience for our customers that we believe is consistent with their attitudes, fashion tastes and identities and is otherwise unavailable in most malls. In addition, we operate a website that sells merchandise online and provides content and a community for our target customers. The Company was formed in August 1978.

Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with store associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers. Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our

        In order to generate customer traffic we depend heavily on locating our stores in prominent locations within successful shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of a mall's other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. Our sales volume and mall traffic generally may be adversely affected by, among other things, economic downturns in a particular area, competition from Internet retailers, non-mall retailers and other malls, increases in gasoline prices and the closing or decline in popularity of other stores in the malls in which we are located. A reduction in mall traffic as a result of these or any other factorsaction sports retailing could have a material adverse effect on our business,results of operations.

The action sports retail industry historically has been subject to substantial cyclicality. As economic conditions in the United States change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. When discretionary

consumer spending is reduced, purchases of action sports apparel and related products may decline. The current uncertainty in the United States economy and increased government debt spending may have a material adverse impact on our results of operations and financial condition.position.

Because of this cycle, we believe the “value” message has become more important to consumers. As a retailer that sells approximately 82% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers.

Our sales and inventory levels fluctuate on a seasonal basis, leaving our operating results particularly susceptible to changes in back-to-school and winter holiday shopping patterns.

Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back-to-school and winter holiday shopping seasons. Sales during these periods cannot be used as an accurate indicator of annual results. Our sales in the first and second fiscal quarters are typically lower than in our third and fourth fiscal quarters due, in part, to the traditional retail slowdown immediately following the winter holiday season. Any significant decrease in salesAs a result of this seasonality, any factors negatively affecting us during the back-to-school and winter holiday seasons wouldlast half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations.operations for the entire year. In addition, in order to prepare for the back-to-school and winter holiday shopping seasons, we must order and keep in stock significantly more merchandise than we carry during other partstimes of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, results of operations and financial condition.

Our quarterly results of operations are volatile and may decline.

Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. As discussed above, our sales and operating results are typically lower in the first and second quarters of our fiscal year due, in part, to the traditional retail slowdown immediately following the winter holiday season. Our quarterly results of operations are affected by a variety of other factors, including:

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the timing of new store openings and the relative proportion of our new stores to mature stores;

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whether we are able to successfully integrate any new stores that we acquire and the presence ofor absence of any unanticipated liabilities in connection therewith;



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fashion trends and changes in consumer preferences;



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calendar shifts of holiday or seasonal periods;



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changes in our merchandise mix;



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timing of promotional events;



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general economic conditions and, in particular, the retail sales environment;



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actions by competitors or mall anchor tenants;



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weather conditions;



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the level of pre-opening expenses associated with our new stores; and



•

inventory shrinkage beyond our historical average rates.

Failure to successfully integrate any businesses or stores that we acquire could have an adverse impact on our results of operations and financial performance.

We may from time to time acquire other retail stores, individually or in groups, or businesses. In particular, in June 2006 we completed the acquisition of the Fast Forward an apparel and accessory retail sales company. We may experience difficulties in assimilating any stores or businesses we may acquire and any such acquisitions may also result in the diversion of our capital and our management'smanagement’s attention from other business issues and opportunities. We may not be able to successfully integrate any stores or businesses that we may acquire, including their facilities, personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions or if such acquisitions fail to provide the benefits that we expect to receive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and financial performance.

Our business is susceptible to weather conditions that are out of our control including the potential risks of unpredictable weather patterns, including any weather patterns associated with naturally occurring global warming,climate change, and the resultant unseasonable weather could have a negative impact on our results of operations.

Our business is susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures (including any weather patterns associated with global warming)warming and cooling) during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions, particularly in regions of the United States where we have a concentration of stores, could have a material adverse effect on our business and results of operations.

We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our competitors, our sales could decrease.

The teenage and young adult retail apparel, hardgoods and accessories industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates and management personnel. In the softgoods market, which includes apparel, accessories and footwear, we currently compete with other teenage-focused retailers. In addition, in the softgoods market we compete with independent specialty shops, department stores and direct marketers that sell similar lines of merchandise and target customers through catalogs and e-commerce.ecommerce. In the hardgoods market, which includes skateboards, snowboards, bindings, components and other equipment, we compete directly or indirectly with the following categories of companies:

other specialty retailers that compete with us across a significant portion of our merchandising categories, such as local snowboard and skate shops;shops, large-format sporting goods stores and chains and Internetecommerce retailers.

Some of our competitors are larger than we are and have substantially greater financial, marketing, including advanced ecommerce marketing capabilities, and other resources than we do. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices and could result in the loss of our customers. Current and increased competition could have a material adverse effect on our business, results of operations and financial condition.

If we fail to maintain good relationships with vendors or if a vendor is otherwise unable or unwilling to supply us with adequate quantities of their products at acceptable prices, our business and financial performance could suffer.

Our business is dependent on continued good relations with our vendors. In particular, we believe that we generally are able to obtain attractive pricing and other terms from vendors because we are perceived as a desirable customer, and deterioration in our relationship with our vendors would likely have a material adverse effect on our business. We do not have any contractual relationships with our vendors, other than normal course of business purchase orders and, accordingly, there can be no assurance that our vendors will provide us with an

adequate supply or quality of products or acceptable pricing. Our vendors could discontinue selling to us or raise the prices they charge at any time. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Also,In addition, certain of our vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future. There can be no assurance that such vendors will not decide to discontinue supplying their products to us, supply us only less popular or lesserlower quality items, raise the prices they charge us or focus on selling their products directly. In addition, a number of our vendors are smaller, less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies. These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted. Any inability to acquire suitable merchandise at acceptable prices, or the loss of one or more key vendors, would have a material adverse effect on our business, results of operations and financial condition.

If we lose key management or are unable to attract and retain the talent required for our business, our financial performance could suffer.

Our performance depends largely on the efforts and abilities of our senior management, including our Co-Founder and Chairman, Thomas D. Campion, our President and Chief Executive Officer, Richard M. Brooks, our Chief Financial Officer, Trevor S. Lang, our Executive Vice President and General Merchandising Manager, Lynn K. Kilbourne, our Chief Financial Officer and Chief Administrative Officer, Trevor S. Lang and our Executive Vice President of Stores, Ford K. Wright. None of our employees except Mr. Brooks, has anhave employment agreementagreements with us and we do not plan to obtain key person life insurance covering any of our employees. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth objectives. As our business grows, we will need to attract and retain additional qualified management personnel in a timely manner and we may not be able to do so.

Our failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including divisional managers, regional managers, district managers, store managers and store associates, who understand and appreciate our corporate culture based on a passion for the action sports lifestyle and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber, skills and number needed to fill these positions may be in short supply in some areas, and the employee turnover rate in the retail industry is high. Competition for qualified employees could require us to pay higher wages to attract a sufficient number of suitable employees. If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected. We are also dependent upon temporary personnel to adequately staff our stores, distribution center and distributionecommerce fulfillment center particularly during busy periods such as the back-to-school and winter holiday seasons. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of temporary personnel. Although none of our employees is currently covered by collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future, which could increase our labor costs and could subject us to the risk of work stoppages and strikes. Any such failure to meet our staffing needs, any material increases in employee turnover rates, any increases in labor costs or any work stoppages, or interruptions or strikes could have a material adverse effect on our business or results of operations.

Our operations, including our sole distribution center, are concentrated in the western United States, which makes us susceptible to adverse conditions in this region.

Our home office and sole distributionecommerce fulfillment center are located in a single facilityWashington, our sole distribution center is located in Washington,California and a substantial number of our stores are located in Washington and the western half of the United States.

We also have a substantial number of stores in the New York/New Jersey region and Texas. As a result, our business may be more susceptible to regional factors than the operations of more geographically diversified competitors. These factors include, among others, economic and weather conditions, demographic and population changes and fashion tastes. In addition, we rely on a single distribution center in Everett, Washington to receive, store and distribute the vast majority of our merchandise to all of our stores and to fulfill our internet sales.stores. As a result, a natural disaster or other catastrophic event, such as an earthquake affecting western Washington, in particular, or the West Coast, could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.

We have relocated our sole distribution center previously located in general,Everett, Washington to Corona, California to receive, store and distribute the vast majority of our merchandise to all of our retail stores. As a result, events may occur subsequent to the relocation that could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.

We are required to make substantial rental payments under our operating leases and any failure to make these lease payments when due would likely have a material adverse effect on our business and growth plans.

We do not own any of our retail stores or our combined home office and distributionecommerce fulfillment center, but instead we lease all of these facilities under operating leases. Payments under these operating leases account for a significant portion of our operating expenses.expenses and has historically been our third largest expense behind cost of sales and our employee related costs. For example, total rental expense, including additional rental payments (or "percentage rent"“percentage rent”) based on sales of some of the stores, common area maintenance charges and real estate taxes, under operating leases was $22.2$61.8 million, $31.9$58.0 million and $43.5$52.9 million for the fiscal 2005, 2006,2010, 2009 and 2007 respectively. As of February 2, 20082008. At January 29, 2011, we were a party to operating leases requiring future minimum lease payments aggregating approximately $134.1$227.8 million through fiscal year 20122015 and approximately $87.5$120.0 million thereafter. In addition, substantially all of our store leases provide for additional rental payments based on sales of the respective stores, as well as common area maintenance charges, and require that we pay real estate taxes, none of which is included

in the amount of future minimum lease payments.taxes. These amounts generally escalate each year. We expect that any new stores we open will also be leased by us under operating leases, which will further increase our operating lease expenses.

Our substantial operating lease obligations could have significant negative consequences, including:

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increasing our vulnerability to general adverse economic and industry conditions;



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limiting our ability to obtain additional financing;



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requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus reducing



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cash available for other purposespurposes; and



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limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete, and placing us at a disadvantage with respect to some of our competitors.

We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or to fund our other liquidity and capital needs, which would have a material adverse effect on us.our business.

The terms of our revolving credit facility impose operating and financial restrictions on us that may impair our ability to respond to changing business and economic conditions. This impairment could have a significant adverse impact on our business.

We have a $25 million revolvingrenewed and amended our secured credit facilityagreement with Wells Fargo HSBC Trade Bank, N.A., which we useon June 10, 2009, and the prior facility agreement was terminated. The credit agreement provides us with a secured revolving credit facility until September 1, 2011 of up to $25.0 million. The secured revolving credit facility

provides for inventory financingthe issuance of a standby letter of credit in an amount not to exceed $5.0 million outstanding at any time and other general corporate purposes,with a term not to exceed 365 days. The commercial line of credit provides for the issuance of a commercial letter 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 secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. There were no outstanding borrowings under the secured revolving credit facility at January 29, 2011 or January 30, 2010. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.5 million and $0.6 million at January 29, 2011 and January 30, 2010. The secured revolving credit facility bears interest at the Daily One Month LIBOR rate plus 1.00%. The credit agreement contains a number of significant restrictions and covenants that generally limit our ability to, among other things, (1) incur additional indebtedness,debt, (2) enter into certain transactions and (3) undergo a change in ownership. In addition, all of our personal property, including our inventory, equipmentownership and fixtures, secure our obligations under the revolving credit agreement. Our(3) enter into certain transactions. The credit agreement also contains financial covenants that require us to meet certain specified financial tests and ratios, including, minimuma maximum net loss not to exceed $10.0 million after taxes on a trailing four-quarter basis provided, that, there shall be added to net income after taxes,all charges for impairment of goodwill and store assets not to exceed $5.0 million in aggregate, and a minimum total liabilitiesquick ratio of 1.25. The quick ratio is defined as our cash and near cash equivalents plus certain defined receivables divided by tangible net worththe outstanding borrowings. All of our personal property, including, among other things, our inventory, equipment and minimum quick asset ratio. Our abilityfixtures, has been pledged to complysecure our obligations under the credit agreement. We must also provide financial information and statements to our lender. We were in compliance with these ratios may be affected by events beyond our control.all such covenants at January 29, 2011.

A breach of any of these restrictive covenants or our inability to comply with the required financial tests and ratios could result in a default under the credit agreement. If a default occurs, the lender may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay outstanding borrowings when due, whether at their maturity or if declared due and payable by the lender following a default, the lender has the right to proceed against the collateral granted to it to secure the indebtedness. As a result, any breach of these covenants or failure to comply with these tests and ratios could have a material adverse effect on us. There can be no assurance that we will not breach the covenants or fail to comply with the tests and ratios in our credit agreement or any other debt agreements we may enter into in the future and, if a breach occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders.

The restrictions contained in our credit agreement could: (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.

Our business could suffer if our ability to acquire financing is reduced or eliminated.

In the current economic environment, we cannot be assured that our borrowing relationship with our lender will continue or that our lender will remain able to support its commitments to us in the future. If our lender fails to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.

Our business could suffer as a result of small parcel delivery services such as United Parcel Service or Federal Express being unable to distribute our merchandise.

We rely upon small parcel delivery services for our product shipments, including shipments to, from and between our stores. Accordingly, we are subject to risks, including employee strikes and inclement weather, which may affect their ability to meet our shipping needs. Among other things, any circumstances that require us to use other delivery services for all or a portion of our shipments could result in increased costs and delayed deliveries and could harm our business materially. In addition, although we have contracts with small parcel delivery services, we and the service providers have the right to terminate these contracts upon 3030-90 days written notice. Although the contracts with these small parcel delivery services provide certain discounts from

the shipment rates in effect at the time of shipment, the contracts do not limit their ability to raise the shipment rates at any time. Accordingly, we are subject to the risk that small parcel delivery services may increase the rates they charge, that they may terminate their contracts with us, that they may decrease the rate discounts provided to us when an existing contract is renewed or that we may be unable to agree on the terms of a new contract with them, any of which could materially adversely affect our operating results.

Our business could suffer if a manufacturer fails to use acceptable labor practices.

We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor practices of our vendors and these manufacturers. The violation of labor or other laws by any of our vendors or these manufacturers, or the divergence of the labor practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. In that regard, most of the products sold in our stores are manufactured overseas, primarily in Asia and Central America, which may increase the risk that the labor practices followed by the manufacturers of these products may differ from those considered acceptable in the United States.

Additionally, our products are subject to regulation of and regulatory standards set by various governmental authorities with respect to quality and safety. Regulations and standards in this area are currently in place. These regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell in our stores, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.

Our failure to adequately anticipate a correct mix of private label merchandise may have a material adverse effect on our business.

Sales from private label merchandise accounted for 15.4%18% of our net sales in fiscal 2007.2010 and generally carries higher gross margins than our other merchandise. We may take steps to increase the percentage of net sales of private label merchandise in the future, although there can be no assurance that we will be able to achieve increases in private label merchandise sales as a percentage of net sales. Because our private label merchandise generally carries higher gross margins than other merchandise, ourOur failure to anticipate, identify and react in a timely manner to fashion trends with our private label merchandise, would likely have a material adverse effect on our comparable store sales, financial condition and results of operations.

Most of our merchandise is produced by foreign manufacturers, therefore the availability and costs of these products may be negatively affected by risks associated with international trade and other international conditions.

        Most of our merchandise is produced by manufacturers around the world. Some of these facilities are located in regions that may be affected by natural disasters, political instability or other conditions that could cause a disruption in trade. Trade restrictions such as increased tariffs or quotas, or both, could also affect the importation of merchandise generally and increase the cost and reduce the supply of merchandise available to us. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have a material adverse effect on our results of operations. Although the prices charged by vendors for the merchandise we purchase are all denominated in United States dollars, a continued decline in the relative value of the United States dollar to foreign currencies could lead to increased merchandise costs, which could negatively affect our competitive position and our results of operation.

If our information systems hardware or software fails to function effectively or does not scale to keep pace with our planned growth, our operations could be disrupted and our financial results could be harmed.

Over the past several years, we have made improvements to our infrastructure and existing hardware and software systems, as well as implemented new systems. If these or any other information systems and software do not work effectively, this could adversely impact the promptness and accuracy of our transaction processing, financial accounting and reporting and our ability to manage our business and properly forecast operating results and cash requirements. To manage the anticipated growth of our operations and personnel, we may need to continue to improve our operational and financial systems, transaction processing, procedures and controls, and in doing so could incur substantial additional expenses that could impact our financial results.

Our inability or failure to protect our intellectual property or our infringement of other'sother’s intellectual property could have a negative impact on our operating results.

We believe that our trademarks and domain names are valuable assets that are critical to our success. The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the

Zumiez brand, our store concept, our private label brands or our goodwill and cause a decline in our net sales. Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the United States, there are certain countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks or at all. Also, the efforts we have taken to protect our trademarks may not be sufficient or effective. Therefore, we may not be able to prevent other persons from using our trademarks or domain names outside of the United States, which also could adversely affect our business. We are also subject to the risk that we may infringe on the intellectual property rights of third parties. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees. As a result, any such claim could have a material adverse effect on our operating results.

The effects of war or acts of terrorism could adversely affect our business.

Substantially all of our stores are located in shopping malls. Any threat of terrorist attacks or actual terrorist events, particularly in public areas, could lead to lower customer traffic in shopping malls. In addition, local authorities or mall management could close shopping malls in response to security concerns. Mall closures, as well as lower customer traffic due to security concerns, would likely result in decreased sales. Additionally, the escalation of the armed conflicts in the Middle East, or the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales for us. Decreased sales would have a material adverse effect on our business, financial condition and results of operations.

The outcome of litigation could have a material adverse effect on our business, and may result in substantial costs and could divert management'smanagement’s attention.

We are involved, from time to time, in litigation incidental to our business including complaints filed by investors. This litigation could result in substantial costs, and could divert management'smanagement’s attention and resources, which could harm our business. Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time. While we maintain director and officer insurance for litigation surrounding investor lawsuits, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured. As a result,We also maintain other forms of insurance that have historically been adequate to address lawsuits; however, there can be no assurance that the actual outcome of pending or future litigation will not have a material adverse effect on our results of operations or financial condition.

Our operations expose us to the risk of litigation, which could lead to significant potential liability and costs that could harm our business, financial condition or results of operations.

We employ a substantial number of full-time and part-time employees, a majority of whom are employed at our store locations. As a result, we are subject to a large number of federal and state laws and regulations relating to employment. This creates a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. We are also subject to other types of claims in the ordinary course of our business. Some or all of these claims may give rise to litigation, which could be time-consuming for our management team, costly and harmful to our business.

In addition, we are exposed to the risk of class action litigation. The costs of defense and the risk of loss in connection with class action suits are greater than in single-party litigation claims. Due to the costs of defending against such litigation, the size of judgments that may be awarded against us, and the loss of significant management time devoted to such litigation, we cannot assure you that such litigation will not disrupt our business or impact our financial results.

Our internetfailure to comply with federal, state or local laws, or changes in these laws, could have an adverse impact on our results of operations and financial performance.

Our business is subject to a wide array of laws and regulations. Changes in the regulations, the imposition of additional regulations, or the enactment of any new legislation including those related to health care, taxes, environmental issues and trade, could adversely affect our results of operations or financial condition.

Recent federal health care legislation could increase our expenses.

We are self-insured with respect to our health care coverage and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss, which helps limit the cost of large claims. In March 2010, the Patient Protection and Affordable Care Act (the “Act”) and the Health Care Education Reconciliation Act of 2010 (the “Reconciliation Act”) were signed into law. The Act, as modified by the Reconciliation Act, includes a large number of health care provisions to take effect over four years, including expanded dependent coverage, incentives for businesses to provide health care benefits, a prohibition on the denial of coverage and denial of claims on pre-existing conditions, a prohibition on limits on essential benefits and other expansions of health care benefits and coverage. The costs of these provisions are expected to be funded by a variety of taxes and fees. Some of the taxes and fees, as well as certain health care changes required by these acts, are expected to result, directly or indirectly, in increased health care costs for us. For example, the prohibition on limits on essential benefits (whereas we currently cap health-related benefits) could result in increased costs to us. At this time, we cannot quantify the impact, if any, that the legislation may have on us due to the changing regulatory environment around this legislation and due to the government’s requirement to issue future unknown regulatory rules. There is no assurance that we will be able to absorb and/or pass through the costs of such legislation in a manner that will not adversely impact our results of operations.

Our ecommerce operations subject us to numerous risks that could have an adverse effect on our results of operations.

Although internetecommerce sales constitute a small, but increasing portion of our overall sales, our internetecommerce operations subject us to certain risks that could have an adverse effect on our operational results, including:

•

diversion of traffic and sales from our stores;



•

liability for online content; and



•

risks related to the computer systems that operate our website and related support systems, including computer viruses, and electronic break-ins and similar disruptions.

In addition, risks beyond our control, such as governmental regulation of the internet,ecommerce, entry of our vendors in the internetecommerce business in competition with us, online security breaches and general economic conditions specific to the Internet and online commerceecommerce could have an adverse effect on our results of operations.

We have incurred and will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance.

We completed our initial public offering in May 2005 and we have incurred and willcould continue to incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as related rulesRules and regulations implemented by Congress, the SEC and Thethe NASDAQ Global Select Market hashave required changes in corporate governance practices of public companies. Compliance with these laws rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act as discussed in the following risk factor, have caused and will continue tocould cause us to incur significant costs and expenses, including legal and accounting costs, and have made and will continue tocould make some compliance activities more time-consuming and costly. These laws,negatively impact our financial performance. Additionally, these rules and regulations have mademay make it more expensive for us to obtain director and officer liability insurance, and we have been required to accept reduced policy limits and coverage.insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. As a result of the foregoing, we have incurred and we expect to incur significant legal, accounting, insurance and certain other expenses on an ongoing basis, which will negatively impact our financial performance and could have a material adverse effect on our results of operations and financial condition.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.

Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify as to the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting on an annual basis. This process requires us to document our internal controls over financial reporting and to potentially make significant changes thereto, if applicable. As a result, we have incurred and expect to continue to incur substantial expenses to test our financial controls and systems, and we have been and in the future may be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to make such improvements and to hire additional personnel. If our management is ever unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are ever identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital.

Changes to accounting rules or regulations could significantly affect our financial results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations, such as changes to lease accounting guidance or a requirement to convert to international financial reporting standards, could negatively affect our results of operations and financial condition through increased cost of compliance.

The security of our databases that contain personal information of our retail customers could be breached, which could subject us to adverse publicity, litigation and expenses. In addition, if we are unable to comply with security standards created by the credit card industry, our operations could be adversely affected.

Database privacy, network security and identity theft are matters of growing public concern. In an attempt to prevent unauthorized access to our network and databases containing confidential, third-party information, we have installed privacy protection systems, devices and activity monitoring on our network. Nevertheless, if unauthorized parties gain access to our networks or databases, they may be able to steal, publish, delete or modify our private and sensitive third-party information. In such circumstances, we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules. This could result in costly investigations and litigation, civil or criminal penalties and adverse publicity that could adversely affect our financial condition, results of operations and reputation. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect our retail operations.

The current uncertainty surrounding the United States economy coupled with cyclical economic trends in action sports retailing could have a material adverse effect on our results of operations.

        The action sports retail industry historically has been subject to substantial cyclicality. As economic conditions in the United States change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. When discretionary consumer spending is reduced, purchases of action sports apparel and related products may decline. A recession in the general economy or continued uncertainties regarding future economic prospects could have a material adverse effect on our results of operations.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is traded publicly and various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as

the analysts'analysts’ estimates of our future performance. The analysts'analysts’ estimates are based upon their own independent opinions and are oftencan be different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. Recently,In December 2007, a

securities class action litigation and associated derivative lawsuits was brought against us and such actions are frequently brought against other companies following a decline in the market price of their securities. These lawsuits were dismissed with prejudice in March 2009. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management'smanagement’s attention and resources that are needed to successfully run our business.

The trading pricevalue of our investment in marketable securitiesinvestments may fluctuatefluctuate.

We investhave our excess cash primarily invested in diversified high credit money market accounts, US treasuries, certificates of deposit,state and local municipal bondssecurities, U.S. Treasury securities, U.S. Agency securities and auction rate securities. Thevariable-rate demand notes. These investments have historically been considered very safe investments with very minimal default rates. However,At January 29, 2011, we had $114.6 million of investments in state and local government securities and variable-rate demand notes, excluding our auction rate security. These securities are not guaranteed by the recentUnited States government and are subject to additional credit risk based upon each local municipality’s tax revenues and financial stability. As a result, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition.

The 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. We reduced our holdingsAt January 29, 2011, we had $0.9 million, net of $0.1 million temporary impairment, invested in an auction rate securities during 2007 throughsecurity that is included in long-term investments on the auction process. As of February 2, 2008, we had $2 million invested in auction rate securities, which are classified as current, available-for-sale marketable securities on our consolidated balance sheet. If market liquidity issues continue, weWe may haveincur impairment charges on this investment in the future.

In addition, we made a $2.0 million equity investment in a manufacturer and expect the value of this investment to increase. However, we do not have control over this investment and it may encounter unanticipated operating issues or negative financial performance that could adversely impact the value of our investment.

A decline in the market price of our stock and our performance may trigger an impairment of the goodwill recorded on the consolidated balance sheets.

Goodwill and other intangible assets with indefinite lives is required to be tested for impairment at least annually or more frequently if management believes indicators of impairment exist. Any reduction in the carrying value of our goodwill as a result of our impairment analysis could result in a non-cash goodwill impairment charge to our statement of operations. A goodwill impairment charge could have a significant impact on earnings and potentially result in a violation of our financial covenants, thereby limiting our ability to secure short-term financing.

Changes to estimates related to our fixed assets, or operating results that are lower than our current estimates at certain store locations, may cause us to incur non-cash impairment charges.

We make certain estimates and projections in connection with impairment analyses for our store locations and other property and equipment. These calculations require us to make a number of estimates and projections of future results. If these investmentsestimates or haveprojections change or prove incorrect, we may be required to reclassify them from short-term assets to long-term assets.record impairment charges on certain store locations and other property and equipment. If these impairment charges are significant, our operating results would be adversely affected and our bank covenants may be violated.

Item 1B.    UNRESOLVED STAFF COMMENTS

UNRESOLVED STAFF COMMENTS

None.

 None.

Item 2.    PROPERTIES

PROPERTIES

All of our stores, primarily located in shopping malls and encompassing approximately 1,174,000 total square feet at January 29, 2011, are occupied under operating leases.

        In early February 2005, we completed our move from the 49,000 square foot combined home office and distribution center that we occupied since 1994 to a new

We lease an 87,350 square foot combined home office and distributionecommerce fulfillment center both in Everett, Washington. This lease expires in 2017.

In October, 2006fiscal 2010, we entered intoacquired a new lease agreement whereby168,450 square foot building in Corona, California that serves as our warehouse and distribution facility. Additionally, in fiscal 2010, we agreed to expand our existing lease of 87,350acquired approximately 253,500 square feet of land in Lynnwood, Washington, which we plan to use as the location of our new home office and distribution center space by 37,350 square feet, bringing the aggregate square footage leased to 124,700 square feet effective January 1, 2007. The new lease agreement terminated and replaced the original February 2005 lease with the landlord. The new lease agreement provides for an initial lease term of 126 months within which we have an option to extend the lease term for an additional period of five years.starting in 2012.

 All of our stores, encompassing approximately 829,000 total square feet as of February 2, 2008 are occupied under operating leases. The store leases range for a term of five to ten years and we are generally responsible for payment of property taxes and utilities, common area maintenance and marketing fees.

Item 3.    LEGAL PROCEEDINGS

We are involved from time to time in litigation incidental to our business. We believe that the outcome of current litigation is not expected to have a material adverse effect on our results of operations or financial condition.

See Note 89 to the Notes to Consolidated Financial Statements found in Part IV Item 8 of Part II15 of this Form 10-K (listed under "Litigation"“Litigation” under Commitments and Contingencies).

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II

 No matters were submitted to a vote of security holders during the fourth quarter ended February 2, 2008.

PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

a)    Market Information

Our common stock has traded on the NASDAQ Global Select Market under the symbol "ZUMZ". As of February 2, 2008“ZUMZ.” At January 29, 2011, there were 29,002,85230,834,713 shares of common stock issued. We began trading on the NASDAQ Stock Market on May 6, 2005. Accordingly, no information prior to this date is available.outstanding. The following table sets forth the April 20, 2006 stock split adjusted high and low last reported sales prices for our common stock on the NASDAQ Global Select Market for fiscal 2010 and fiscal 2009.

Performance Measurement Comparison

The following graph shows a comparison for total cumulative returns for Zumiez Inc., The NASDAQ Composite Index and the fiscal years ended February 3, 2007NASDAQ Retail Trade Index during the period commencing on January 28, 2006 and February 2, 2008.ending on January 29, 2011. The comparison assumes $100 was invested on January 28, 2006 in each Zumiez, the NASDAQ Composite Index and the NASDAQ Retail Trade Index, and assumes the reinvestment of all dividends, if any. The comparison in the following graph and table is required by the SEC and is not intended to be a forecast or to be indicative of future Company common stock performance.

b)    Holders of the Corporation'sCorporation’s Capital Stock

We had approximately 20356 shareholders of record as of March 3, 2008.7, 2011.

c)     Dividends

No cash dividends have been declared on our common stock to date nor have any decisions been made to pay a dividend in the foreseeable future. Payment of dividends is evaluated on a periodic basis and if a dividend were paid, it would be subject to covenants of our lending facility, which may have the effect of restricting our ability to pay dividends.

d)    Recent Sales of Unregistered Securities

None

e)     Issuer Purchases of Equity Securities

        NoneThe following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended January 29, 2011.

Item 6.    SELECTED FINANCIAL INFORMATION

The following selected consolidated financial information has been derived from our audited Consolidated Financial Statements. The data should be read in conjunction with our Consolidated Financial Statements and the notes thereto, and Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

 Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Our fiscal years ended January 31, 2004, January 29, 2005, January 28, 2006 and February 2, 2008 each consisted of 52 weeks. Our fiscal year ended February 3, 2007 consisted of 53 weeks. In this document, we refer to the fiscal year ended January 29, 2005 as "fiscal 2004", to the fiscal year ended January 28, 2006 as "fiscal 2005", to the fiscal year ended February 3, 2007 as "fiscal 2006" and fiscal year ended February 2, 2008 as "fiscal 2007".

 The selected statement of operations data for the fiscal year ended January 28, 2006, the fiscal year ended February 3, 2007 and the fiscal year ended February 2, 2008 and the selected balance sheet data as of February 3, 2007 and February 2, 2008 are derived from our audited consolidated financial statements, which are included elsewhere in this document. The selected consolidated statement of operations data for the fiscal years ended January 31, 2004 and January 29, 2005 are derived from our audited financial statements not included in this document.

(1)

Fiscal 2003, 2004 and 2005 have been restated to reflect the 2 for 1 stock split that occurred in fiscal 2006 in the form of a share dividend.

(1)

Gross margin percentage represents gross profit divided by net sales.

(2)

Comparable store sales percentage changes are calculated by comparing comparable store sales for the applicable fiscal year to comparable store sales for the prior fiscal year. Comparable store sales are based on net sales, and stores are considered comparable beginning on the first anniversary of their first day of operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—General" for more information about how we compute comparable store sales. Comparable stores sales for fiscal years ended February 2, 2008 and February 3, 2007 consisted of 52 weeks and 53 weeks, respectively, resulting in an extra week of sales in fiscal 2006.

(3)

Comparable store sales, net sales per store and net sales per square foot include our in-store sales and our internet sales. Our internet sales represented approximately 1% of our total net sales in each of the periods presented. Fiscal 2006 included an extra week of sales due to the addition of a 53^rd week.

(4)

Net sales per store represents net sales for the period divided by the average number of stores open during the period. For purposes of this calculation, the average number of stores open during the period is equal to the sum of the number of stores open as of the end of each month during the period divided by the number of months in the period. Fiscal 2006 included an extra week of sales due to the addition of a 53^rd week.

(5)

Total square footage at end of period includes retail selling, storage and back office space.

(6)

Average square footage per store at end of period is calculated on the basis of the total square footage at end of period, including retail selling, storage and back office space, of all stores open at the end of the period.

(7)

Net sales per square foot represents net sales for the period divided by the average square footage of stores open during the period. For purposes of this calculation, the average square footage of stores open during the period is equal to the sum of the total square footage of the stores open as of the end of each month during the period divided by the number of months in the period.

		January 29, 2011				January 30, 2010				January 31, 2009				February 2, 2008				February 3, 2007
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents and current marketable securities		$	128,801			$	108,051			$	78,582			$	76,532			$	51,977
Working capital (1)			155,400				133,927				112,092				92,161				54,929
Total assets			301,631				260,265				233,349				216,095				167,294
Total long-term liabilities			29,435				27,802				24,177				18,097				12,910
Total shareholders’ equity			226,735				192,676				177,951				154,602				104,812

(5)	Average square footage per store at the end of a period is calculated based on the total store square footage at end of period, including retail selling, storage and back office space, of all stores open at the end of the period.

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in "Item“Item 1A Risk Factors".Factors.” See the cautionary note regarding forward-looking statements set forth at the beginning of Part I of the Annual Report on Form 10-K.

Overview

We are a mall based specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of February 2, 2008At January 29, 2011, we operated 285400 stores primarily located in shopping malls, giving us a presence in 2737 states. We were founded in 1978 by Thomas D. Campion, our Chairman. Our current President and Chief Executive Officer, Richard M. Brooks, joined us as Chief Financial Officer in 1993. Our stores cater to young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMX and motocross. We support the action sports lifestyle and promote our brand through a multi-faceted marketing approach that is designed to integrate our brand image with our customers'customers’ activities and interests. This approach, combined with our differentiated merchandising strategy, store design, comprehensive training programs and passionate employees, allows us to provide an experience for our customers that we believe is consistent with their attitudes, fashion tastes and identities and is otherwise unavailable in most malls. Accordingly, our success is largely dependent upon our ability to anticipate, identify and respond to the fashion tastes of our customers and to provide merchandise that satisfies customer demands.

        OurFiscal 2010—A Review of This Past Year

Zumiez’ financial results in fiscal 2010 meaningfully exceeded our own projections and these results were significant, particularly when viewing against the teen retail landscape in what remained a tenuous consumer environment. In addition, while accomplishing these results, we made strategic investments that we believe will reap long-term benefits focused on enhancing the customer experience across multiple sales channels, and on our people and infrastructure aimed at improving decision making and product speed to market. The table below show net sales, increased from approximately $101.4 millionoperating profit and margin and diluted earnings per share growth for fiscal 2010 compared to fiscal 2009:

Our sales results were primarily driven by an increase in transactions, which is a testament to our differentiated product offering and the unique customer experience our store associates provide. The strong sales results we realized in fiscal 20022010 translated to approximately $381.4 milliona significant increase in operating income, operating margin and diluted earnings per share compared to fiscal 2007, a compound annual growth rate of 30.3%. Net sales2009 due to our unique business model and focus on managing our cost structure.

Fiscal 2011—A Look At the Upcoming Year

While the momentum we have seen throughout fiscal 2010 would suggest that discretionary spending is increasing, unemployment, debt and housing remain concerns and the economy is still in recovery. In addition, other challenges have surfaced as we look out into fiscal 2011, most notably increases in production costs that may have an impact on our ability to maintain product margins. Considering these factors, our current outlook is cautiously optimistic, and we are planning the business conservatively for fiscal 2007 increased by $83.2 million, or 27.9%, over net2011.

For the year, we expect total sales for fiscal 2006. Over the past five fiscal years ended February 2, 2008 we increased our store base from 99 to 285 and our comparable store net sales increased an average of 10.1% per fiscal year. As of February 2, 2008 we operated 285 stores that averaged approximately 2,900 square feet per store.

        We intend to expand our presence as a leading action sports lifestyle retailer by opening new stores and continuing to generate sales growth through improved store level productivity. We have successfully and consistently implemented our store concept across a variety of mall classifications and geographic locations, and our strategy is to continue to open stores in both new and existing markets. We plan to open 57 new stores in fiscal 2008 and to continue to open a significant number of new stores in future years. Through our merchandising and marketing efforts, we have generally been successful in increasing the level of net sales in our existing stores and we will seek to continue such increases going forward.

        We believe that we have developed an economically compelling store model. Our new stores opened during fiscal 2006, including 19 stores, net, acquired from Fast Forward, generated average net sales of approximately $1.2 million during their first full year of operations. On average, our net investment to open these stores, excluding the Fast Forward stores, was approximately $314,000, which includes capital expenditures, net of landlord contributions. However, net sales and other operating results for stores that we open or have opened subsequent to the end of fiscal 2006, as well as our net investment to open those stores, may differ substantially from net sales and other operating results and our net investment for stores we opened in fiscal 2006. See "Business—Stores." We opened 50 new stores in fiscal 2007 with an average net investment of approximately $330,000 which includes capital expenditures, net of landlord contributions. However, our net investment to open new stores and net sales generated by new stores vary significantly and depend on a number of factors, including the geographic location, type of mall and size of those stores. Accordingly, net sales and other operating

results for stores that we open or have opened subsequent to the end of fiscal 2007, as well as our net investment to open those stores, may differ substantially from net sales and other operating results and our net investment for the stores we opened in fiscal 2007.

        In any given period, our overall gross margin may be impacted by changes in the margins of the various products we offer as well as changes in the relative mix of revenues from the different categories of apparel and hardgood products that we sell. Over the past five fiscal years, our annual gross margin as a percentage of our net sales has ranged from a low of 30.9% to a high of 36.3%. We achieved these results while continuing to adjust our merchandise mix to respond to changing consumer preferences and market conditions. A number of other factors may also positively or negatively impact our gross margins and results of operations, including, but not limited to:

•

the timing of new store openings and the relative proportion of our new stores to mature stores;



•

whether we are able to successfully integrate any new stores that we acquire and the presence or absence of any unanticipated liabilities in connection therewith;



•

fashion trends and changes in consumer preferences;



•

calendar shifts of holiday or seasonal periods;



•

timing of promotional events;



•

general economic conditions and, in particular, the retail sales environment;



•

actions by competitors or mall anchor tenants;



•

weather conditions;



•

the level of pre-opening expenses associated with our new stores; and



•

inventory shrinkage beyond our historical average rates;

        One of our ongoing goals is to leverage our expenses, particularly general corporate overhead and fixed costs such as non-variable occupancy costs, through increases in both comparable store sales and total net sales. At the store level, our strategy is to increase comparable store sales indriven by an effort to improve operating results by spreading our store level fixed costs over increased net sales per comparable store. We also seek to increase our total net sales, both through increases in comparable store sales, and bythe opening of approximately 44 new stores, including our first stores in an effort to better leverageCanada, and increased sales from our corporate level expensesecommerce channel. If we achieve our sales projections, we expect earnings will increase in fiscal 2011. We will make further investments in people and decrease our general and administrative expenses as a percentageinfrastructure in fiscal 2011, building on the progress we have made through fiscal 2010, primarily focused on the development of our net sales.multi-channel sales strategies, expansion into Canada and continued progress on our product assortment planning and supply chain solutions and a capital investment related to building a new home office, planned to opening in the spring of 2011. We expect our cash, short-term investments and working capital to increase, and do not anticipate any borrowings on our credit facility. Inventory levels per square foot are expected to grow due to increased production costs and to support sales growth.

General

Net sales constitute gross sales net of returns.actual and estimated returns and deductions for promotions. Net sales include our in-store sales and our internetecommerce sales, which includes ecommerce shipping revenue. Ecommerce sales were 4.7%, 2.5% and accordingly, information herein with respect to comparable store sales,1.7% of total net sales per storefor fiscal 2010, 2009 and net sales per square foot includes our internet sales. For fiscal 2002 through fiscal 2007, internet sales represented approximately 1% of our annual net sales. We record the sale2008. Sales of gift cards as a current liabilityare deferred and recognize a salerecognized when a customer redeems a gift card.cards are redeemed. The amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered ("(“gift card breakage"breakage”). Gift Card Breakagecard breakage is recognized as revenue after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.

We report "comparable“comparable store sales"sales” based on net sales, and stores are included in our comparable store sales beginning on the first anniversary of theirthe first day of operation.operation of a new store. Our comparable store sales also include our ecommerce sales. Changes in our comparable store sales between two periods are based on net sales of stores which were in operation during both of the two periods being compared and, if a store is included in the calculation of comparable store sales for only a portion of one of the two periods being compared, then that store is included in the

calculation for only the comparable portion of the other period. When additionalAny change in square footage is added to a store that is included inof an existing comparable store, sales,including remodels, does not eliminate that store remainsfrom inclusion in the calculation of comparable store sales. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable or same store sales. As a result, data herein regarding our comparable store sales may not be comparable to similar data made available by our competitors or other retailers.

Cost of goods sold consists of thebranded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of merchandisegoods sold to customers, inbound shipping costs,also includes shrinkage and buying, occupancy, distribution costs, depreciation on leasehold improvements at our distribution center, buying and merchandising costs and store occupancywarehousing costs. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold.

        In early February 2005 we completed our move We receive cash consideration from vendors, which have been reported as a reduction cost of goods sold if the 49,000 square foot combined home office and distribution center we had leased since 1994 toinventory has sold, as a newly leased 87,350 square foot combined home office and distribution center. In October, 2006 we entered into a new lease agreement whereby we agreed to expand our existing lease of 87,350 square feet of home office and distribution center space by 37,350 square feet, bringing the aggregate square footage leased to 124,700 square feet. The effective datereduction of the new lease was January 1, 2007. The new Lease Agreement terminatedcarrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and replacedadministrative expense if the original February 2005 lease withamounts are reimbursements of specific, incremental and identifiable costs of selling the Landlord. The new Lease Agreement provides for an initial lease term of 126 months within which we have an optionvendors’ products.

With respect to extend the lease term for an additional period of five years. As a result, we experienced a slight increase in our distribution and warehousing costs, which are included as afreight component of our costsecommerce sales, we arrange and pay the freight for our customers and bill them for this service, unless our customers have their product shipped to one of our stores or we have free shipping promotions to our customers, in which case we do not bill our customers. Such amounts billed are included in net sales and the related freight cost is charged to cost of goods sold, in fiscal 2006.sold.

Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, outbound freight, store supplies, depreciation on leasehold improvementsfixed assets at our home office and stores, facility expenses and training, advertising and marketing costs. Credit card fees, insurance, public company expenses, Sarbanes Oxley compliancelegal expenses stock based compensation 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:

Comparable store sales. As previously described in detail under the caption “General,” comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period.

We expect thatconsider comparable store sales to be an important indicator of our current performance. Comparable store sales results are important to achieve leveraging of our costs, including store payroll, store supplies and rent. Comparable store sales also have a direct impact on our total net sales, 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.

Operating profit.We view operating profit as a key indicator of our success. The key drivers of operating profit are comparable store sales, gross profit, our ability to control selling, general and administrative expenses will,and our level of capital expenditures affecting depreciation expense.

Store productivity.We review our stores’ operating profit as described below, increase in future periods due in part to increased expenses associated with opening new stores.a measure of their profitability.

        We recognized stock-based compensation expense of approximately $4.6 million in fiscal 2007 and $2.1 million in fiscal 2006. As a result of FinancialCritical Accounting Standards Board (FASB) Statement No. 123(R),EstimatesShare-Based Payment ("SFAS No. 123(R)"), which became effective for us beginning with the first quarter of fiscal 2006, share-based payments granted in future periods will increase compensation expense that would otherwise have been recognized

Our consolidated financial statements are prepared in accordance with Accounting Principles Board Opinion No. 25,Accounting For Stock Issued To Employees,GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and outstanding unvested options will resultestimates 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 management believes 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 additional compensation expense that otherwise would only have been recognized on a pro-forma basis. For more information regarding the implementationaccordance with 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 SFAS 123(R), see "CriticalSignificant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Part IV Item 15, “Exhibits and Estimates" below.

        Our success is largely dependent uponConsolidated Financial Statements,” of this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our ability to anticipate, identify and respond to the fashion tastes of our customers and to provide merchandise that satisfies customer demands. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could have a material adverse effect on our business, operatingreported financial results, and financial condition.they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

        We have and will continue to incur significant legal, accounting, insurance and other expenses as a result of being a public company, which will adversely affect our results of operations, perhaps materially. Among other things, we expect that continued compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations will result in significant legal and accounting costs in the future. See Item 1A "Risk Factors".

Description		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions
Valuation of Merchandise Inventories
We value our inventory at the lower of cost or fair market 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 dates. Each quarter, we reserve for anticipated physical inventory losses on an aggregate basis.		Our write-down reserve contains uncertainties because the calculation requires management to make assumptions based on the current rate of sales, the age of inventory, the profitability of the inventory and other factors. Our inventory loss 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 inventory loss 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 or assumptions we use to calculate our inventory reserves. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses or gains that could be material. A 10% decrease in ultimate sales price at January 29, 2011 would have affected net income by $0.1 million in fiscal 2010. A 10% difference in actual physical inventory shrinkage reserved at January 29, 2011 would have affected net income by $0.3 million in fiscal 2010.
Fixed Assets
We review the carrying value of our fixed assets for impairment whenever events or changes in circumstances indicate that the carrying value of such asset 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 projected individual store discounted cash flow to the asset carrying values. Declines in projected store cash flow could result in the impairment of assets. The actual economic lives of our fixed assets may be different from our estimated useful lives, thereby resulting in a different carrying value. These evaluations could result in a change in the depreciable lives of these assets and therefore our depreciation expense in future periods.		Our impairment loss 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 and operating expenses and selecting the discount rate that reflects the risk inherent in future cash flows. Our fixed assets accounting methodology contains uncertainties because it requires management to make estimates with respect to the useful lives of our fixed assets that we believe are reasonable.		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. Although management believes that the current useful lives estimates assigned to our fixed assets are reasonable, factors could cause us to change our estimates, thus affecting the future calculation of depreciation.

        We may take steps, such as increased promotional activities, to increase the percentage of net sales of private label merchandise in the future, although there can be no assurance that we will be able to achieve increases in private label merchandise sales as a percentage of net sales. Because our private label merchandise generally carries higher gross margins than other merchandise, our failure to anticipate, identify and react in a timely manner to fashion trends with our private label merchandise, particularly if the percentage of net sales derived from private label merchandise increases, may have a material adverse effect on our comparable store sales, financial condition and results of operations. See Item 1A "Risk Factors".

Description		Judgments and Uncertainties		Effect If Actual Results Differ From Assumptions
Revenue Recognition
Revenue is recognized upon purchase at our retail store locations. For orders placed through our website, revenue is recognized upon estimated delivery to the customer. Revenue is recorded net of estimated and actual sales returns and deductions for promotions. Revenue is not recorded on the sale of gift cards. A current liability is recorded upon sale, and revenue is recognized when the gift card is redeemed for merchandise. The amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered (“gift card breakage”). Gift card breakage is recognized as revenue after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.		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 transaction experience.		We have not made any material changes in the accounting methodology used to measure sales returns or recognize revenue for our gift card program 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. A 10% change in our sales return reserve at January 29, 2011 would have affected net income by less than $0.1 million in fiscal 2010. A 10% change in our unredeemed gift card breakage life at January 29, 2011 would have affected net income by $0.2 million in fiscal 2010.
Stock-Based Compensation
We maintain the Zumiez Inc. 2005 Equity Incentive Plan under which non-qualified stock options and restricted stock have been granted to employees and non-employee directors. In determining the fair value of our stock options, we use the Black-Scholes option pricing model, which requires management to apply judgment and make assumptions to determine the fair value of our awards. We determine the fair value of our restricted stock awards based on the closing market price of our stock on the grant date.		The calculation of stock-based compensation requires management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the inputs to the Black-Scholes option pricing model, future employee turnover rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.		We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material. A 10% change in our stock-based compensation expense in fiscal 2010 would have affected net income by $0.3 million in fiscal 2010.
Accounting for Income Taxes
As part of the process of preparing the 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.		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, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations.		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. 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.

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 in the Notes to the Consolidated Financial Statements.		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 contingencies 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.
Goodwill
We evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We complete our impairment evaluation by performing internal valuation analyses, considering other publicly available market information, and where appropriate, by use of an independent valuation firm. We test goodwill for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of impairment. We estimate fair value using discounted cash flows.		Forecasts of future cash flow are based on our best estimate of future net sales and operating expenses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate economic factors and the profitability of future business operations.		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 test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. A 10% decrease in the fair value of the Company at January 29, 2011 would have no impact on the carrying value of goodwill.

Results of Operations

The following table presents, for the periods indicated, selected items in the consolidated statements of operations as a percent of net sales:

Fiscal (2007) Year Ended February 2, 20082010 Results Compared With Fiscal 2009

Net Income

Net income for fiscal 2010 was $24.2 million, or $0.79 per diluted share, compared with Fiscal (2006) Year Ended February 3, 2007net income of $9.1 million, or $0.30 per diluted share, for fiscal 2009. Our effective income tax rate for fiscal 2010 was 37.7% compared to 34.8% for fiscal 2009.

Net Sales

Net sales increased to $381.4were $478.8 million for fiscal 2007 from $298.22010 compared to $407.6 million for fiscal 2006,2009, an increase of $83.2$71.2 million or 27.9%17.5%. The increase reflected a comparable store sales increase of 11.9% for fiscal 2010 as well as the net addition of 23 stores (27 new stores offset by four store closures) in fiscal 2010.

        ComparableGeographically, our best performing region for comparable store netsales was the South, increasing 12%. Our stores west of Texas, which accounted for 50% of our comparable store sales, increased by 9.2%9%, our stores in the 52 week period ended February 2, 2008 compared toNortheast and Midwest increased by 8% combined and the 52 week period ended February 3, 2007. Thisremaining increase in comparable store sales is due to increases in our ecommerce sales. The increase in comparable stores sales was primarily due to higher netdriven by an increase in comparable store transactions, partially offset by a decline in dollars per transaction. Comparable store sales of men's and women'sincreases in men’s apparel, accessories, footwear, boy’s apparel and skatejunior’s apparel were partially offset by comparable store sales decreases in hardgoods. For information as to how we define comparable stores, see "General"“General” above.

        The increase in total net sales was due to an increase in comparable store net sales of approximately $23.6 million and an increase in net sales from non-comparable stores of approximately $59.6 million. The increase in non-comparable store net sales was primarily due to the opening of 50 new stores in fiscal 2007.

Gross Profit

Gross profit for fiscal 2007 was $137.0 million compared with $108.2$170.4 million for fiscal 2006,2010 compared to $134.7 million for fiscal 2009, an increase of $28.8$35.7 million, or 26.6%26.5%. As a percentage of net sales, gross profit decreasedincreased 250 basis points for fiscal 2010 to 35.9% in35.6% from 33.1% for fiscal 2007 from 36.3% in fiscal 2006.2009. The increase was primarily due to product margin improvement of 140 basis points and a 140 basis points decrease in gross profit as a percentage of net sales was due primarily to higher shrinkage, store occupancy costs, and distribution costs, partially offset by higher product marginsa 40 basis points increase due to improved product management.distribution costs primarily associated with the exit costs and other charges of $2.4 million related to the relocation of our distribution center.

Selling, General and Administrative Expenses

Selling, general and administrative or "SG&A,"(“SG&A”) expenses inwere $133.0 million for fiscal 2007 were $98.02010 compared to $122.0 million compared with $75.8 million infor fiscal 2006,2009, an increase of $22.2$11.0 million, or 29.4%9.0%. This increase was primarily the result of costs associated with operating new stores as well as increases in infrastructure and administrative staff to support our growth. As a percentage of net sales, SG&A expenses increased to 25.7% in fiscal 2007 from 25.4% in fiscal 2006. The increase in SG&A expenses as a percentagepercent of net sales was primarily attributabledecreased by 220 basis points for fiscal 2010 to 27.8% compared to 30.0% for fiscal 2009. The primary contributors to this decrease were 110 basis points due to store operating expense efficiencies gained by growing expenses at a slower rate than sales growth, the increased stock based compensationeffect of the change in accounting estimate for the depreciable lives of our leasehold improvements of 90 basis points (as further explained in Note 2 in our Notes to Consolidated Financial Statements), 60 basis points due to impairment charges of $2.5 million on 21 stores in fiscal 2009 and increased depreciation expensea 30 basis points impact of $3.9a litigation settlement charge of $1.3 million incurred fiscal 2009, partially offset by lower growtha 70 basis points impact of a litigation settlement charge of $2.1 million incurred in store wagesfiscal 2010.

Exit or Disposal Activities

On March 2, 2010, we acquired a 168,450 square foot building in Corona, California for $11.8 million and benefits relativewe have relocated our distribution facility from Everett, Washington to this facility. We believe that we will be more effective distributing our products through a distribution center located in Corona, California due to the growthmajority of our vendors being located in net salesSouthern California. Cumulatively, during fiscal 2010, we have recorded $0.9 million of employee benefit costs (severance and lower incentive compensation expense.performance bonuses), $0.6 million of lease termination costs, $0.3 million of loss on disposal of long-lived assets and $0.8 million of other costs to exit the

facility, partially offset by the $0.2 million benefit related to deferred rent liability. These amounts are included in cost of goods sold in our consolidated statements of operations. We do not expect to incur material additional costs related to the relocation.

Operating Profit

        As a result of the above factors, operating profit increased to $38.9 million for fiscal 2007, compared with $32.4 million in fiscal 2006 an increase of $6.5 million or 20.0%. As a percentage of net sales, operating profit was 10.2% in fiscal 2007 compared with 10.9% in fiscal 2006.

Provision for Income Taxes

        Provision for income taxes was $15.3 million for fiscal 2007 compared with $12.8 million for fiscal 2006. The effective tax rate was 37.7% for fiscal 2007 and 37.9% for fiscal 2006. The lower effective tax rate was due to higher interest income from tax exempt municipal bonds.

        During fiscal 2007 the Company adopted the provisions of FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109."Fiscal 2009 Results Compared With Fiscal 2008

Net Income

Net income increased to $25.3 million, in fiscal 2007 from $20.92009 was $9.1 million, or $0.30 per diluted share, compared with $17.2 million, or $0.58 per diluted share, in fiscal 2006 an increase2008, a decrease of $4.4 million, or 21.4%46.9%. As a percentage of net sales,The decrease in net income was 6.6%driven by the deleveraging effect of increased selling, general and administrative expenses (SG&A) on a decrease in net sales, partially offset by an improvement in gross profit as a percent of sales. Our effective income tax rate in fiscal 20072009 was 34.8% compared with 7.0%to 35.6% in fiscal 2006.

Fiscal (2006) Year Ended February 3, 2007 Compared with Fiscal (2005) Year Ended January 28, 20062008.

Net Sales

Net sales increasedin fiscal 2009 decreased 0.3% to $298.2 million for fiscal 2006 from $205.6 million for fiscal 2005, an increase$407.6 million. The decrease reflected a comparable store sales decline of $92.6 million, or 45.0%.

        Comparable store net sales increased by 13.0%10.0% in the 52 week period ended February 3, 2007 compared to the 52 week52-week period ended January 28, 2006. This increase30, 2010, mostly offset by the net addition of 34 new stores in fiscal 2009 and a full year of sales from the 58 stores opened in fiscal 2008.

Geographically our stores west of Texas, which account for 54% of our comparable store sales, declined by 12.4%, while our comparable store sales in the Northeast, Midwest and South decreased 9.0% combined. The decline in comparable store sales was primarily due to higher netdriven by a decrease in comparable store transactions and all merchandise categories experienced comparable store sales of men's apparel, accessories anddeclines except footwear. For information as to how we define comparable stores, see "General"“General” above.

        The increase in total net sales was due to an increase in comparable store net sales of approximately $27.2 million and an increase in net sales from non-comparable stores of approximately $65.4 million. The increase in non-comparable store net sales was primarily due to the opening of 42 new stores in fiscal 2006 and the acquisition of 20 stores from Fast Forward.

Gross Profit

Gross profit forwas $134.7 million in fiscal 2006 was $108.22009 compared to $134.5 million compared with $72.5 million forin fiscal 2005,2008, an increase of $35.7$0.2 million or 49.2%0.2%. As a percentagepercent of net sales, gross profit increased to 36.3%0.2 percentage points in fiscal 20062009 to 33.1% from 35.3%32.9% in fiscal 2005.2008. The increase in gross profitwas primarily due to product margin improvement of 140 basis points and 20 basis points from supply chain efficiencies, largely offset by a store occupancy increase of 140 basis points. Store occupancy is largely a fixed cost for which we have a minimal ability to lower. Store occupancy costs increased as a percentage of netpercent to sales was due primarily to the increase in net sales for fiscal 2006 compared to fiscal 2005, which allowed us to leverage certain fixed costs, over greater total net sales, improved pricing from some of our vendors

due to our larger merchandise purchases and reduced freight costs, distribution costs and buying costs as a percentage of net sales.10.0% same store sales decline.

Selling, General and Administrative Expenses

        Selling, general and administrative, or "SGSG&A" expenses in fiscal 2006 were $75.8 million compared with $52.5 was $122.0 million in fiscal 2005,2009 compared to $109.9 million in fiscal 2008, an increase of $23.3$12.1 million or 44.4%11.0%. ThisSG&A as a percent of sales increased by 310 basis points in fiscal 2009 to 30.0% compared to 26.9% in fiscal 2008. The primary contributors to this increase was primarily the result of costswere a 180 basis points increase for expenses associated with operatingthe opening of 36 new stores, increases in infrastructure40 basis points related to impairment charges on 21 stores, and administrative staff to support our growth and thelegal settlement costs contributing 30 basis points. New stores generally open with lower revenues than stores that have been open greater than one year, but a majority of being a public company, including Sarbanes-Oxley costs, accounting fees, legal fees, and other related expenses. As a percentage of net sales, SG&A expenses decreased to 25.4% in fiscal 2006 from 25.5% in fiscal 2005. The decrease in SG&A expenses as a percentage of net sales was primarily a result of leveraging fixednew store operating costs offset by an increase in store payroll for neware not meaningfully lower than stores of $9.5 million, additional depreciation of $3.0 million, Sarbanes-Oxley costs of $1.0 million, increased stock based compensation expense of $1.7 million and to a lesser extent, additional infrastructure and administrative staff costs to support our growth.

Operating Profit

greater than one year old. As a result, of the above factors, operating profit increasedthese stores contribute to $32.4 million for fiscal 2006, compared with $20.0 million in fiscal 2005 an increase of $12.4 million or 62.0%. Ashigher SG&A as a percentage of net sales, operating profit was 10.9% in fiscal 2006 compared with 9.8% in fiscal 2005.

Provision for Income Taxes

        Provision for income taxes was $12.8 million for fiscal 2006 compared with $7.8 million for fiscal 2005. The effective tax rate was 37.9% for fiscal 2006 and 2005.

Net Income

        Net income increasedpercent to $20.9 million in fiscal 2006 compared to $12.9 million in fiscal 2005, an increase of $8.0 million or 62.3%. As a percentage of net sales, net income was 7.0% in fiscal 2006 compared with 6.3% in fiscal 2005.sales.

Seasonality and Quarterly Results

As is the case with many retailers of apparel and related merchandise, our business is subject to seasonal influences. As a result, we have historically experienced, and expect to continue to experience, seasonal and quarterly fluctuations in our net sales and operating results. Our net sales and operating results are typically lower in the first and second quarters of our fiscal year, while the back-to-school and winter holiday periods in our third and back-to-school periodsfourth fiscal quarters historically have accounted for the largest percentage of our annual net sales. Quarterly

results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, general economic conditions, competition and weather conditions.

The following table sets forth selected unaudited quarterly consolidated statements of operations data for the periods indicated.last two recent fiscal years. The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere herein and includes all adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with theour audited consolidated financial statements and the notes thereto appearing elsewhere herein.thereto. The operating results for any fiscal quarter are not indicative

of the operating results for a full fiscal year or for any future period and there can be no assurance that any trend reflected in such results will continue in the future.

(1)

Note 2—Significant Accounting Policies for "Cost of Goods Sold" reclassification of shipping costs.

(2)

Comparable store sales percentage changes are calculated by comparing comparable store sales for the applicable fiscal quarter to comparable store sales for the same fiscal quarter in the prior fiscal year. Comparable store sales are based on net sales and stores are considered comparable beginning on the first anniversary of the first day of operations. See "General" above for more information about how we compute comparable store sales.