Earnings Transcript for ZUMZ - Q4 Fiscal Year 2023

Operator: Good afternoon, ladies and gentlemen. And welcome to the Zumiez Inc. Fourth Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 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 risks 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'd like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Rick Brooks: Hello, everyone, and thanks you 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 fourth quarter and full year performance before discussing some of our strategic priorities for 2024. Chris will then take you through the financials and our outlook for the coming year. After that, we'll open the call to your questions. The fourth quarter represented an encouraging finish to what was a challenging year. As was the case throughout fiscal 2023, we faced headwinds in the fourth quarter, including highly promotional activity across the soft lines retail sector and an increasingly selective consumer pressured by the multiyear inflationary impact on discretionary income. That said, our men's business turned positive in November and growth accelerated in both December and January. Overall, momentum built throughout the quarter with total sales trends improving month-to-month, culminating January turning to positive comparable sales, fueling fourth quarter sales and adjusted EPS that were both above the high-end of our guidance ranges. Many ways, the fourth quarter monthly sales trends were a microcosm of the trend we've seen throughout the year. To recap our improving trend line, year-over-year total sales were down 17% in first quarter, down 12% in the second quarter, down 9% in the third quarter and down less than 4% in the fourth quarter, excluding the benefit of the 53rd week, which drove sales slightly positive for the quarter. As we enter 2024, we have continued to see some areas of strength in our business. While total sales trends for February were not yet positive, we did see sequential strength as we moved through the month and noted that the primary headwind was tied to seasonal snow sales in Europe, that turned negative in February after being significantly positive in January due to the timing of promotions. For October through February, Europe snow sales were down low single-digits despite significant variability across periods that pushed our seasonal snow comparable sales positive in January and negative in February. To be clear, 2023 was a disappointing year overall, and we're not satisfied with our results. With two years of meaningful negative comparable sales trends, the business has deleveraged significantly, and we experienced the first annual net loss in our history this last year. As we look to 2024, we expect the macro climate to remain a headwind in the near-term, as Chris will detail in our outlook. However, we are optimistic that the work we are doing will inflect our trend line positive. Overall, we will focus on items within our control to grow sales and drive the business back to profitability. To that end, we plan to take specific actions to adjust portions of our strategy in the new year. I'll quickly take you through the most significant changes, starting with a shift in focus for the European business. The last few years have been particularly challenging for profitability in the European market. The business was close to achieving breakeven in 2019 before the onset of the pandemic. However, the longer and stricter pandemic area closures in Europe, combined with the inflationary impact to the consumer and instability in the region in the year since, have resulted in earnings declines for our European business since 2020. To correct this negative trend, we are pivoting our focus away from store expansion to enhancing the productivity of the existing European business. With a solid foundation of nearly 90 stores across nine countries and a pan European web business, we believe we have adequate penetration today in the relevant European markets to unlock the potential for the concept and to create value as we work through what has been a difficult cycle. By focusing on increasing the productivity of our current business in Europe, we'll improve our near-term profitability and cash flow. We're also creating a profitable platform for long-term growth in the future. We have seen positive signs such as double-digits comparable sales growth in Germany, the Netherlands, Norway and Sweden during the year, which gives us confidence that we can achieve profitability in Europe as we've done in other international markets like Canada and Australia. There is no doubt that trends emerge locally and grow globally. Remaining relevant in these markets is a significant advantage to Zumiez over the long-term and serving both our customers and our brand partners. This heightened emphasis on profitability extends beyond Europe. In 2023, we closed 20 underperforming North American stores and expect to close an additional 20 to 25 locations in 2024, should results continue to be challenged. As a result, we have reduced field and corporate staffing levels to align with 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 to reducing shipping and logistic costs company-wide and continue to implement other cost savings opportunities in many areas throughout the organization. While we heighten our focus on profitability company-wide, we're also making investments to ensure we continue to win with customers, including injecting assortments with newness. In 2023, we launched nearly 200 new brands, almost double a typical year and we expect this newness with relevant and desired brands to continue to attract a broader customer set into 2024 and beyond. We're already seeing our new brands launched in the last couple of years represent a larger portion of our sales than we've historically seen, which we believe is an indication that they are resonating with our customers. We're also growing our private label brands. Private label represented approximately 23% of sales in 2023 compared to 18% in 2022 and 13% in 2021, which is a testament to our teams in capturing both the trend and value customer and provides another significant runway for growth. And we're maintaining our best-in-class service in stores and on the web, with continued investment in training and technology that combined are aimed at enhancing our relationship with customers and connecting with them in a more personalized and relevant way. After two challenging years, we're ending 2024 with a strong balance sheet and over $170 million in cash that will allow us to weather the current environment. Before I close the call and turn the call over to Chris, I'd like to thank our teams and our brand partners for their efforts and partnerships in 2023. Our talented and dedicated people have been a bright spot, have we navigated recent challenges and will be the driving force behind the company's return to sustainable growth in the quarters and years ahead. I remain confident in our ability to serve our customers and drive back to profitability and positive cash flow and look forward to updating you on our progress in the quarters ahead. 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 the fourth quarter and full-year 2023 results. I'll then provide an update on our first quarter to date sales trends before providing some perspective on the full year. Net sales for the fourth quarter of 2023, which was a 14-week period, increased 0.6% to $281.8 million, compared to $280.1 million in the fourth quarter of 2022, which was a 13-week period. Comparable sales were down 3.9%. The decrease in comparable sales was driven by continued inflationary pressure on the consumer, continued challenges and competition for the discretionary dollar and tougher trends in certain categories of our business. From a regional perspective, comparing the 14-week period in the current year to the 13-week period in the prior year, North America net sales were $212.4 million, a decrease of 3.4% from 2022. Other international net sales, which consist of Europe and Australia, were $69.4 million, up 15.2% from last year. Excluding the impact of foreign currency translation, North America net sales decreased 3.4% and other international net sales increased 12.3% compared with 2022. Comparable sales for North America were down 5.4% and comparable sales for other international were up 0.9% for the 14 weeks ended February 3, 2024. From a category perspective, men's was the only category with positive comparable sales for the quarter, while all other categories were down from the prior year. Women's was our most negative category, followed by accessories, hardgoods and footwear. The 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 units per traction and an increase in average unit retail. Fourth quarter gross profit was $96.7 million compared to $95.3 million in the fourth quarter of last year. Gross profit was 34.3% of sales for the quarter compared with 34% in the fourth quarter of 2022. The 30 basis point increase in gross margin was primarily driven by 70 basis points of benefit in shipping costs related to better outbound shipping rates, 60 basis points positive impact related to a mix shift away service and related shipping revenue in the prior year results, which carried a negative margin during the prior year quarter and 30 basis points of leverage in store occupancy costs related to a reduction in total expense year-over-year combined with the modest increase in sales related to the 53rd week. These benefits were offset by a 110 basis point reduction in product margin due to discounted selling to manage aged inventory, which was generally in line with our expectations and a 20 basis points of deleverage in fixed and other costs included in gross margin. SG&A expense for the fourth quarter of 2023 was $129.4 million or 45.9% of net sales for fiscal 2023 compared with $80.1 million or 28.6% of net sales in 2022. This includes a $41.1 million non-cash goodwill impairment charge that resulted from our decision to slow growth in Europe and focus on profitability. This change in our modeling had a direct impact on the future cash flow projections of our Blue Tomato business that have been tied to increased store growth and improved performance as we grow the business. The 1,730 basis point increase in SG&A expenses as a percent of net sales was driven by the following

Operator: [Operator Instructions] Our first question comes from Corey Tarlowe with Jefferies.

Corey Tarlowe: Great. Thanks, and good afternoon. As it relates to Europe, where are you seeing green shoots? And then where are you seeing opportunities to improve as we look ahead and you assess the viability of certain regions or areas in which you're currently present as you think about the go-forward outlay for that region for your business?

Rick Brooks: All right. I'll start, Corey, and then Chris can add on to -- add on his comments, too. I think there really -- what's important in this conversation is the pivot in Europe or we can store growth because obviously, we are growing sales in Europe over the last few years, but sales have been challenged relative to our expectations for the sales growth that we expect to see in Europe and helping new markets is an expensive proposition. So what you're really seeing us do here is say we need to really refocus our team's efforts on going back and giving them the time and the bandwidth to go back and really focus on building out profitability in our existing markets. And that's our focus. And as we commented in the script, we've seen some good results, particularly in Germany last year, which is our, I think, our biggest market in terms of unit count in Europe. We had a double-digit gain in the year. We made significant progress relative to profitability in that market, but we have more progress to make, Corey. And I guess that's what you're seeing us say here is we're going to put a positive growth, build a profitable base and then reconsider where we go from there. So this is more about basis. It's about the fundamentals and tactics. And we have markets that are profitable in Europe, to be clear. But this is about getting all moving in the right direction, getting back that what our teams look like in every location, driving better product margins across the business, controlling and managing expenses more effectively by not again, reducing the cost of entering new markets as an example. And so we're back to basics. And I would tell you much the same thing about here in our North American business, too. So I think it was more about perspective of -- we have opportunity there, and we have opportunity to grow the profitability on a 4-wall basis across those markets and we know our web business in Europe. So it's really about the pivot, slowing growth, focusing on building a profitable base, doing and executing the basics and putting all of our efforts into that.

Corey Tarlowe: Great. And then I have 2 more, if I can. On North America, the men's business seems to have made a turn. How do you think about the prospects for that to potentially drive maybe perhaps a more widespread momentum across the other categories of the business now that you've seen the turn there. And then just briefly on store count on the, I believe it's 10 openings that you're anticipating, what would be the net number for the full year?

Rick Brooks: All right. Great. I'll take the first part. And again, I'll let Chris add on as he like. So North American business, the good news -- this is -- I have good news for you in North America is the improvement in our North American business is directly related to the comments we made in the script earlier. Our private label business is dead on, I think, the trends we're doing really fun, creative things there. Multiple trends are working for us in private label. And private label is growing in absolute dollars. Despite the overall sales decline, we're not declining in private label on a relative basis, not a gain share on a relative basis. It’s a gain in absolute dollars in our business in private label. So we have a lot of momentum there. And I think we're on the early edge, I think we've been not just on those trends, but we've been leading the trend cycles that we're seeing out in the market. So that is a huge driver for private label. It also has, I think, a positive benefit of women's that we'll see play out over time in terms of what we're doing on the women's side with our private label brands. And again, it's both about the freshness we can offer the consumer and being on those trends, building those trends for our customer as well as the value proposition we have by the move, the ability we have with private label to do bundling and things like that for customers to provide more value for them beyond just cheap prices. That's never been our strategy. The second thing on men's that’s really, I think, again, directly correlated to the results we're seeing, and we commented on this in the script, too, is that the emerging brands in '22 and '23, and I will tell you, particularly in '23, the brands we launched in '23. And in some cases, the brands we launched in the back half of 2023 are gaining significant share in our business that have been doing so month over month and better, deeper penetration in Q4 than Q3. And so this is the newness when we talk about injecting newness into the business, this is what we're talking about. And we're seeing it resonate and that these trends that we're seeing are the exact things that are driving our positive trend in the men's business. So as we think about that, with new brands, Corey, what we'll look to do there in terms of broadening of the categories is we'll look to do exactly that, which is how can we take a [indiscernible] brand and get them into accessories and different accessories categories. How can we partner with [indiscernible] with these brands to help drive more sales for them? How can we expand them to new categories of business? These are the things we'll be working with, again, not all of them, but select brand partners to try to drive even more sales results. And I just think these are, again, we're new in a lot of these. We're going to -- these are just -- these are brands that are just to continue to gain share. And again, we intend to launch a lot more new brands throughout 2024. That's always our goal every year. So I just want to be clear, there's a direct correlation between what we're seeing in the improving trend results and new brands and the efforts we put into private label. So they're directly correlated and they're driving the better results. And I think we can expand it to other categories, absolutely, and potentially we will be able to lever some of that benefit for other departments within the business, too.

Chris Work: Yes. And I'd just add a couple of quantification points to men's before I answer your question around store count that. Men's as a percentage of our total sales grew from 43% to 47%, which I think is a strong metric for our business, and it ties into some of the thoughts we gave annually as far as the belief that we think we can grow sales for the year. What I think is really good about the men's business is it turned positive in back to school. While it wasn't positive for all of Q3, it was positive during that 6-week period. And then again, turned positive in November and December during the peak and now has remained positive in January and February. I bring that up because as we look back on the business and we look at other periods that have been a little more challenging from a financial perspective for us, the last one being 15 and 16, men's really was and specifically, men's T-shirts, was really was the driver for us coming out in growth of 17, 18, 19. So again, I give our buying teams a lot of credit here. This is about finding newness and brands that will stick and men's really is the driving category. So I think it's a good call out from you to ask. From a store count perspective, I guess, what we plan to do right now, what we said in the script is that we would probably open 10 stores and close 20 to 25 stores. But in answering that question, I do want to step back because we also noted that we closed 21 stores in 2023. As you think about that on a 2-year combined closure, it is a pretty significant closure cycle for us and really not a territory we've been in before. So I want to be careful in giving closure numbers because of the 20 to 24 closures in 2024. I mean this could increase or decrease as we move through the year depending on how our results go and our ability to work both with our landlord partners as well as internally on some of the things that we control. And when it comes to closures, it's not a process we really take lightly either. I mean we have a pretty detailed process to look at closures, we try to factor in thing, obviously, the sales and profitability levels of the specific location in question. But we also look at what does that store mean to its trade area. And as we think about serving that customer, what other opportunities do we have around that store to impact that customer. We look at the condition of the center and how the landlords plans for the center are playing into the location in regards to vacancies and the ability to bring newness to a location and then we look at peak performance and working through some of the decline we see in our business right now are permanent or temporary based on the current state of the market. I think that's a really important thing that we do and then what else we can do about the store economics. So we go through a pretty diligent process, I think, after factoring in all of those things, if we make the determination if a store to close, it probably means that it's in a location or a mall that is one of the declining centers that we have in our country and something that will close. So for 2023, the majority of our closures were in North America. In 2024, we anticipate that will hold true, although we do expect some closures in Europe as well. It does have an impact on overall sales, although, again, I mean, despite this, which we estimate to be about $10 million and the 53rd week, we still think we can grow sales in excess of those amounts.

Operator: Our next question comes from Mitch Kummetz with Seaport.

Mitch Kummetz: I've got maybe a few housekeeping and then maybe a couple of little more strategic. Because I think you may be partly answer my first question. Just on 53rd week, what was the sales and earnings impact in '23? Was that the $10 million in sales that you just referenced? Maybe I didn't hear that correctly.

Chris Work: No. The $10 million in sales is referencing the closures. The amount that the 21 stores we closed are worth in sales. The 53rd week is going to be worth about $12 million.

Mitch Kummetz : And what about the earnings?

Chris Work: It's about $1.8 million of operating profit.

Mitch Kummetz: Okay. That's helpful. And then on the 1Q guide, you gave us a sales range. Is there sort of a comp assumption that's embedded in that range?

Chris Work: Yes. The comp assumption in this year will have a little bit of a negative spread, obviously, because of how the closures impact it. But it won't be that significantly different than the range we gave.

Mitch Kummetz: Okay. And then on the full year, again, you expect sales growth and I want to say that that's inclusive of the 53rd week in '23. So maybe just to confirm that. But then also given the net store closures that you're anticipating, I assume that you're expecting comp growth for the year. Can you just confirm that?

Chris Work: Correct. Yes. When we talked about, we didn't give specific guidance for the year or number, obviously, just given kind of the uncertainty and what's ahead. But we are planning the business with sales growth factoring in both the 53rd week challenge that we'll have as well as the $10 million in store closures.

Mitch Kummetz: So if there's comp growth in '24, do you anticipate some of that coming from just like now that you slowed the growth or shut down the growth of stores in Europe, is there an opportunity for comp growth in Europe, just kind of from the standpoint of like a mature ramp? Or do you see that as an opportunity?

Chris Work: Yes. I think I would look at this -- I'm going to take your question a little bit higher level, and then I'll come into Europe. I think when we're looking at this business, we think we have opportunity for comp growth really across the business. Specifically because what we know this business has been able to do and where we have landed here these last couple of years, which is pretty disappointing to us, to be quite frank. But we're looking at many of these locations, knowing we've got good locations. We've got buyers that are really homed in on finding the right product for what's next. We've got good sales teams that are out there to serve the customers. And so as we tie this together and we think about 2024, we think we have a good opportunity. Now earlier in this call, we talked about men's as being an opportunity. And I think that's a really good place for our business to start. I think each of our other categories have had some challenges as well. So as we look at those and we look at some of these new brands that Rick spoke to and the fact that we've continued to bring a lot of newness into the business, we think we have opportunity in our other categories as well. Geographically, we know that North America has been challenged. It has been just as much, if not more, than Europe. So we know that in the U.S., we've got opportunity. We believe we have opportunity in Canada. And as it comes to Europe, I think you're absolutely right. We've got a lot of new units. We've been very focused on new markets and growth. And as Rick said, we're sort of pausing that with the idea that we need to grow comp and we need to focus on the customer and get back to basics to drive the profitability and cash flow, right, within that region. And then I think once we get to that level, we have the opportunity to rethink about growth because there still is a lot of growth in Europe. I don't want to give the impression that the growth is not there. We just have to be able to do it in a profitable way with cash flow. And as we think about Europe individually, I mean despite the pullback we saw in overall sales, I mean, Europe did comp in 2023. It just did not comp to a level that we needed it to, especially in light of what you've seen with wage inflation and some of the other costs that have gone up in Europe. So I believe there's comp opportunity across the business, and I think that's why you're hearing us be pretty confident about the ability to grow sales despite the fact that we've got the 53rd week in closures that we've got to overcome.

Mitch Kummetz: Okay. And then maybe two last ones are a bit more strategic. One on the new brands. It sounds like the benefit that you're seeing there is mostly on the men's side. Is there also, I think, Rick, you mentioned the opportunity to do more women's with private label, but there is also an opportunity to add brands to help the women's business? So that would be my first question. And secondly, one month doesn't make a trend, but footwear, it looks like it was positive in February. I'm just wondering, is that really a function of that you're just starting to lap easier compares? Or have you also kind of worked on sort of pivoting with footwear assortment to try to drive better results there?

Rick Brooks: All right. Thanks for the question, Mitch. First, I guess just for clarity purposes around new brands. We have some brands that are new brands we've launched that are working well in women's. So I'll be clear about that. And where it's really made a difference in the business, just not enough to tip it to the positive at this stage of the game. In the private label, we have a lot of good stuff there, too. And then other brands that we're launching that are predominantly have benefited the men's. We know there's also a unisex aspect to how our customer buys products. So it becomes a little harder for me to quantify that for you to how it’s impacting women. We see that throughout our business with women buying boy shoes as an example, would be another example where we know it's happening based upon the seismic we see playing out there, or we see it in T-shirts, where we're selling small size of the men's disproportionately to our typical business. So it's a little bit hard to answer that question, Mitch, just because we know there's a unisex aspect to our business particularly with women in the business. But yes, we do have some brands that are specifically new in the women's business, and we're seeing some success just not enough to tip it to the positive at this point. So we're always looking for brands across wide ranges that we think will really be relevant for all of our customers. I would guess would be the message you have for you there. On footwear, in February, yes, it was positive. But it was a promotionally driven positive number. So what I will tell you about footwear, Mitch is, we have just been clearing footwear aggressively and we've had a lot of footwear. We've had some good help from our brand partners here in doing this. But as you know, it's been an issue in a challenged department for a while now. And so what you're seeing us do is get inventory in position so they can really go after newness in footwear. So I think, Chris, inventory in footwear was down.

Chris Work: 30%.

Rick Brooks: 30% at the end of the year, Mitch, to give you a sense of where we're at on the footwear inventory. We have aggressively been aggressive about clearing it out. And again, great support from our brand partners in helping us do that. And we've done it also through liquidation. So what you're really seeing over the last month is aggressive liquidation in the footwear market. Now as we look forward, we definitely have some trends that are working, and I'm sure you're identifying them on our footwear wall. And so now it's about the right levels of inventory. It's about, we're going to ride the trends that we know are working that really actually go together with the trends that are in our private label business, particularly in long bottoms. They're going to drive, I think, some -- that will drive improved business in footwear. And then what our teams have done is we have basically, if you were to see our plan for footwear throughout 2024, I think we have a really solid plan for injecting newness throughout the year on a pretty regular basis, period by period, we're going to see us launch newness and build as we move -- really try to build and adjust as we move towards back-to-school and holiday with what works in the assortment and how we reposition our footwear wall to really hit those peak periods as best we can. So I think the key takeaway off it is yes, it was, but it was promotionally-driven liquidation mode, I would say. But as we look forward, we now have inventory in a position where we can really go out and make investments and really try, as you know, footwear is top because of the size, the sizing, you do have to be larger investments in each style of footwear you try. So what we're going to do now is just go out there and have some fun. We're going to play our brand partners, again, are being incredibly supportive here, and we have a lot of newness coming every period in footwear.

Mitch Kummetz: I look for being size 14 in your stores. I appreciate you taking all my questions.

Rick Brooks: Well, not that much new, Mitch.

Operator: [Operator Instructions] That concludes the question-and-answer session. At this time, I would like to turn the call back to Rick Brooks for closing remarks.

Rick Brooks: All right. Thank you, everyone, again. We always appreciate your support of Zumiez greatly and again to our employees and all of our brand partners. We really, again, as I said in the commentary earlier, we really appreciate the challenging year we all worked through and we’re looking forward to, hopefully, a better and improved 2024. So thank you, everyone, and we look forward to talking to you after first quarter results.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.