ZUMZ
#Thank you, and welcome, everyone.
Joining me on today's call is Chris <UNK>, our Chief Financial Officer.
I'll start today's call with a few brief remarks regarding our first quarter performance.
I'll then give an update on our broader strategy and will hand the call over to Chris, who will take you through the numbers.
After that, we'll open the call to your questions.
First quarter net sales came in at $181.2 million, up 4.7% compared to the first quarter of 2016.
Comparable sales increased 1.8%, which was near the high end of our guidance range of flat to plus 2%.
As we expected, our monthly comp performance varied widely during the first quarter.
Following a difficult February, comps returned to positive territory in March and accelerated to high single-digit growth in April, driven by the later Easter holiday this year.
Overall, mall traffic trends for the quarter in total appeared to be more challenging than the industry expected.
While we are not immune to these challenges, we are encouraged to see our third consecutive quarter of positive comparable sales and transaction gates.
We continue to believe that the retail environment is radically changing as the customer continues to redefine their shopping experience.
In response to this change, we have made great progress towards evolving the business and believe the investments we have made in several key areas have created competitive advantages that are allowing us to enhance the brand and customer experience.
It is these investments that we believe will allow us to capture market share in the current environment.
Let me outline a few of these key focus areas.
We've continued to enhance our brand experience through unique product and investment in our people.
In 2016, we launched over 100 new brands, which was consistent with each of the last 5 years and how we expect to bring newness to the business going forward.
While these brands are generally not a significant portion of our overall offering in their first year, they continue to bring uniqueness to our customers and will represent the next wave of meaningful brands in the coming years.
In addition to unique product, we continue to invest in our best-in-class sales teams.
In early May, we again held our annual store managers retreat.
It's a great event that provides valuable skills through a multiyear training format that allows our managers to be better teachers and leaders.
At our event this year, we saw more participants in the advanced classes than we have ever had, representing reduced manager turnover and the strength of our teams.
It is our belief that this event sends our retail managers back to their stores with renewed energy and enthusiasm for the Zumiez brand and cultural experience.
We have significantly enhanced our ability to engage with customers on multiple fronts through the integration of our physical and digital channels.
We have a comprehensive customer experience that allows them to see all inventory through any channel, and includes features in which our customers have access to their local store's inventory, can buy online, pick up in store; reserve online, pay in store; and buy whenever and however they choose.
Included in this experience is fully localized fulfillment in our North American business, putting the local customer experience back in the hands of our store teams and significantly reducing our order-to-delivery time.
In 2017, we're continuing to roll out our new customer engagement suite across the U.S. store fleet.
We're very excited about this system enhancement, which in concert with existing omnichannel capabilities, gives us new ways to learn more about our customers and to engage with them in a more meaningful way.
Through this level of interaction, in conjunction with face-to-face dialogue in stores, we'll be able to keep our finger on the pulse of local trends, allowing us to provide hyper-localized and purely authentic product assortments and a superior personalized brand experience for our customers.
Lastly, we continue to believe our physical stores are integral to successfully executing our customer-centric growth strategies.
As our store expansion in the U.S. and Canada moderates, we continue to explore new ways to leverage our physical presence in order to bring long-term value to both our customers and our shareholders.
Our goal in managing our current store base is not to have one more store than necessary in any given trade area to service the customer.
Looking overseas, we're optimistic about our long-term growth prospects.
Over the last 5 years in Europe, we have successfully expanded our presence despite unfavorable macroeconomic conditions.
That said, our presence on the continent remains relatively small.
By continuing to execute our omnichannel strategies, which include selective store openings along with localization efforts, we remain confident that we can profitably advance Blue Tomato.
The same is true in Australia, where we gained a foothold with our acquisition of Fast Times last year.
We believe the combination of best practices from each of our teams provides a strong foundation for future growth in this strategically important market.
At the speed at which changes in consumers' shopping behavior continues to gain pace, we are confident that the investments we have made in our business and our people, coupled with our ability to manage costs, have us well-positioned to outperform relative to the industry and deliver increased value to our shareholders over the long term.
With that, I'll hand the call over to Chris for his review of the financials.
Chris.
Thanks, Rick, and good afternoon, everyone.
I'm going to start with a review of our first quarter results.
I'll then provide a brief update on May before discussing our second quarter guidance and some high-level perspective on how we're thinking about the year.
First quarter net sales increased $8.2 million or 4.7% to $181.2 million from $173 million a year ago.
Contributing to this increase was the net addition of 25 stores since the end of last year's first quarter, including 6 Fast Times stores in Australia and positive comparable sales growth of 1.8%.
During the 2017 first quarter, we saw an increase in transaction volume, partially offset by a decrease in dollars per transaction.
The decrease in dollars per transaction resulted from lower units per transaction, partially offset by an increase in average unit retail.
Men's and juniors categories comped positive, while footwear, hardgoods and accessories comped down for the quarter.
From a regional perspective, North America net sales increased $6.1 million or 3.9% to $162.5 million.
International net sales, which consist of Europe and Australia, increased $2.1 million or 12.5% to $18.6 million.
First quarter gross profit was $52 million, an increase of $2 million or 4.2% compared to the first quarter of 2016.
Gross margin was 28.7% in the quarter, down 20 basis points compared to 28.9% a year ago.
The decrease was primarily driven by a 50-basis-point increase in inventory shrinkage, partially offset by a 40-basis-point increase in product margin.
SG&A expense was $58.3 million in the first quarter compared to $53.9 million a year ago.
SG&A as a percentage of net sales was 32.2% compared to 31.2% of net sales in the first quarter of last year.
The increase was primarily driven by 80 basis points related to investments in salaries, minimum wage increases and deleverage of labor costs and 30 basis points related to incentive compensation.
Operating loss in the first quarter of 2017 was $6.2 million compared to the operating loss of $3.9 million in the first quarter of 2016.
Net loss for the first quarter was $4.4 million or $0.18 per diluted share compared to a net loss of $2.1 million or $0.08 per diluted share for the first quarter of 2016.
Our tax rate in the first quarter of the year was negatively impacted by a new accounting guidance for share-based payments, which reduced our tax benefit and earnings for the quarter by $0.4 million or $0.02 per share.
Turning to the balance sheet.
Cash and current marketable securities totaled $76.5 million as of April 29, 2017, up from $62.1 million as of April 30, 2016.
The increase in cash and current marketable securities was driven by cash generated through operations, partially offset by capital expenditures, stock repurchases and cash used in the acquisition of Fast Times.
As of April 29, 2017, we had $122.4 million in inventory, up 8.4% from this time last year, driven primarily by our recent sales trends, increased global store count and strategic investments in inventory that we believe are equating and will continue to equate to higher sales.
Turning to our May sales results.
Total net sales for the 4-week period ended May 27, 2017, increased 6.5% to $53.2 million compared to $50 million for the 4-week period ended May 28, 2016.
Comparable sales increased 3.3% during the 4-week period ended May 27, 2017, compared to comparable sales decrease of 7.6% for the 4-week period ended May 28, 2016.
The comparable sales increase was driven primarily by an increase in transactions, partially offset by a decrease in dollars per transaction.
Dollars per transaction were down for the 4-week period due to a decrease in units per transaction, partially offset by an increase in average unit retail.
During the 4-week period, men's and juniors posted positive comps, while hardgoods, accessories and footwear posted negative comps.
Looking at guidance for the second quarter.
Once again, I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales, product margin and earnings growth, given the variety of internal and external factors that impact our performance.
We are currently planning second quarter comparable sales results in the range of positive 1% to positive 3%, with total sales in the range of $185 million to $189 million.
We anticipate that gross margins will be in the range of down 20 basis points to positive 20 basis points compared to the second quarter of 2016.
Consolidated operating margins are expected to be between negative 1% and negative 2%, with loss per share between a loss of $0.06 and a loss of $0.11 compared to a loss of $0.03 in the prior year second quarter.
Year-over-year, our second quarter EPS is negatively impacted by investments made throughout 2016 and into 2017 as well as increased incentive competition levels planned in 2017 that were not achieved in 2016.
Before I wrap up, I'd like to give you a few thoughts on how we're thinking about 2017.
While our recent comparable sales trends remain positive, the retail environment in general remains uncertain.
As we look to the back half of 2017 and beyond, we continue to believe that the investments we've made in our infrastructure, particularly our omnichannel presence, as well as those investments we continue to make in the Zumiez brand and team, will drive long-term top and bottom line growth.
With that in mind, we continue to believe that comparable sales will be positive for the year and we will experience earnings growth based on our current planning.
There will be an extra week in fiscal 2017, resulting in a 14-week fourth quarter and a 53-week fiscal year.
This extra week will benefit sales and earnings growth in fiscal 2017 and will be a detriment to sales and earnings growth rates in fiscal 2018.
As a reminder, we saw product margin expansion in each quarter of 2016 with the exception of the first quarter.
In 2017, we expect product margins for the year to be greater than 2016.
However, we anticipate that the increase will be modest.
From a cost perspective, we are currently planning SG&A to grow at a greater rate than in 2016 as we continue to absorb minimum wage increases across the country and invest in important initiatives for our long-term success such as continued investments in our people, the rollout of our new customer engagement suite and other strategic initiatives.
We are planning to open approximately 19 new stores, including 4 in Europe and 2 in Australia, with roughly 2/3 of the openings occurring ahead of the back-to-school season.
We expect capital expenditures for the full 2017 fiscal year to be between $24 million and $26 million compared to $20.4 million in 2016.
The majority of the capital spend will be dedicated to new store openings and planned remodels.
While our store growth ---+ count growth rate is decreasing in 2017, the related decrease in capital was offset by an increase in remodels for the year.
We expect that depreciation and amortization will be approximately $27 million, in line with the prior year.
We are planning our business assuming an annual effective tax rate of approximately 38%.
And lastly, we are currently projecting our diluted outstanding share count for the full year to be approximately 25 million shares.
And with that, operator, we would like to open the call up for questions.
All right.
Thank you, Jeff.
I appreciate the question.
So again, I'll just go back and highlight that uniqueness in our product assortment has always been a key part of what we've been about, and that uniqueness historically for us is ---+ has traditionally, primarily been driven by young brands becoming ---+ going from the emerging state to going to the growth state in their brand formation.
And I think as we've talked about on previous calls, those cycles have ---+ one of the things that's changed in the new world is how much more quickly brands can launch in today's world; how much more quickly, once they find their right spot and really resonate with consumers, can grow much more fastly from emerging to growth.
And then I still think we're going to see, when they're in growth mode, we're going to see that we have a multiyear play on those brands.
So I think with the brands we've been talking about for over a year now, in terms of really start talking at this time last year, about our confidence in some of the brands we saw that were going from the emerging phase to growth phase, we still feel pretty good about where we're at.
And we do a number of things internally, Jeff, that we're not only tracking how many brands that we're introducing into the system each year.
And again, I would tell you that, year-to-date, we're feeling good about that relative to our 2017 targets.
I think we'll be at our ---+ at or better than our historical levels for bringing new brands into our system.
But we also track the position of those brands relative to those brands that are gaining compared to those brands that are going down, because of course, if you have brands that are gaining in our world, as you know, from our concentrations in top 10, top 20 brands, we have significant turnover.
So we're always looking at the net position between top gainers and top losers.
And I think as we look forward in the rest of the year, we're still feeling relatively confident that we have some brands that are capable of driving some gains for us.
Now we'll see if we can do that as we look forward.
That's going to be determined by the marketplace.
But again, we know we have brands that are going to decline, but we also have these brands that have been running gains over the last year, and I think we feel confident that they have some room to go yet in terms of our processes and thinking about those brands.
And as you'd guess, we're also, Jeff, pushing forward those next-level brands that we think may have an opportunity.
It doesn't mean that they're going to become growth brands as back-to-school; what it means is we're positioned to try to help them as a brand partner and position them for ---+ introduce them to a wider consumer base outside of where they may have launched initially within our system.
So we're constantly working with our brand partners to ---+ about how we can help them to move their brand forward.
And again, we're going to be launching many brands, planned yet for the year coming up, in many categories of our business, too.
So I think we're encouraged about that.
So I think, generally, Jeff, we're feeling good about where we're at.
Again, time will tell here if this logic will hold out.
Yes, I think it's a really good question, Jeff, and it's something we are very focused on, too.
And I think, as we think about the incentive, I just want to make sure that I'm clear on how that's working for us this year.
Because as we entered 2016, much ---+ over a year ago and we built our plan, we really, based on the challenges we had in 2015 and how we were seeing '16 play out, we could not build a plan that we thought warranted a full incentive payout.
So what you saw in the first quarter of 2016 and the second quarter of 2016, and really, throughout the year, was us accruing to and planning to a level of incentive that we thought was warranted with the results.
Obviously, 2016 was not as strong as we had hoped, and those results came in on a consolidated level much lower than we had anticipated, actually approximately around 30% of the total planned incentive payout.
So as we moved to 2017, we believe that we had a built a plan that worked to pay out the full incentive as well as reward our shareholders with sales and earnings growth.
And that incremental step-up on the year is about $4.4 million.
So what I'd tell you about that is all incentive payouts, it's contingent on us hitting those sales and earnings growth, contingent of paying that amount out.
So as we move through 2017, we will continue to evaluate that based on where we're at.
But what we plan to do is, as we move through this and we can hopefully more normalize our positioning, is that we would get into a spot where we could leverage SG&A, just like you'd expect and we'd expect to grow earnings over the long term.
So I would anticipate as we continue to plan that, that's going to be part of our goal, is leveraging SG&A and growing gross margin, and hopefully we can do that while we're still able to pay out our incentive levels.
No, I don't ---+ there's not a lot to call out here.
I think basically, as you called out, we came in the quarter at 3.3%.
We have spent a lot of time analyzing our own results, obviously, in relation to how the first quarter came in, which, as Rick pointed out in his prepared remarks, was a little bit choppy.
And we're trying to ---+ we've been trying to kind of analyze where the run rate is.
And quite frankly, we felt pretty good at that low-single-digit, kind of 1% to 3% comp range for the second quarter.
So I think it's in line with where we landed in May.
And as we think about what are the drivers of the business and how we're thinking about June and July heading into back-to-school, it felt a appropriate level for us to plan the second quarter.
So I can promise you, Ben, we're going to try to beat it.
That's always our goal.
But I think in this type of environment, we are feeling pretty good about that range.
I'll let Chris talk about the digital business.
Let me kick it off, though, Ben, with, again, we don't think about the digital business as a stand-alone entity.
These are ---+ from our perspective, we're working in a channel-less world to serve our customers.
And that's why things like, in the omnichannel efforts, things like localized fulfillment, creating great brand experiences, every touch point, whether it be in the digital touch point or physical touch point, is so critical to our long-term success.
So ---+ and you've heard us talk about the counts of the trade area and how we think about measuring trade area and about where sales really belong.
Are they digital or physical.
What's ---+ where is the line.
Those are hard things to tell nowadays.
So I just ---+ I'll let Chris take the comments from here, but I just want to make sure that, as we think about here, the ---+ I hope that over the next few years, we're not going to talk about digital channels, what we're going to talk about is trade area success and how we might measure success in marketplace differently or based on our performance and how we're serving customers in an integrated channel-less world.
So just keep that in the back of your mind, and I'll turn it over to Chris.
Yes, and I'll just add to what Rick said, I mean, as we analyze all of our numbers from many different directions, we firmly believe in Rick's comments because of what we see in the numbers.
And where we don't have stores, we really don't have much of a web presence.
When we open stores, we typically get a pretty big web impact.
And so what I would tell you is we think the customer is shopping in both channels.
And what's hard for us to decipher, is I can tell you what the web numbers are, I can tell you what the store numbers are, I just am not sure how accurate they are anymore, because the customer may shop in an in-store channel and go home and make the purchase or start online and come into the store and make the purchase.
And I think that makes the complexity of reporting one channel or the other more challenging.
When I do break out the numbers, which the numbers we lay out are based on originations, meaning, where did the sale actually take place and originate, I ---+ to the best of our knowledge, I can tell you that our web penetration year-over-year has grown, and our web comp is performing ahead of the consolidated comp that I've given you today.
But again, knowing our customer pretty well and spending time in stores like we do, we certainly see that customer start online and head into store and get an experience in store that translates to their online activity.
So we believe they're very integrated, but we're seeing web growth ahead of our comp growth, just like most retailers out there.
All right.
Thanks very much.
Again, we appreciate everyone's attention today and time, and we look forward to talking to you as we get through second quarter, and of course, post our Labor Day weekend.
Thanks, everybody, very much.
Bye.
