Earnings Transcript for ZUMZ - Q1 Fiscal Year 2024

Operator: Good afternoon ladies and gentlemen and welcome to the Zumiez Inc. First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. Before we begin, I'd like to remind everyone of the company's Safe Harbor language. Today's conference call includes comments concerning Zumiez Inc. business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risk and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez' filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Rick Brooks : Hello, and thank you everyone for joining us on today's call. With me today is Chris Work, our Chief Financial Officer. I'll begin with a few remarks about our first quarter performance before touching on our strategic priorities for 2024. Chris will then take you through the financials and our outlook for the balance of the year. After that, we'll open the call to your questions. Our first quarter performance represented an encouraging start to 2024. While total sales of $177 million were down 3% from the same quarter last year, both sales and earnings per share were above the high-end of our guidance range showing continued improvement in year-over-year trends and demonstrating our progress in positioning the business for growth. First quarter top-line results were driven by North America as comparable sales for the region inflected positive. This performance was led by our men's business, which was up year-over-year for the second consecutive quarter after accelerating from its positive finish to fiscal 2023. Our women's business also contributed to sales performance turning positive for the quarter. As expected, hardgoods remained under pressure. Giving back some on Quarter 4's improvement, as we exited the snow season. Overall, we experienced increases in both average unit retail and units per transaction for the first three months of fiscal 2024, which was offset by a decline in transactions. Meanwhile, merchandise margins were higher than a year ago and ahead of quarterly guidance as our heightened focus on driving full price selling in Europe fueled our consolidated core product margin growth. This helped drive the overall improvement on our bottom-line results despite our sales decline to a loss of $0.86 per share compared to a loss of $0.96 per share last year. This is meaningfully better than our guidance of a loss of $1.09 to $1.19 per share. Our first quarter results are a further indication that we are progressing towards positive comparable sales and improved profitability. That said, we recognize that we still have a considerable amount of work ahead of us to achieve both the levels of top-line revenue and bottom-line profitability that we expect from the business. As we continue to navigate a challenging retail environment, we stay focused on items within our control to grow sales and drive the business back to its historical operating performance and beyond. As shared on our fourth quarter call in March, our focus continues to be the following strategies; First, we are concentrated on reinvigorating our top-line through investments to ensure we continue to win with consumers. Some of these initiatives include infusing our product assortments with fresh offerings. We launched over 100 brands in 2022 and over 150 brands in 2023 with plans to launch similar levels in 2024. We are already seeing our newly launched brands in the past couple of years, accounting for a larger portion of current sales than we have seen historically, indicating they are resonating well with our customers. We are also expanding our Private Label brand portfolio this year. Private Label represented approximately 20% -- 23% of sales in 2023, up from 18% in 2022 and 13% in 2021. This growth showcases our team's ability to capitalize on both trend and value conscious consumers, providing another avenue for growth. And we are maintaining our best-in-class service in stores and online with continued investment in training and technology. Combined, these efforts aim to enhance our customer relationships and engage with them in more personalized and relevant ways. Along with these new top-line initiatives, we are enhancing our focus on profitability, both in Europe and in North America. In Europe, our plan involves a pivot from our growth strategy. We have slowed store expansion this year, and instead we'll focus on enhancing the productivity of nearly 90 stores across nine countries and our pan-European web business that currently serve the European market. With a focus on full price selling for our existing footprint, we believe we can unlock the potential for the business and create value as we work through what has been a difficult cycle in Europe. There is no doubt that trends emerge locally and grow globally and our current penetration of the relevant markets is a significant advantage to Zumiez over the long-term. Overall, we believe we can achieve profitability in Europe with this new focus as we have done in other international markets like Canada and Australia. Beyond Europe, we are focused on profitability in other markets as well. In 2023, we closed 18 underperforming North American stores and expect to close an additional 20 to 25 locations in 2024. As a result, we decreased field and corporate staffing levels to align with the reduced store count. We are also further optimizing store labor through several initiatives, including adjustments to staffing models at lower volume stores. We have made structural changes with shipping and logistic costs company-wide, reduced discount selling compared with last year's elevated levels and continue to implement other cost-saving opportunities in many areas throughout the organization. While we'll not be able to improve earnings on negative sales results over the long-term, is a combination of these initiatives that helped us reduce the loss per share in the first quarter despite the sales decline. Overall, these adjustments in our operating strategy, combined with our strong balance sheet with more than $145 million in cash, position us well to navigate the current environment and emerge a stronger and more profitable company. Before I turn the call over to Chris, I just would like to thank each of our team members for their hard work and dedication. Your collective efforts were the key to our continued progress this quarter, and I'm truly appreciative to all you do. I look forward to further advancing our strategic objectives in the year ahead, as we work toward delivering greater value for our shareholders. With that, I'll turn the call over to Chris to discuss the financials.

Chris Work : Thanks, Rick and good afternoon, everyone. I'm going to start with a review of our first quarter results. I'll then provide an update on our May sales trends and some perspective on how we're thinking about the full year. First quarter net sales were $177.4 million, down 3% from $182.9 million in the first quarter of 2023. Comparable sales were down 2.4% for the quarter. As Rick mentioned, our North America business comparable sales were up year-over-year, marking the first time we've seen growth in the region since 2021. This was offset by a decline in international sales, as we put greater emphasis on full price selling in Europe, which benefited margins but pressured our top-line revenue. From a regional perspective, North America net sales were $142.7 million, a decrease of 0.9% from 2023. Other international net sales which consists of Europe and Australia were $34.7 million down 10.8% from last year. Excluding the impact of foreign currency translation, North America net sales decreased 0.9% and other international net sales decreased 10.6% year-over-year. Comparable sales for North America were up 0.3% and comparable sales for Other International were down 13% for the quarter. From a category perspective, men's with our largest positive comping category, followed by women's. Hardgoods with our largest negative comping category, followed by Accessories and Footwear. The consolidated decrease in comparable sales was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction were up for the quarter, driven by an increase in average unit retail and an increase in units per transaction. First quarter gross profit was $51.9 million compared to $49.4 million in the first quarter of last year. Gross profit as a percentage of sales was 29.3% for the quarter compared with 27% in the first quarter of 2023. The 230 basis point increase in gross margin was primarily driven by an improvement of 70 basis points in product margin. 70 basis points of leverage in shipping costs, 20 basis points of leverage in distribution center costs, 20 basis points of leverage in store occupancy costs, and a benefit of 60 basis points related to a mix shift away from service and related shipping revenue in the prior year's results, which carried a negative margin during the prior year quarter. SG&A expense was $72.1 million or 40.6% of net sales in the first quarter compared to $70.7 million or 38.7% of net sales a year ago. The 190 basis point increase in SG&A expenses as a percent of net sales resulted from the following

Operator: [Operator Instructions] Our first question comes from the line of Mitch Kummetz of Seaport.

Mitch Kummetz: Yeah. Thanks for taking my questions. Rick, on the strength of the men's business and now you're seeing some positives on women's. Is it largely brand related? Or is it applied to any particular categories? Can you just maybe provide a little bit more color on what's happening apparel to where you're seeing the improvement there?

Rick Brooks: Sure. Mitch, I'm glad to do that. And I'm going to tell you, it's really the same for both men's and women's. There are really two things driving the improvement in our business. It is the performance of our Private Label relative to trend. I think our teams have just -- we've done just a really good job there. [Private Label] (ph) for a couple of years in a row now. And it continues to resonate. I believe that what we are doing is really taking share on -- particularly in the bottoms business in the market. So I think that's been really strong. And the second thing is in apparel is new brands, is the freshness of the offering that we're offering with new and emerging brands in the market. It's both those things for both men's and women's [matures] (ph), what really is driving the business is newness and being on the trend cycles. And it's really been -- that's where we're really seeing the traction.

Mitch Kummetz: And then on the new brand side of it, if I recall correctly, several years ago you had sort of a [trio] (ph) of brands that really emerged to become pretty powerful on the apparel side. Like how does this stack up to that? Like do you see sort of the same trajectory that we are just early innings? Or is there any sort of takeaways from that that might inform you as to kind of what's happening here?

Rick Brooks: Sure, Mitch, and I can kind of take it away more broadly because the last few years have been pretty crazy about how we want to look at them. But typically, what we've seen historically as we've seen ourselves concentrate volume in the top 10 and top 20 brands and then deconcentrate as new brands come up and we lose volume from the ones that are trending down. And then what we find is which of those new brands become the next big brands and then we reconcentrate volume back in the top 10 and top 20 vendor base. So for me, this is consistent with that historical pattern now, where we really had a dearth of new brands during the pandemic. I think, that was definitely as Chris said, there is a myriad of things over the last few years that made our business tough. That is another one of them that I'd say was a challenge coming out of the pandemic. And so we just didn't have that pool of new brands that -- and none of those brands that did launch then have really worked at all for us. It is really the strength has been in the last two years and particularly last year, with the brands we've launched. So I expect that we are going to properly now return to that kind of pattern. And as I said in the comments, we're seeing that where these new brands are at, they are historically ahead of pace relative to what we've seen in this kind of now growing and concentrating now -- they are going to grow, and we'll find out which one of those become really top-tier brands here over the next couple of years.

Mitch Kummetz: And then, Chris, you mentioned the calendar shift in 2Q. By my math, it looks like you're talking about $10 million. Does that sound about right? And can you also -- I know you're not giving 3Q guidance, but I would guess, an equivalent, if not maybe bigger hit to the third quarter. Can you maybe address that so that we get our models right?

Chris Work: Yes. Yes, happy to do that. I mean, when we look at the year and what's remaining in the year, your number around $10 million is pretty much spot on. It works out to be right around 5% of growth just tied to the calendar shift. Again, this is back-to-school weeks moving into the second quarter as the calendar shifted with the moving past the 53rd week. The vast majority of that or actually all of that will really come back in the third quarter. And then as we all know, in the fourth quarter, we just have another detriment because the 53rd week goes away from – we are having an extra week in 2023 that we don't have in 2024. So those are the main calendar shifts that we'll experience here. I will point out, as you look at May results, it is probably better to focus on the comp in May as well. You'll see a little bit of actually just the volume shift even starts in those May reported comps or reported sales trends. So comparable sales are the real key barometer to measure the business.

Mitch Kummetz : All right. Thanks guys. Good luck.

Rick Brooks : Thanks Mitch.

Operator: Thank you. Our next question comes from the line of Richard Magnusen of B. Riley.

Richard Magnusen: Hello. Well, thank you for taking our call. First, can you provide more details around your plans to manage inventory during back-to-school, any strategy for -- although you did mention that you're focusing on full price any strategy on managing any type of promotional or discounted merchandise packages throughout that period? And then further are there any outstanding trends that you believe you could capitalize on that [end of period] (ph).

Rick Brooks: All right. I'll start and then Chris can add on. So first, yes, we are going to -- we believe we have some things that are really working. And you are going to see us be aggressive in those areas, appropriately aggressive on inventory positions during those periods. And again I think our teams have done whether you are looking here at the inventory results at the end of Q1 or through last year. I think our team doing a really good job managing inventories, but we are going to go -- we're going to make the appropriate investments in inventory that we believe we should base on what's driving the business forward. And of course, back to school, those apparel categories are more important to us, on a relative basis in terms of mix. So yes, we will be making investments there, but I think we have good and appropriate risk mitigation strategies in place for those investments. But we believe actually we’ve got, good opportunity there to drive volume relative to taking some inventory positions. We do also, though, expect that back-to-school be as promotional as ever. And I think that we'll see our competitors be traditionally probably more promotional than we are. But what we're going to do is we're going to do what we do for customers, I think, really well, which is lead on trend, have to cool new brands in place and then use our Private Label and our Bundling efforts to offer value as we package transactions for customers. And I think that's the way we always foresee we can really add that value for our consumer base. Make them some good deals and [narrow] (ph) the private label business to do that. So with that, again but that's action additive to margin if we can do that. So it may be a good value for the customer, but it's also a good value for us and for our shareholders. So that's kind of our thinking and how we're thinking about back-to-school at this point. Chris, I'll let you add anything else?

Chris Work: Yes. The only thing I'd add is as we quantify the numbers, this would be our third quarter in a row we've seen inventory declines. I think the teams are really focused on managing inventory at tight levels. You're seeing that in both the product margin trajectory we had in the first quarter as well as what we're forecasting here for the second quarter. And the last thing I'd just add to what Rick is saying is just this idea that we have the ability to chase. I think that's something that our buying teams have done a good job in their management of inventory to be able to really find trends here and chase. And what's unique about our current trend line is, again, while not quite where we want to be yet by any means, it continues to get better. We're seeing that growth, as we've talked about here on this call in men's and women's. We're seeing something like footwear that is down low-single digits, not down as significantly as what we've seen over the last couple of years. And the inventory positions are getting in a better spot. So then you take all three of those together, and you're really talking about 75% of our business. And that's important because if we look about the vast majority of our now 45-plus years that we've operated, we've operated across these 5 departments, and it's rare that we see them all comp positive. But here, we are in a spot where we are starting to see 75% of the business in a really good spot. And so in a spot that we believe we can hopefully accelerate as we move through the year. So happy with where the inventory stands happy that we have the ability to chase as we see trends that are really working here and -- I think we've got some good brand partners behind us that are ready to chase as well.

Richard Magnusen : All right. Well, thank you. I get back into the queue.

Operator: Thank you. [Operator Instructions] I would now like to turn the conference back to Rick Brooks for closing remarks. Sir?

Rick Brooks: Thank you. And again, just I want to offer my appreciation for everyone's interest in Zumiez and our continued challenge to work through what's been a really challenging year over the last few years, and I think we're feeling good about our quarter-to-quarter trends, and we were looking forward again, talk to you in September. Thanks, everybody.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.