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 third quarter performance.
I'll then give an update on our broader strategy and will hand the call over to Chris, who'll take you through the numbers.
After that, we'll open the call to your questions.
Our third quarter sale results came in ahead of expectations during the important back-to-school season.
Third quarter comparable sales rose 7.9% versus our original guidance of up 4% to 6%.
This comes on top of a 4% increase a year ago and marks our fifth consecutive quarter of positive comparable sales and transaction gains.
We're extremely pleased with the strength of our business in a difficult regional environment as it validates our ability to serve the customer through the efforts of our collective teams.
Our momentum continued in November as comparable sales increased 7.8% for the month, representing a great start to the holiday season.
With third quarter earnings growth of 11.5% and a strong start to the fourth quarter, we are well positioned to deliver an annual improvement in year-over-year profitability.
Our results underscore our ability to provide customers with authentic and differentiated product assortments that appeal to their individual taste across multiple lifestyle categories and deliver great shopping experience regardless of where and when they choose to engage with us.
Providing the customer with a great shopping experience has always been our mission.
Our sustained success is the result of our ability to adapt to the rapid changes in consumer preferences and purchasing behavior.
Trends emerge and spread much faster in our more connected world, and customers expect to be able to experience brands on a much more frequent and more personalized level.
We have continued to separate ourselves from the competition by constructing a lifestyle retailer with our unique culture and brand at the center to build ---+ to meet increasing demands of today's consumer while maintaining the flexibility to continually adapt to future marketplace changes.
We are confident in the investments we have made and will continue to make in key areas, including working with original brands; planning and allocation; logistics; enhancing our sales channel; and most importantly, our people, who will further strengthen our competitive advantages and support long-term profitable growth.
Let me provide an update on certain key initiatives.
We continue to find new and unique brands across all departments around our product assortments.
This year, we've already launched over 100 new brands, bringing the newness in localized fashion that our customer is looking for.
These emerging brands, coupled with the growth of more established brands within our portfolio, are in our growth to success of our business model and have a direct impact on both our current results and those in the coming years.
With respect to our physical presence, we believe brick-and-mortar is critical to successfully executing our customer-centric growth strategies.
Therefore, we continue to selectively open stores in each of our geographic regions with the goal of achieving the optimal number of locations required to reach our customers and provide them with a superior level of service they expect from Zumiez.
Along this line, our pace of new store openings in North America has moderated over the past few years as we optimize our presence in each trade area.
Year-to-date, we have opened the 12 new stores planned for the U.S. and Canada, bringing our total store count in North America to 659 stores.
To reiterate what I said on our last earnings call, we are being very thoughtful and deliberate in managing our North American real estate portfolio to minimize risk and bring long-term value to both our customer and our shareholders.
We are confident that the vast majority of our stores in their surrounding trade areas will continue to achieve and/or exceed their productivity targets.
For those locations where we are less certain, we focus on both reducing rent and shortening lease terms down in the 1- to 3-year range to provide added flexibility.
This aligns with our capital spend that prioritizes those locations that we believe have potential for long-term success.
At present, within the bottom 20% of our North America store base in terms of store contribution, we have the right to exit over 85% of those stores in the next 3 years.
While this highlights the lease flexibility that we have within our lower-performing stores, it's important to note that at this time, the majority of these stores provide positive contribution and cash flow.
Overseas, we see a longer runway for growth as our store footprint is significantly smaller.
2017, we're on track to open 5 Blue Tomato locations in Europe which will bring the total store count to 34 by year end, while in Australia, we have added 2 Fast Times locations for a total of 7 stores in the market.
We're excited about the long-term potential of these markets and continue to apply a combination of best practices from each of our teams to build on the strong foundations already in place.
Lastly, we've rolled out our new customer engagement suite to approximately 30% of our U.S. store fleet.
The combination of this system enhancement and our existing digital capabilities allow us to both learn more about our customers and engage with them in a more meaningful way.
This local engagement, along with face-to-face in-store interactions, helps keep our finger on the pulse of local trends, allowing us to provide hyper-localized, authentic product assortments and a superior, personalized brand experience for our customers.
To close, we're obviously pleased with momentum we are experiencing as we head into our busiest and most profitable selling period.
We are committed to fully capitalizing on the many near-term opportunities ahead of us to deliver a strong finish to the holiday season and 2017.
At the same time, our sights are firmly on the future, and we'll continue to make decisions that are in the best long-term interest of the company and its shareholders.
I want to thank the entire Zumiez team for their hard work and dedication to upholding the cultural values that are directly tied to our strong third quarter and positive start to the fourth quarter.
With that, I'll hand the call 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 third quarter results.
I'll then provide a brief update on November before discussing our fourth quarter guidance.
Third quarter net sales increased $24.4 million or 11% to $245.8 million from $221.4 million a year ago.
Contributing to this increase was the positive comparable sales growth of 7.9% and the net addition of 6 stores since the end of last year's third quarter.
During the 2017 third 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.
During the quarter, the men's category provided our largest positive comparable sales increase, followed by juniors.
Accessories was the largest negative comparable sales category, followed by hardgoods and then footwear.
From a regional perspective, North America net sales increased $20.2 million or 10% to $223.1 million.
International net sales, which consists of Europe and Australia, increased $4.2 million or 22.5% to $22.7 million.
Third quarter gross profit was $83.4 million, an increase of $7.2 million or 9.4% compared to the third quarter of 2016.
Gross margin was 33.9% in the quarter, down 50 basis points compared to 34.4% a year ago.
This decrease was driven primarily by an 80 basis point increase in inventory shrinkage and a 40 basis point decrease in product margin, partially offset by a 90 basis point decrease in occupancy costs, which leveraged on strong sales results.
The decrease in product margin is due primarily to our efforts in our European business to move through aging inventory and, to a lesser extent, a slight decline in North America.
SG&A expenses was $64.6 million in the third quarter compared to $59.3 million a year ago.
SG&A as a percentage of net sales improved 60 basis points to 26.2% compared to 26.8% in the prior year.
The decrease was primarily driven by 90 basis points from the leveraging of our store costs, partially offset by a 40 basis point increase related to our annual incentive compensation.
Operating income in the third quarter of 2017 was $18.8 million or 7.7% of net sales, an increase of 11.2% as compared to the prior year operating income of $16.9 million or 7.6% net sales for the third quarter of 2016.
Net income for the third quarter was $11.9 million or $0.48 per diluted share, an increase of 11.5% as compared to net income of $10.7 million or $0.43 per diluted share for the third quarter of 2016.
Turning to the balance sheet.
Cash and current marketable securities totaled $85.8 million as of October 28, 2017, up from $49.2 million as of October 29, 2016.
The increase was driven by cash generated through operations, partially offset by capital expenditures.
As of October 28, 2017, we had $157 million in inventory, up 4.2% from this time last year.
Turning to our November sales results.
Total net sales for the 4-week period ended November 25, 2017, increased 11.3% to $77.1 million compared to $69.3 million for the 4-week period in November 26, 2016.
Comparable sales increased 7.8% during the 4-week period in November 25, 2017 compared to comparable sales increase of 5.7% for the 4-week period in November 26, 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 unit per transaction and, to a lesser extent, average unit retail.
During the 4-week period, the men's category provided our largest comparable sales increase, followed by juniors, while accessories was our largest negative comparable sales category, followed by hardgoods and footwear.
Looking at our guidance for the balance of 2017.
Once again, I'll start off by reminding everyone that formerly 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 fourth quarter comparable sales results in the range of positive 3% to positive 5%, with total sales in the range of $291 million to $297 million.
We anticipate that gross margins will increase in the range of 20 basis points to 50 basis points compared to the fourth quarter of 2016.
Consolidated operating margins are expected to be between 10.5% and 11%, with earnings per share between $0.78 and $0.84 compared to earnings per share of $0.74 in the prior year fourth quarter.
With regard to the fourth quarter and full year, I'd like to remind everyone there will be an extra week in fiscal 2017, resulting in a 14-week fourth quarter and a 53-week fiscal year.
The extra week will benefit sales in fiscal 2017 by approximately $9 million and earnings growth in fiscal 2017 by $0.05 per diluted share, and will be a detriment to sales and earnings growth rates in fiscal 2018.
A few other thoughts regarding the balance of the year.
Through November 25, 2017, we have opened 18 new stores, including 3 in Canada, 4 in Europe and 2 in Australia.
This brings our total store count as of November 25, 2017 to 699, including 659 in North America, 33 in Europe and 7 in Australia, and excluding 2 stores in North America that are still closed due to natural disasters.
We plan to open 1 new store for the balance of fiscal 2017 as well as potentially reopen the 2 stores I just referred to that were damaged by weather.
Full year capital expenditures are expected to be between $24 million and $26 million.
We anticipate 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%.
Lastly, we are currently projecting our weighted average shares used in the calculation of diluted earnings per share for the full year to be approximately 25 million shares.
And with that, operator, we'd like to open the call up for questions.
Sure.
Thanks, Jeff, for the congratulations there.
From a gross margin perspective, as we did, we said 20 to 50 basis points.
What we're thinking here on a product margin perspective is we'll probably be up by 10 to 20 basis points.
We're expecting to see some benefit there on product margin.
And then we expect to continue to see some leverage on occupancy.
Obviously, based on the sales levels that we are as well as the environment, we've been able to leverage occupancy pretty well over the year.
And the guidance does assume a little bit of risk on the shrink side.
I think the one piece to call out there is it's probably less of an impact than the first 3 quarters of the year based on the fact that we started to see shrinks increase in the fourth quarter of last year.
So that's kind of how we're thinking about gross margin for the fourth quarter on the 3 to 5 guidance.
Yes.
Let me start, Jeff, and then I'll ask Chris to chime in.
And you know I'll start because I always start on this topic, Jeff, which is I don't really like to talk about differences between the channels, and in fact, I'm not even sure I like the word omnichannel anymore.
I actually prefer, I think, channelist or integrated retail as a way of thinking about what we're doing us a model.
And ---+ so again, we will share some highlights for Q3 about that in a moment, but let me just maybe phrase up a little bit about how we're thinking about where we're at, what we're doing and what's next in this area.
So we've made great progress over the last 6 and 7 years of building, I think, this integrated model to serve customers.
And this is a model that has changed actually every aspect of our business from how we micro-sort locations and trade areas to how we think about sales teams.
We don't think about a web sales team anymore.
We don't think about a the store sales team anymore.
We think about our integrated sales team and how we're serving customers and how they work together to do that.
We think about how all those things optimize customer experiences.
We think about how that's changed how we incentivize our teams across the company for this integrated channelist retail world.
And again, virtually every aspect of our business has been touched by the demands of the consumer in terms of how they can really change.
So every touch point that's guiding us, Jeff, is this idea that we're going to empower our consumer to make choices and put the power in their hands and let them choose just how they want to interact with our brand.
And we're going to be relevant at each of those touch points, highly relevant, hopefully, in both product and experiences.
And we're going to be fast at every touch point as we work through that.
So those are kind of guiding principles for us, Jeff, as we think about what we're doing and as we think about these integrated model.
And again, I think we just made amazing progress, and Chris maybe can share a little bit about our ---+ this idea of distributor localized fulfillment over the last weekend.
I mean, it's amazing what our teams can do.
And ---+ but that being said, with the progress we've made, we have much work to do, both in tuning our existing integrated sales model and in pushing ourselves to enhance and build on our ability to serve these customers.
We have a whole new way, I think, of really big ideas and initiatives in front of us over the next 3 to 5 years for us to tackle to really, again, continue to meet the needs of this empowered consumer.
So from that perspective, I think we're pretty excited about the opportunity that's in front of us in this integrated sales world.
And I'll ask Chris to share a little bit of information for you.
Yes, sure.
And just to add to what Rick said, and I\
Great.
Thank you, <UNK>.
I\
Yes, great.
Thanks, Rick.
I think, <UNK>, one of the things we have ---+ we presented in the last few quarters or last few years really is just talking about kind of where our top 10 and top 20 brands sit.
And as we look at the third quarter, we continue to see kind of a further concentration of those brands, meaning that the top 20 represent a higher percent of overall sales than they did a year ago at the same time.
We continue to also see that turnover that we talked about, 20% to 30% turnover in the brands, which again speaks to Rick's points around the newness.
And then the last thing I would point out is in June of 2016, when our results were not quite as good, Rick and I talked about some things we started to see in the business, specifically talked about 3 brands that were starting to emerge that got us kind of excited about back to school.
And as we know now from history, that materialized in the back half of 2016 and has been part of our driver here that Ricky just spoke to around some of the brands are moving the business.
And what I'd point out with those 3 brands is as we look at how they stand within our top 20, none of them have gotten to that point of kind of 6% to 9%, which is typically where our top independent brand will peak any given year.
And in fact, all of them combined are still less than 10%.
So that gives us some comfort that there's still some room for growth based on historical results.
Now that's not a slam dunk.
The brands have to continue to do their job in innovation of product and bringing newness.
And our sales teams have to do a great job presenting it to the customer.
And that's the partnership we work on.
And what I'd also say, as you talk about kind of sustainably and drivers, is I'd just kind of continue to elaborate on the long-term model that Rick talked about, the 3 drivers.
But also it's a diversification within categories.
And if you look at kind of our makeup of Q3, our men's and women's categories were the only positive categories, representing about 57% of our overall sales in the third quarter, meaning the other 43%, which is footwear, accessories and hardgoods, continues to have some challenges.
And as we look at this long term, over a period of 3 and 5 years, and then look backwards over the last 4 years, what we've seen is we've seen this happen as trends change, right.
As one category has its challenges, typically another one benefits.
And so we're really encouraged by the overall sales results we're running today with only 57% of our business positive.
And I think that gives us some opportunity as we look to the future as new brands or trends or unique items emerge in that other 43% as ---+ if we do peak in the apparel categories to help offset some of that.
Yes, sure.
As we think about the fourth quarter guidance, and maybe I'll just talk about November a little bit deeper here, as we said, we had a strong November with positive comps across the month.
And from a cadence perspective, weeks 1 and 2 were stronger and posting actually low double-digit comps in weeks 1 and 2 and then more into the mid-single-digit comps in weeks 3 and 4.
Now we don't see that as a negative.
We actually think, as we look back to last year, the first couple of weeks were pretty tough last year as it was a little bit of time of uncertainty around the election and the time after that.
And it was not a big shopping period, where as we look to this year, I think it's more normalized with some of the trends we've seen over the last few years, maybe absent 2016, of that volume spreading out a little bit more over the period.
I would tell you, we had a strong Black Friday weekend overall and are pretty pleased with our results.
But as we indicated, the results were more in that kind of mid-single digits leaving the quarter.
We had a great fourth quarter last year, as you know.
And so as we plan the business, as we think about the remaining 3 quarters of the sales in December and January, we planned it kind of at that mid-single-digit mark that would get us to the 5 in the top end of the guidance here for the quarter.
And I'd just add, <UNK>, to that, that the rest of the ---+ this is always such a wild ride in holiday because we know that the middle weeks of December are always going to be really tough, great online, tough in-stores, and so you see, as huge.
And this is true probably for the last decade, where we've seen the middle weeks of December get weaker, the troughs get deeper and the peaks get steeper.
And we fully expect it to play out that way.
So as Chris said, we're planning to that mid-single-digit number, and we expect that we'll have these tougher middle weeks and then huge weeks 4 and 5 in December.
So it always makes looking at holiday numbers a little nerve-racking as you do it, but we're pretty confident, as we've been talking about here, about our trend cycles.
And as you said, we've been going up against tougher comps, but been able to maintain the comp numbers for the current year.
So we're confident going into it, but it's always appropriate to be just a little cautious as we look forward.
Yes.
Thanks, <UNK>.
So as we look at this, you're right.
We are ---+ while we're encouraged by overall sales growth ---+ even overall sales growth, exclusive of the 53rd week, it is a little more muted.
And I think what I would point out here, as we think about the results for this year, I mean, we're pretty excited and pleased with our top line results.
We have had some operational challenges that we need to correct, which we have talked about for the last few quarters and this quarter and mainly around the shrinkage line items.
So that's something that we have strong plans in place and plan to get fixed here in the short term.
And ---+ but it's been a drag on the 2017 results, and hopefully something that will be a benefit to us as we move forward.
I think the other piece that we talked about throughout the year that has been ---+ had an impact on the year is the incentive accrual.
Clearly, the results are stronger this year.
And as we have experienced over the last few years because we have not been in the spot where we could pay out target incentives.
And today, we actually feel like these results kind of warrant that.
We've been planning that impact in all year.
That total impact on the year is about $4.6 million, just to give you some perspective.
And I would classify that even deeper from a standpoint of we accrue this based on a probability analysis as we move through the year.
And the fourth quarter of last year, we really determined that some of this was going to fall off.
And therefore, the ---+ of that $4.6 million, almost 1/3 of it is the increase in the fourth quarter because we're truing up over a period where we hardly recorded any incentive compensation in the prior year.
So that's something that we're glad to get into the base.
Has been a little bit of a drag on this year.
But as we think about 2018 and beyond, we don't expect to have that pressure.
And then there's other things, too, like we talked about within the Q3 results some challenge on our product margin primarily related to Europe.
We're taking a real strong stance in trying to clean up areas where we think we need to clean up and set us up for the long term, as Rick talked about, right, in his prepared remarks that we're very focused on that and driving the long term.
So I think, overall, we feel pretty good about some of our opportunities heading into 2018.
And we'll obviously withhold on giving any guidance for '18 until we get to March.
But I think from a cost perspective, specifically around shrink and some of the SG&A growth areas, we hope to not have some of the bigger items we had this year.
All right.
Thank you, James.
And I'll close with just by wishing everyone a happy holiday season, and we'll be very hopefully excited about coming back to you in March with our results for Q4 and the full 2017 year and a chance to talk about our initial thoughts on 2018.
Thanks, everybody, greatly for your interest in Zumiez, and we look forward to talking with you soon.
