Zumiez Inc Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Zumiez, Inc.'s Second Quarter Fiscal 2021 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 would 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 would like to turn the call over to Mr. Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

Hello, and thank you all for joining us today. I have Chris Work, our Chief Financial Officer, with me. I will start with some remarks about our second quarter, followed by insights on our sales for the third quarter thus far, and then I will hand it over to Chris for a detailed discussion of our financial results. After that, we will welcome your questions. Our second-quarter results highlight the strength of our business model, showing solid top-line growth and better-than-expected profitability despite challenging comparisons. Looking back at the second quarter of 2020, our stores were open for only about 73% of potential operating days due to the pandemic. Despite these closures, our total sales in Q2 2020 rose by 10% compared to 2019, thanks to our ability to leverage strong sales trends and pent-up demand created by significant closures in the first quarter of 2020. Therefore, we were pleased to see our total sales in the second quarter of 2021 increase by 7% year-over-year and by 18% over a two-year period, while still achieving strong full-price selling. On the expense side, our spending has returned to more typical levels after last year’s temporary cost savings measures and government subsidies, leading to diluted earnings per share of $0.94, just $0.07 below last year's record of $1.01 and up over 160% from the second quarter of 2019. Our teams have once again excelled in adapting to the current environment to meet the demand for our unique merchandise offerings. This year’s results indicate a return to a more historical balance between our in-store and digital channels as customers increasingly prefer physical shopping. This trend is positively significant as it enhances the brand experience through human interactions. Looking forward, we are optimistic about our ability to surpass 2020 sales levels in the latter half of the year, despite facing tougher comparisons and increased competition for discretionary spending. With the majority of school districts returning to in-person learning, we've observed a more normalized kickoff to the back-to-school season, which should give the business a good start for the third quarter. So far in Q3, leading up to Labor Day, total sales have risen 23% year-over-year and increased 7% compared to the same period in 2019. These results come despite ongoing challenges related to the pandemic. The recent increase in COVID cases from the Delta variant has introduced some uncertainties around operating conditions and consumer behavior in the short term. However, we have confidence in our teams' agility demonstrated throughout the pandemic and in our business's financial strength to manage potential risks ahead. Our agility is drawn from our strong culture, brand, and exceptional sales teams that help us gain market share. The foundation of our success remains our one-channel mentality and our ability to adjust to changing consumer needs. We have implemented strategies like in-store fulfillment capabilities, including Zumiez Delivery, bringing our top-tier sales teams directly to customers' homes. While aspects of our model will continue to evolve in the coming years, our customer-centric strategy anchored in a strong brand and culture will stay unchanged. We have partnered with outstanding brands to offer diversity and uniqueness that allow our customers to express themselves. Our infrastructure enables customers to shop with us and receive what they want, how they want, and as quickly as they want. We have transformed our business into a channel-less organization, with inventory visibility across all touchpoints and backend capabilities that allow us to efficiently manage expenses regardless of the sales channel. The collaborative work we've achieved will be crucial as we focus on serving customers more effectively. Thus, we remain committed to investing in our future. We believe that times like these present great opportunities. With the right talent, strategies, and resources, we are well-positioned to emerge from this crisis as a stronger brand than ever before, a clear leader amid the ongoing consolidation in retail. Now, I will pass the call to Chris to discuss the financials in more detail. Chris.

Thanks, Rick. Good afternoon, everyone. Given that our stores were closed for approximately 27% of the quarter last year due to the pandemic, I'll provide comparisons to both the prior year and the second quarter of fiscal 2019 where appropriate. Following my review of our second-quarter results, I'll provide an update on third quarter-to-date sales trends and our current perspective on the full year. Second-quarter net sales were $268.7 million, up 7.3% from $250.4 million in the second quarter of 2020, and up 17.6% from $228.4 million in the second quarter of 2019. The year-over-year increase in sales was primarily driven by the reopening of stores, our ability to capitalize on current trends, and the continued impact of domestic economic stimulus on the business during the second quarter. Compared with the second quarter of 2019, we saw comparable sales growth is 16.6% and the net addition of 15 stores. Our stores were open for approximately 96% of the potential operating days during the second quarter of 2021 compared to 73% in the second quarter of 2020 and 100% in the second quarter of 2019. From a regional perspective, North America's net sales were $237.5 million, an increase of 6.3% over 2020, and up 14.8% compared to the same period in 2019. Other international net sales, which consists of Europe and Australia, were $31.1 million up 15.7 from last year, and up 45.1% from 2 years ago. Excluding the impact of foreign currency translation, North America net sales increased 5.8% and other international net sales increased 7.6% compared with 2020. We experienced significant COVID-related store closures during the second quarter in Canada, Australia, and Europe, noting they were open for approximately 68%, 77%, and 88% of the available operating days respectively. During the quarter, the men's category was our largest growth category, followed by accessories and footwear. Hardgoods was the largest negative category followed by women. The second-quarter gross profit was $105 million compared to $90.9 million in the second quarter of last year, and $77.2 million in the second quarter of 2019. Gross margin as a percentage of sales was 39.1% for the quarter compared to 36.3 in the second quarter of 2020 and 33.8 in the second quarter of 2019. The 280-basis point improvement from the second quarter of 2020 was largely due to a 170-basis point decrease in web shipping costs related to a decrease in web sales from the second quarter last year when we add a higher rate of store closures driving customers online. A 100-basis point increase in product margin, and a 70-basis point improvement in inventory shrinkage, partially offset by a 60-basis point increase in distribution and inbound shipping costs. Gross margin improved 530 basis points from 2019, driven largely by product margin improvement of 270 basis points, occupancy leverage of 170 basis points, and a shrink improvement of 90 basis points. SG&A expense was $73 million or 27.2% of net sales in the second quarter compared to $57.7 million or 23.1% of net sales a year ago, and $65.5 million or 28.7% of net sales two years ago. Compared to 2020, the 410-basis point increase in SG&A expense as a percent of sales primarily reflects the benefit from temporary cost savings tied to the pandemic last year. The most significant changes include 150 basis points of deleveraging in our store wages, 60 basis points of deleveraging in corporate costs, 50 basis points of deleveraging in annual incentive compensation, and 40 basis points due to a decrease in governmental subsidies. During the quarter, we also accrued a legal settlement resulting in a 110 basis points negative impact. Operating income in the second quarter of 2021 was $32 million, or 11.9% of net sales, compared with $33.1 million, or 13.2% of net sales, last year. In the second quarter of 2019, we had an operating profit of $11.7 million or 5.1% of net sales. Net income for the second quarter was $24 million or $0.94 per diluted share. This compares to a net income of $25.4 million or $1.01 per diluted share for the second quarter of 2020. a net income of $9 million, or $0.36 per diluted share, for the second quarter of 2019. Our effective tax rate for the second quarter of 2021 was 26.8%, compared with 26% a year ago period and 30.7% 2 years ago. Turning to the balance sheet, the business ended the quarter in a very strong financial position. Cash and current marketable securities increased 37.7% to $412 million as of July 31st, 2021, compared to $299.1 million as of August first, 2020. The increase in cash and current marketable securities was driven by cash generated through operations, partially offset by capital expenditure. The Company repurchased 200,000 shares during the quarter at an average cost of 44.21 per share and a total cost of $10.9 million. Year-to-date, as of September 7, 2021, the Company has repurchased 700,000 shares at an average cost of $42.49 and a total cost of $31.4 million. As of July 31, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the quarter with $149.4 million in inventory, up 17.9% from the second quarter of 2020 and down 1.1% compared to the second quarter of 2019. On a constant-currency basis, our inventory levels were up 17.3% from last year. Overall, the inventory on hand is healthy and selling at a favorable margin. Now to our third quarter to date results. Net sales for the 37-day period ended September 6th, 2021, increased 23.2% compared to the 37-day period ended September 7th, 2020. As we saw our customers go back to in-person learning and the majority of the regions in which we operate. Compared to the 37-day period on September 9, 2019, total net sales increased 6.7%. Our stores were opened 98% of the available days during the period in 2021 compared to 91% in the same period last year. Total comparable sales for the 37-day period into September six, 2021 increased 10.5% on a one-year basis and increased 5.4% compared with two years ago. From a regional perspective, net sales for our North American business for the 37-day period ended September 6, 2021, increased 25.5% over the comparable period last year and were up 5.1% compared to the 37-day period ended September 9, 2019. Meanwhile, other international businesses increased 2.3% versus last year and increased 28.8% compared with the same period of 2019. From a category perspective, Men's was our most positive category, followed by accessories, footwear, and women's. Hardgoods was our only negative category. Due to limited visibility in the business, we will not be providing specific guidance for the third quarter of 2021 or the fiscal year, but do want to provide a directional update on our expectations for the year. Concerning revenue, for the full fiscal 2021, we are projecting net sales to grow in the low to mid-teens from fiscal 2019. This translates to net sales growth from 2020 between the high teens to just over 20%. For the back half of the year, we continue to anticipate top-line growth on 2020 results that were above 2019 results. For the third and fourth quarters of fiscal 2021, we anticipate we'll grow sales in the mid to high-single-digits from fiscal 2020, absent significant COVID restrictions and lockdowns. For the third quarter, specifically, this is a slowdown from what we have just reported quarter-to-date. However, we believe it is warranted, as we had a slow start to a back-to-school season in 2020 and saw continued strength through late September and October last year. This year, we've seen a more normalized cadence to back-to-school and do not anticipate that September and October will be as strong as they were in 2020. Moving on to gross margin, 2021, gross margin is currently planned to grow year-over-year, driven by leverage of occupancy costs on increased sales, a reduction in shipping costs as web revenue normalizes with stores being opened, and improved product margins. While we anticipate improvements in gross margin in our third and fourth quarter, the year-over-year growth will be much more modest than our first two quarters. Fiscal 2021 SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons, many related to the pandemic. The drivers of the increase include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021, governmental subsidies received in 2020 not anticipated to repeat in fiscal 2021, an increase in incentive compensation and other discretionary accruals related to improved performance, illegal settlement accrued during the second quarter, an increase in costs related to training and recognition events that were reduced significantly in 2020 due to pandemic, an increase in marketing events and other related spending that was not possible with the restrictions in 2020, and an increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results. In summary, we expect to see the expansion of gross margin while SG&A expenses grow much closer with overall sales. On a net basis, however, we now anticipate operating margins will be up year-over-year in fiscal 2021, reaching double-digits as a percent of sales. We are currently planning our business assuming an annual effective tax rate of approximately 26% in fiscal 2021, compared to 25.6% in 2020. We are planning diluted earnings per share to increase meaningfully in fiscal 2021 compared with fiscal 2020, primarily driven by a significant increase we achieved in the first quarter. As we saw in the second quarter, more expenses are coming back into the model as COVID restrictions are reduced, such as store payroll related to capacity and hours, travel training, and other costs discussed above. We are currently earning diluted EPS in the back half of the year to be flat to down modestly from the last six months of 2020. In the event our top-line estimates exceed those outlined today, we would expect a strong flow-through on incremental sales. We are planning to open 25 new stores in fiscal 2021, including approximately 8 stores in North America, 12 stores in Europe, and 5 stores in Australia. We are planning to close approximately 5 to 6 stores during the year. Capital expenditures are planned to be between $22 million and $24 million in fiscal 2021, compared with $9.1 million in fiscal 2020. The majority of the capital spending will be dedicated to new store openings and planned remodels. We expect that depreciation and amortization excluding non-cash lease expense will be approximately $22 million in fiscal 2021 compared to $23.5 million in fiscal 2020. We are currently projecting our diluted share count for the full year to be approximately 25.3 million shares. Any share repurchases made after those disclosed today will reduce our share count from this estimate. And with that, Operator, we'd like to open the call up for questions.

Thank you. Please stand by while we compile the Q&A roster. Our first question comes from Janine Stitcher with Jefferies. Your line is open.

Hi, good afternoon. Thanks for taking my question. You acknowledged the challenging supply chain environment. I was just hoping you could elaborate more on what you're seeing, maybe break it up between your private brands and then what you're seeing from some of the third-party brands that you work with. Just speak to any areas where you feel like there are challenges in getting the product in and help us understand what you're currently seeing in the business. Thank you.

It's required us to work extremely closely with our brands and our logistics vendors to navigate the different challenges that are out there, including how we think about raw material and commodity pricing, factory capacity, transportation capacity, transportation costs, labor shortages, country-by-country challenges, how this affects our timelines and receiving, and then obviously, the general inflation challenges that are tied to this. So, I think from an overall perspective, we feel like our teams have navigated this really well. Clearly, it has resulted in some delays in the product, but I think because we've been dealing with this for the amount of time we have, we've been planning for it, and as we just talked about, we're really happy with the inventory levels. I mean, a year ago, our inventory was much lower than we wanted it to be as Q2 of 2020 was very strong in demand, and we're really happy we built those inventories back up. We think they are in a good spot, so yeah, it has impacted what we wanted to receive, but our teams have done a good job working around that with our vendors. And I think that's how we plan to address this moving forward. I think we continue to work with our brands on how we get through these challenges and really try to provide the best customer experience at the end of the day. I think as we look at the supply chain moving forward, we continue to expect there are going to be issues through the back half of this year. I think moving out of back-to-school we expect there to continue to be some challenges on the inbound side. Like I've laid out here. And I think we'll also start to see some of the challenges we saw in Q4 last year on the business-to-consumer side and getting products to our customers. But all that said, I think we've got really good strategies to mitigate that. Rick talked about our ability to deliver and we're working already with our shipping carriers on how to navigate that and I think we've got a pretty good plan in place. So, we're not forecasting a material impact on the business at this point in the estimates that we laid out for the year for you guys, but I think we're able to manage through it to date. We'll keep track on as we go. And the last thing I'd just add to this, as we think about supply chain, it wasn't too long ago we were talking about where our entire product was coming from, and I think we've done a really good job. I'm really proud of the teams on how we've diversified. We have a much more diversified country of origin layout today within our business than we had two or three years ago. So, I think that's a really good thing. And that helps with how we think about your question of branded versus private label, right? We have, obviously, more say in how we run our private label goods. We've tried to really diversify in that category and work with our brands, and our brands are very smart, and they've built their own logistics, too, to try to diversify their offerings. So, it's a challenge. It's a challenge. I think we've got good strategies around and we'll see how it plays out as we move through the year.

Great. And then maybe just on the hard goods side of the business, just speak to what you're seeing there, just your views on what ending of the cycle we're in, I'm guessing that the negative trend is more just a function of comparisons from what you felt last year during the surge of COVID, but just any thoughts on where we are and maybe what you thought to fulfill on that. Thank you.

Sure, Janine. When we consider the skate hard goods cycle, it’s clear that the pandemic significantly impacted this category. Similar to the camping category, there was a surge in volumes as many people were home due to store closures and lockdowns. As a result, we’re facing tough comparisons this year because of the volume pulled forward during that time. It will be interesting to see how this evolves next year. Nevertheless, I want to highlight that our business has performed well despite the decline in skate hard goods, which was somewhat expected after more than three years in this cycle. We have compensated for this downturn by increasing our apparel sales, which remains a key driver for us. We are also maintaining our share of customer spending, and we are optimistic about our inventory management in skate. Overall, I feel confident about our current position.

Great. Thanks very much.

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is open.

Yes, hello, this is Richard Magnusen in for Jeff Van Sinderen. Thank you for taking our question. We know that the business is omnichannel, but what more can you tell us about the recent trends in in-store traffic, e-commerce, and delivery? And then are you seeing any significant changes in consumer behavior that could last longer as this COVID impacted environment plays out?

All right, Richard, I'll begin and then ask Chris to present some data. I want to emphasize that our role is to empower our customers with choices in how they shop with us, allowing them to craft their own journey within the Zumiez experience. Our one-channel business model is specifically designed to cater to our customers' local needs while utilizing a cost structure that supports both digital and physical sales. I am genuinely excited to report that our customers have strongly returned to our stores for shopping. This is significant because I believe it fosters a richer brand experience. Research indicates that Gen Z prefers shopping in physical stores, which allows for that vital human connection and a deeper brand experience, making shopping at Zumiez truly impactful when customers engage with our employees. With that, I'll turn it over to Chris for some data.

Yeah. Richard, I think this is something obviously we put a lot of thought into heading into the year. Just given the increase in online demand in 2020 when we had our stores close, and we kind of looked at it and said, you know, in 2020, we saw our web penetration for the year-ago from about 16% to 26%. And we kind of said, okay, we think it's going to be somewhere in between there. And to Rick's point, we're just ecstatic that we're just so much closer to 2019 levels, and as it relates to even the second quarter here, we were about 15% digitally originated and compared to the 27% last year. And so, I think you see some things in the model that are really favorable here. One of the things I talked about in gross margin was that we had leveraged web shipping by 170 basis points. What's interesting is if you go back to the last Q2, you'd see what's almost completely offsetting last year. So, I think it's a richer experience for our customers. It's financially a good experience for us as our customers, really, there in-store and gets the immediate fee of the product. So really excited to see those levels go back to 2019 and obviously we'll see how that plays out here in the back half of the year.

And lastly, Richard, to be clear in my response, this isn't just a U.S. issue. We've observed this trend across a wide range of our businesses, including in Europe, where our mix is returning more to the levels we saw in 2019. As your question suggested, this reflects a global trend in terms of consumer behavior. I believe this is particularly unique to our brand experience and the characteristics of our consumer base.

Okay. Regarding the supply chain situation, are you noticing any effective alternatives, such as ships being rerouted to other ports? Has the supply situation prompted you to hold back on some sales? You mentioned this briefly, and I thought there might be more details to share.

Yeah, I think from a supply chain perspective, we've tried to be as creative as possible to navigate lots of the different issues. There are situations where we have pulled product forward, where we've tried to get it sooner to navigate this, and it really becomes a vendor-by-vendor discussion, depending on kind of the demand we have for the product, and what our expectations of selling patterns are going forward. So, I don't have a specific call out for you other than I think the teams have really tried to navigate this in lots of different ways from moving product forward to potentially airfreighting things. All depending on the need for the product.

All right. Thank you. I'll get back in the queue.

Thank you. Our next question comes from the line of Jonathan Komp with Baird, your line is open.

Hi. Thank you. Maybe first just a follow-up on the question of the hard goods. If I look at the last 3 or 4 years and then 2020, I believe hard goods accounted for more than all of the growth for the Company over that period. I wanted to just follow up and ask, do you think there is a risk that you go all the way back for hard goods? I don't know if you have a view there and related to that, are you seeing trends in other categories that you think could offset it if you do?

I'll go ahead and take a crack and will let Rick add anything if you'd like. From an overall perspective, I guess, John, this really falls back to our model of hard goods has been a huge growth driver. We've been super happy to have it. It's been a core part of our offering. And like all of the trends we see over long periods of time, categories have been flowing. And so, to the second part of your question, I was like, how far do we think it's going to go? I'm not really sure. I think that the best part of what we've got going is that we do have things offsetting it, and we are running overall gains. So yeah, we've seen hard goods decrease a little bit. We mentioned that Men has been our strongest category, we continue to have really strong results there, we've seen increases in footwear, and now we're seeing increases in accessories. So, I think all of those are really good signs as we flip to the back-to-school, we see growth across all three of those areas I just mentioned as well as our women's business. So, for me, the hard goods results are still pretty phenomenal over a multi-year view. And now that we've seen a little bit of a pullback here in Q2 and into Q3, we're running big gains in the other areas. And that's great because that's the model and that's the diversification we hope to offer with what we're doing so that as things trend up or trend down, we have other things to offset them.

Yeah, that's really helpful. And then just as a follow-up, this may be theoretical, as you mentioned, predicting where the categories will trend towards, but could you just maybe comment on the relative product margin across your major categories, and if you do see hard goods fall back in favor of other categories, what that might mean for product margin?

Yeah, sure. And I'm happy to speak to that, and I think from a product margin perspective, we could not be happier with kind of where we stand. I think this is now year 6 of us running product margin gains. And if you look at the offering that we have, the apparel categories and accessories are typically our highest product margin and the snow or the hard goods business and the footwear are lower margins for us. Now, the beauty of this is as we look at the last 6 years, we've been able to grow margin both within departments as well as across the Company with these changes happening, right? So hard goods have grown in nature over the last few years. We've continued to grow our product margin. Another interesting piece to this is we've seen our private label penetration over the last five years decline as we've been in such a strong branded cycle, we continue to grow product margin. I'm really proud of our U.S. teams as well as our international teams because we've seen product margin growth internationally as well as those businesses that scaled. So, I think we have a lot of different mix things, maybe almost similar to my sales commentary, it's about how we drive the whole pool. There are challenges from time to time as we transition to, say, hard goods or footwear, which are typically not as high from a product margin perspective. But when our teams are really doing everything they can, which is our focus at all times, we can drive product margin both categories across countries and still see overall results even if the mix is trending the wrong way.

Okay. Great. And just last one for me. As we think beyond 2021, any framework to think about the puts and takes for operating margin and your ability to hold on to a double-digit margin. Thank you.

Thanks, John. I'll keep this brief since we won't discuss 2022 in detail. As we mentioned in our Q1 call, comparing to the first quarter of 2021 will be tough as we head into 2022. However, we still consider ourselves a growth retailer and are implementing strategies to counterbalance some of the stimulus-driven advantages from the first quarter. While I won't get into specifics, we do anticipate a setback in the first quarter of 2022. Nevertheless, we are diligently working on a model and a plan for 2022 to minimize that impact as much as possible. In the long term, achieving double-digit operating profit is a goal we've been striving for. Looking back four or five years ago, we were discussing mid-single digits and aiming for high single digits. I'm very proud of our team's accomplishments; we've generated significant value for our shareholders and established a solid model that can reach double digits. I believe we are on track for that in 2021, and we can create models that sustain this focus into 2022 and beyond.

Okay. Thanks again.

Thank you. Our next question comes from the line of Mitch Kummetz with Pivotal Research. Your line is open.

Yeah. Thanks for taking my questions. Let me ask the question of the hard goods a little bit differently. If I look at your sales growth through the first half and even in early Q3, if I look at on a two-year basis, we've seen the sequential deceleration of the growth. Is it fair to say that all of that is due to the softening of the hard goods category?

I’m not sure I fully understand your question, Mitch.

In Q1, sales increased by 31% compared to two years ago, while Q2 saw an 18% rise, and for Q3, you mentioned that the trend is in the high single digits. This indicates a slowdown in the growth rate on a two-year basis. I am interested in knowing what the figures would look like if hard goods were excluded. I assume you might not provide that information, but can you qualitatively explain if the majority of this slowdown has been linked to a decline in hard goods, specifically skate hard goods?

I think it's probably more complicated than that. We need to consider where we were in the previous years. For example, in Q3, we've experienced significant growth in back-to-school for five consecutive years. If I look back to August of 2017, we had an increase of 7.4%, followed by 9.5% in August 2018, and 7.1% in August 2019. These are substantial year-over-year growth rates, and it's important to consider where we are in the year. Our largest growth cycles have generally occurred since 2016, but we haven't seen the same peaks in the first couple of quarters recently. In the last couple of years, particularly in 2021, we've seen much stronger growth in the first and second quarters. Moving forward, we need to see how that develops. For me, it's about how we achieve overall growth. While hard goods are declining, I believe that from a multi-year perspective, we can still achieve positive outcomes.

No, I understand. I asked the question to get a sense of how the rest of the business has been performing over the last two and a half quarters, whether it has remained steady or has also been declining. We can discuss that later. If I remember correctly, snow conditions in Europe were challenging last year due to resort closures and COVID, among other factors. If we have a more normal snow season in Europe this year, do you anticipate a resurgence in demand for both snow hard goods and soft goods?

I believe the answer to your question is yes, we do expect that if we have a more typical snow season in Europe. However, it's important to note that we had an excellent snow season in the U.S. This creates a balance between the two businesses in these regions. The overall results will depend on the snow season we experience in the U.S. as well. Regarding Europe, it can't possibly be worse than last year, when there was minimal snow and access was limited due to store closures, including locations that specifically cater to customers in places like Innsbruck and Schwab. Therefore, a decent snow season should be beneficial for us in Europe.

Okay. Lastly, regarding the gross margins, if I compare your gross margins to two years ago, you have increased by over 500 basis points in both Q1 and Q2. It seems that much of this is attributed to full-price selling, considering the reduced channel inventory. It appears you do not anticipate the same level of margin expansion in the latter half of the year. I'm interested to know if this is because you do not expect full-price selling to remain as robust, or if there are other factors influencing your forecast.

Yeah. We talked about Q2 specifically, but the same play out in Q1. We had 530 basis points of increase in gross margin in the second quarter. If I break that down, 270 basis points are product margin itself. We had occupancy leverage of 170 basis points, and then an improvement in shrink. As we move to the back half of the year, I think that the reason why we're not forecasting the same level of growth is really a factor in a couple of areas. One, that product margin growth that we're talking about that we've seen in Q1 and now into Q2 actually really started in the back half of last year, and maybe even Q2 of last year. So, we saw a really strong product margin growth in Q3 and 4 last year. So, we're not forecasting that to be significant, and we've also run extremely strong shrink numbers throughout the pandemic and what we're really excited about is now in our first quarter really being primarily open. So, we've run good shrink numbers here through the second quarter, and so we don't have the benefit in Q3 and Q4 on the shrink side, either. That's probably why you're seeing a little bit less aggressive in the back half of the year on gross margin, but again, on a multiyear basis, really excited about the results.

Thanks, guys. Good luck.

Thanks, Mitch.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Mr. Rick Brooks for closing remarks.

Right. Thank you. And again, thank you all for joining us on the call today. We're always happy to engage with you, so really appreciate it, and we'll look forward to talking to you in December for our Q3 results. Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.