Zumiez Inc Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Fourth 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'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's filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer.

Hello and thank you everyone for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the fourth quarter, then I'll share some thoughts on the past year and what it means for Zumiez going forward, before handing the call over to Chris, who will take you through the financials and some thoughts on the coming year. After that, we'll open up the call to your questions. When we announced in early January that total sales for the combined November and December period increased 9%, fueled by another strong holiday season. We indicated that we expected trends to slow over the remaining month of the fourth quarter. This is due to several factors including a tough comparison for the stimulus fueled spending in January of 2021, store traffic likely being impacted this year by the fast spreading Omicron COVID variant, and the fact that we started to see some sales patterns that resembled pre-pandemic seasons with volume focused around peak periods. We're also cognizant of other potential issues such as inventory shortages from global supply chain disruptions and added pressure on consumer spending from rising inflation. As you saw from our earnings release issued earlier today, our full fourth quarter results fell short of our expectations, as these headwinds combined to create a more challenging finish to what was overall a pretty phenomenal fiscal year. Overall, net sales increased 4.6% year-over-year for the fourth quarter to a record $346.7 million and diluted earnings per share reached a $1.70, which was also a quarterly record. While the prior-year stimulus payments and current market conditions made it difficult to lap last year's January, our performance to close out the fourth quarter does not diminish the incredible year we delivered and the tremendous shareholder value created through record growth and earnings, coupled with the repurchase of 4.6 million shares or 18% of our common stock from the start of fiscal 2021. For 2021, total sales were up 19.5% and 14.5% compared to 2020 and 2019, respectively and we achieved record diluted earnings per share of $4.85 compared to $3 last year and $2.62 two years ago. In fact, this brings the last five years compound annual growth in diluted earnings per share to over 36%. This result has a direct correlation to the tremendous work of our teams and the strong culture and brand foundation we have built over the past 40 plus years. Looking back on the year, there were a number of positive catalysts. We start the year with a historic stimulus fueled first and second quarter and were then able to capitalize on an outsized back to school season as majority of school districts around the country resumed in person learning this year, and finally, experienced a growth in the fourth quarter. Throughout the year, we saw a strong full price selling, reflecting pent-up demand and our ability to serve the customer with distinct merchandise through our integrated model, however they choose to interact with us. Overall, 2021 was an incredible year for Zumiez, one where our success was directly attributable to the execution of our long-term consumer centric growth strategy that the company has been building and evolving since our inception. This strategy requires significant agility in navigating the trend cycles and speed desired by our customer. Despite numerous challenges, including global supply chain disruption and labor shortages, inflation and closures tied to COVID, we again proved our ability to adapt and capitalize on strong consumer demand and expand our market share this year. Looking ahead, we remain confident in our ability to execute over the long term to serve our customer and drive total shareholder return. As we enter 2022, we anticipate our results to be challenged domestically in the first half, as we anniversary the impact of domestic stimulus that allowed us to have record results in the first and second quarter of 2021, when our business model again proved to be very efficient at grabbing extra discretionary spending. Internationally, we expect 2022 will have some benefit as the businesses we built in Canada, Europe and Australia capitalize on the market opportunities that emerge as those economies reopen more fully. Although, more recently, we are concerned about the potential impact of the ongoing conflict in Ukraine. Remember, we built our strategy and manage our company not toward quarter-to-quarter results, but the long-term financial results and overall shareholder value. Our overarching consumer-centric approach rooted in strong brand and culture will remain constant. We built our business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate. We built an infrastructure in which the customers can shop with us, get what they want, when they want, how they want and as fast as they want. We've worked our business into a channelless organization with inventory visibility from all touch points and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which sales originate. We're internationally diversified allowing us to capture global as well as domestic growth and work with brands that emerge locally and help them grow globally. While much remains uncertain in the macro environment, with the continued supply chain challenges, inflation, the ongoing pandemic and the conflict in Ukraine, we remain confident in this strategy that has been the key to our success. Before I close, I would like to thank all of our teams and our brand partners for their dedication and commitment to Zumiez over the last year and throughout the pandemic. We've come so far since the period of widespread closures in early 2020 and emerged in the last two years a much stronger company. We're proud of our achievements to date and excited for the future as we continue to execute on our winning strategy. With that, I'll turn the call over to Chris to discuss the financials.

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our fourth quarter and full year 2021 results. I'll then provide an update on our first quarter-to-date sales trends, before providing some perspective on how we're thinking about the full year. Fourth quarter net sales were $346.7 million, up 4.6% from $331.5 million in the fourth quarter of 2020 and up 5.5% from $328.8 million in the fourth quarter of 2019. The year-over-year increase in sales was primarily driven by our ability to capitalize on current trends, the reopening of stores compared to the short-term store closures related to the COVID-19 pandemic in the prior year, and a more normalized holiday season in our U.S. business. Our stores were open for approximately 99% of the potential operating days during the fourth quarter of 2021 compared to approximately 94% in the fourth quarter of 2020 and 100% in the fourth quarter of 2019. From a regional perspective, North America net sales were $287 million, an increase of 0.6% over 2020 and up 2.2% compared with the same period in 2019. Other international net sales, which consist of Europe and Australia, were $59.6 million, up 28.8% from last year and up 24.6% from two years ago. Excluding the impact of foreign currency translation, North America net sales increased 0.6% and other international net sales increased 36.9% compared with 2020. We continue to experience temporary COVID-related closures in Europe, which was open for approximately 94% of the potential operating days during the fourth quarter of this year. During the quarter, the men's category was our largest growth category, followed by footwear, accessories, and women's. Hardgoods was our only negative category for the quarter. Fourth quarter gross profit was $133.9 million compared to $129.6 million in the fourth quarter last year and gross margin was 38.6% compared to 39.1% a year ago. The 50 basis point decrease in gross margin was primarily driven by 40 basis points of increased costs related to inventory shrinkage and obsolescence, 30 basis points of deleverage in our occupancy costs, and 20 basis points of deleverage in our distribution fulfillment costs that were all partially offset by a 40 basis point increase in product margins. SG&A expense was $82.2 million or 23.7% of net sales in the fourth quarter compared to $75.8 million or 22.9% of net sales a year ago, and $79.5 million or 24.1% of net sales two years ago. Compared to 2020, the increase in SG&A expense as a percent of net sales was primarily driven by a 90 basis points increase in store wages, as we saw continued expansion of mall hours in 2021 and also a higher rate tied to wage inflation. Operating income in the fourth quarter of 2021 was $51.7 million or 14.9% of net sales compared to $53.8 million or 16.2% of net sales last year. In the fourth quarter of 2019, we had an operating profit of $48.9 million or 14.9% of net sales. Net income in the fourth quarter was $38.2 million or $1.70 per diluted share compared to net income of $42.8 million or $1.68 per diluted share in the fourth quarter of 2020. And net income of $37.9 million or $1.48 per diluted share in the fourth quarter of 2019. Our effective tax rate for the fourth quarter of 2021 was 25.1% compared to 23.7% in the year-ago period and 24.8% two years ago. Looking at our full-year results, net sales for 2021 were $1.18 billion, an increase of $193.2 million or 19.5% from $990.7 million for 2020 and up 14.5% from $1.03 billion in 2019. The year-over-year increase in sales was primarily driven by the reopening of our stores compared to the widespread short-term store closures related to the COVID-19 pandemic in the prior year, our ability to capitalize on current trends and the impact of domestic economic stimulus on the business during the year. For the year, our stores will open approximately 97% of the possible days compared to approximately 78% of the possible days during fiscal 2020. From a regional perspective, North America net sales were $1.03 billion, an increase of 19.1% over 2020 and up 12.7% compared to the same period in 2019. Other international net sales, which consist of Europe and Australia, were $153.2 million, up 22.5% from last year and up 27.8% from two years ago. Excluding the impact of foreign currency translation, North America net sales increased 18.7% and other international net sales increased 21.4% compared with 2020. While not as significant as in fiscal 2020, we continued to experience temporary COVID-19 related store closures outside the United States in fiscal 2021. For the year, our Canadian, European, and Australian stores were open for approximately 86%, 81%, and 79% respectively of the potential operating days in fiscal 2021. 2021 gross margin was 38.6% compared with 35.3% in 2020 and 35.4% in 2019. The 330 basis point increase versus 2020 was driven by a meaningful leverage in our fixed cost structure compared to the period of COVID-19 related closures in the prior year. The increase was primarily driven by 140 basis points of leverage in our store occupancy costs when compared to the prior year, which included the continuation of rent charges without associated sales during COVID-19 related closures in fiscal 2020. In addition, there was a 110 basis point increase in product margin and a 100 basis point decrease in web fulfillment web shipping cost as the volume shifted back to physical stores with fewer store closures in the current year. Annual SG&A expense was $298.9 million or 25.3% of net sales compared with $253.1 million or 25.5% of net sales in 2020 and $280.8 million or 27.1% of net sales in 2019. The 20 basis point year-over-year decrease was primarily driven by 90 basis points of leverage of non-wage store operating costs, partially offset by a 50 basis point unfavorable impact related to fewer government subsidies received in fiscal 2021. Operating income in 2021 was $157.8 million or 13.3% of net sales compared with $96.9 million or 9.8% of net sales last year. In 2019, we had operating profit of $85.8 million or 8.3% of net sales. Full year, net income was $119.3 million or $4.85 per diluted share, up from $76.2 million or $0.03 per diluted share in 2020 and $66.9 million or $2.62 per diluted share in 2019. Our effective income tax rate for 2021 was 25.7% compared to 25.6% for 2020 and 26.5% for 2019. Turning to the balance sheet. The business ended fiscal 2021 in a very strong financial position, even as we accelerated our share repurchase activity late in the year. Cash and current marketable securities as of January 29, 2022 were $294.5 million compared to $375.5 million as of January 30, 2021. The change in cash and current marketable securities was driven primarily by share repurchases of $193.8 million and capital expenditures of $15.8 million, partially offset by cash generated through operations of $135 million. During 2021, the company repurchased 4.6 million shares at an average cost of $43.30 per share and a total cost of $198.4 million. We had $83.3 million remaining on the current share repurchase authorization as of the end of the fiscal year. First quarter-to-date as of March 5, 2022, the company had repurchased an additional 1.2 million shares of stock at an average price of $44.47 and a total cost of $54.3 million. As of that date, we had $29 million remaining on the current share repurchase authorization. As of January 29, 2022 we had no debt on the balance sheet and continued to maintain our full unused credit facilities. We ended the year with $128.7 million in inventory, compared with $134.4 million last year, a decrease of $5.6 million or 4.2%. On a constant currency basis, our inventory levels were down 2.1%. Overall, the inventory on hand is healthy and selling at a favorable margin. Given supply chain issues and lower than expected inventory at fiscal year-end 2021, we anticipate that inventory will grow in excess of sales in fiscal 2022. Now to our fiscal first quarter-to-date sales results. Total first quarter-to-date sales for the 35 days ended March 5, 2022 decreased 1.9% compared to the 35-day period ended March 6, 2021. Our stores were open for 100% of the available days during the period in 2022 compared to approximately 93% in the same period last year. From a regional perspective, total sales for our North America business for the 35-day period ended March 5, 2022 decreased 5.3% over the comparable period last year. Meanwhile, other international business, total sales increased 17.9% versus last year. From a category perspective, footwear was our most positive category followed by women's and accessories. Hardgoods was our largest negative category followed by men’s. With respect to our outlook, while we refrain from giving specific guidance for most of 2020 and all of 2021 due to limited visibility, we have decided to provide specific guidance for the first quarter of 2022 and some annual thoughts. We have made this decision based on the slow start to the quarter, tough comparisons to prior year and the many moving parts affecting near-term sales and margin. I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales, product margin, and earnings growth given the variety of internal and external factors that impact our performance. Furthermore, while our guidance does include the negative impact in 2022 as we anniversary the 2021 domestic stimulus, it does not include any new closures tied to the pandemic over the last two years or a larger impact of the conflicts in Ukraine and Eastern Europe. With that in mind, we are currently expecting total sales for the first quarter will be between $215 million and $221 million and that we will see continued pressure on sales during the second quarter, as we anniversary the impact of domestic stimulus from 2021. Consolidated operating profit as a percent of sales for the first quarter is expected to be between breakeven to positive 1.5% and we anticipate diluted earnings per share will be roughly breakeven to $0.10. Included in our guidance is the addition of costs as we continue to reinstitute store hours for normal operations and bring back travel in our events, including our 2021 100K event that normally occurs in January, but was moved out to Q1 for our employee safety. Now I want to give you a few updated thoughts on how we're looking at 2022. And looking at the annual picture, we had mixed thoughts as we exited 2021 just one month ago assuming modest 2022 sales increases and double-digit growth in earnings per share tied to the buyback. Now with the first five weeks of 2022 behind us, we are more cautious in how we are looking at the full year and the potential impact to the current operating environment. After lapping the impact of the January 2021 stimulus payments, we are now expecting the first half of the year to be much tougher as we anniversary the larger March 2021 economic stimulus. In addition, since the start of Russia's invasion of Ukraine 14 days ago, we have experienced a noticeable change in consumer spending and expect the complex impact on global inflation will be an added headwind in the near term. For the back half of the year, we are more optimistic that trends will improve as our customer shops during the important back-to-school and holiday seasons. As always, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in these events. For sales, we anticipate that total sales will be down in the low-single digit levels in 2022 compared to 2021. This is inclusive of our Q1 guidance and anticipate our domestic business remains challenged heading into the second quarter before we return to normal during the peak selling seasons. Internationally, we are planning strong growth across Canada, Europe, and Australia, as we continue to capitalize on more normalized operations, albeit, we are anticipating some near-term softness in Europe due to the ongoing situation in Ukraine. In fiscal 2021, we achieved peak product margins once again representing our sixth year in a row of product margin expansion. We are currently working on initiatives to continue driving product margins domestically and internationally. However, we recognize the external challenges of driving margins with continued inflation and economic uncertainty entering 2022. With that, we are planning consolidated product margin to be roughly flat. We continue to manage costs across the business. However, with our current sales projections and returning to more normalized operations, we are projecting some deleverage domestically, while our international entities show leverage as they capitalize on continued market share gains and more normalized operations. We currently anticipate year-over-year operating profit dollars will be down in the mid-teens for fiscal 2022. Diluted earnings per share for the full year is currently planned to increase in the mid-single digits as we were able to capitalize on our buyback program executed over the last year. We are currently planning our business assuming an annual effective tax rate of approximately 25%. We are planning to open approximately 34 new stores during the year, including approximately 15 stores in North America, 14 stores in Europe, and five stores in Australia. We expect capital expenditures for the full 2022 fiscal year to be between $30 million and $32 million compared to $16 million in 2021 with the majority of the increase tied to the addition of stores in 2022. We expect the depreciation and amortization, excluding non-cash lease expense will be approximately $22 million, down slightly from the prior year and we are currently projecting our share count for the full year to be approximately 19.6 million diluted shares. Any share repurchases beyond our current repurchase plan will reduce our share count from this estimate.

Thank you. Our first question comes from Sharon Zackfia with William Blair. You may proceed with your question.

Hi. Good afternoon. I'm guessing, you'll get a lot of questions on the current environment. So, I'll avoid that and leave that to everyone else, but I did want to ask about the outlook for store growth. I think if I'm not mistaken, this will be your fastest store growth since 2015. So, and I think that also holds for North America as well as obviously the consolidated global growth. Can you talk about what you're seeing there that gives you the confidence to grow and reaccelerate at that pace? And is this kind of a new pace for Zumiez for the foreseeable future, kind of moving into what I would call more mid-single digit expansion versus what had been kind of more modest growth over the past several years?

Thank you, Sharon. I'll start and allow Chris to follow. Let's focus first on the U.S. store growth, and then we'll look at North America, Europe, and Australia separately since they have different dynamics compared to the U.S. In the U.S., we have been analyzing our trade areas and market conditions, leveraging our sales and loyalty program data. We're identifying market opportunities in various locations where we can add stores to better serve our customers, which we believe will also benefit our digital business. The second point for North America pertains to opportunity. We've realized significant savings in lease and rental costs over the past few years. We have had a list of around 40 desired locations but faced challenges in affording landlords' terms or finding suitable sites. However, it's become easier to navigate these issues now, allowing us to secure locations in quality centers across the U.S. where both we and our landlords can find mutually beneficial arrangements. In the U.S. and North America, I would emphasize these two points: our enhanced understanding from trade area analysis and our ability to partner with landlords for favorable deals. As a result, we see a solid pace for growth. Should more deals arise that align with our criteria, we would consider them, though that is not currently our plan. Now turning to the International side, we are strictly following our traditional growth plan. We're making significant investments in our workforce, aiming for our highest growth in Europe to date. The performance of our recent store openings has pleased us, and we've noticed a decline in occupancy and rent rates in Europe, creating further growth opportunities. We anticipate a unit growth rate of 15% to 20% year-over-year as we expand in those markets. We are also heavily investing in our teams to ensure we have the right management in place, which has been a focus in preparation for this growth. As for the U.S., we're engaged in ongoing trade area work. While I can't provide specific insights, I believe we have a broader range of opportunities in the next three years than we initially thought. Chris, do you have anything to add?

No, I think the only thing I would add is just as we reflected back to going backwards. Some of the stores we opened in ‘08, ‘09 were some of the best stores we've opened. And so, we thought when Rick talks about opportunities, I just kind of reinforce, we continue to work with our landlords. I think this is a really good time for us to be adding stores that we think can really propel us over the next decade.

And then just a question, Chris, on your outlook for the year. I mean, it does kind of sound like you're expecting a tale of two halves. I guess it's hard to have confidence on anything, given the dynamic environment that we're in, but I mean what gives you all the belief that much of what you're seeing right now is related to year ago stimulus and/or Ukraine versus something maybe more long lasting with the consumer pulling back?

I appreciate the question, Sharon. It's something we have discussed internally at length. To understand our current situation, it's essential to consider our performance last year, particularly in relation to the stimulus. While the first quarter of 2021 did see the most significant stimulus, there were several times in 2020 when the stimulus was introduced, and during those periods, we performed better than many in our peer group. This reflects the strength of our business model as a full-price, full-margin retailer. We believe that when our customers have extra cash, we benefit more than others. Looking back at Q1 of last year, we saw over a 100% increase compared to 2020 and a 31% boost compared to 2019, which is quite significant when looking at typical growth patterns. In the first five weeks of this year, we've noted a decline of 1.9%. We noticed some softness at the start of February that mirrored what we experienced in January as we compared it to last year's stimulus. However, we began to see improvement in the latter part of February, particularly in week four. Unfortunately, our momentum was disrupted by the emergence of global events in Ukraine, which has influenced our performance through early March. We are monitoring the impacts of these events across our business, especially in our European stores close to the conflict, and we are also observing effects domestically. This leads us to plan for a softer back half of March and the beginning of the second quarter. Looking ahead for the full year, we are confident that our customers have reasons to shop. As we know, parents control a substantial amount of spending, and we anticipate they will be shopping for back-to-school and holiday seasons. We believe we have planned effectively for these periods, which gives us confidence that we should see normalization later in the year. There may still be lingering effects from inflation in both the U.S. and Europe, but we are currently preparing our business with the hope that most issues will be resolved in the first half of the year, allowing us to stabilize in the second half.

I believe this reflects what we experienced in 2021, where we saw significant stimulus-driven spending in the first quarter and some in the second quarter. Following that, we returned to normalized holiday seasons, including our back-to-school and holiday periods. I want to emphasize that I strongly believe our brand is stronger than ever. We are effectively meeting consumer needs, and I feel that our team is outstanding, aligned, and focused on our goals. These factors give me confidence that, barring any drastic changes in the environment, we will more than achieve our fair share during peak periods.

Okay. Great. Thank you.

Thank you. Our next question comes from Mitch Kummetz with Seaport. You may proceed with your question.

Yeah. Thanks for taking my questions. I've got a few of them. So, I want to start housekeeping, I know the K is coming out shortly. And you'll give the hardgoods penetration in the K, I was hoping you might be able to provide that on the call today?

Sure. Happy to do that. Just as a mix of all of our categories, I'll just lay them all out, Men's apparel was 43%, accessories was 17%, footwear was 13%, our women's apparel was 11% and the hardgoods was 15%.

Okay. That's helpful. Thank you. And then also, Chris, can you maybe speak to the Blue Tomato profitability. I mean, it would be great if you can give us like an EBIT number or a margin percentage, but I assume it was unprofitable for the year. Could you maybe elaborate on that and it sounds like, I know, Ukraine is an issue? Obviously, for that business, but it sounds like you're pretty positive on Europe in general for ‘22. So how do you think that of that business sort of progressing through the year versus either ‘21 or ‘19 or however you want to talk about it?

Sure. I want to start by expressing how proud we are of our Europe team, not only for their results in 2021 but also for their performance over the past few years despite the challenging circumstances. We have confidence in our expansion in Europe, which is closely linked to the performance of the stores we are currently opening. Over the last decade, our planning and decision-making around store openings have improved significantly, and our teams have executed well. In terms of 2021, we experienced considerable closures, with around 60% of days closed in the first quarter and 12% in the second quarter. We managed to open in the third quarter and felt optimistic heading into the holiday season, but faced another 6% of days closed in the fourth quarter. This compares to 25% closures in 2020. Overall, while we had more operational days in 2021 than in 2020, we still faced significant unexpected closures. Despite this, sales in Europe increased by over 21%. We did fall short of our budget by 6%, and the closures were nearly 20% for the year. This indicates that, even with closures, we successfully captured more online volume when we were open, highlighting the strength of our brand in Europe. We are witnessing positive trends in more markets and countries as we increase our presence and recognition. Looking forward to 2022, we are confronting new challenges due to the conflict in Ukraine. Our digital presence in Ukraine has been minimal, and we anticipate difficulties in that region because of the conflict's proximity and the interconnected economies. This will likely lead to higher inflation and disruptions as we consider the refugee crisis impacting most of Europe. Nevertheless, we remain confident in our long-term strategy. We plan to open 14 new stores in addition to the 12 we've already opened this year, including our first store in Norway. We aim to expand into two additional markets while also consolidating our presence in others throughout 2022. As one of the largest lifestyle retailers in our niche in Europe, we have the ability to collaborate with brands uniquely and provide fresh offerings to consumers, which is a significant advantage. Regarding profitability, we were more profitable in 2021 than in 2020, though we are still in the red. Looking towards 2022, we believe we can operate all stores without significant challenges and foresee a path to breakeven this year, with the potential for some profit. This aligns with our previous outlook of a turnaround in 18 to 24 months. Coming into this year, we were optimistic it would be the turnaround year, but the war in Ukraine has dampened that outlook. However, we expect to perform better than in 2021 and are on the verge of reaching profitability. With a more normalized environment, we are confident in our teams in Europe and their capability to drive profits.

Okay, I appreciate that color. And then lastly, I think you said for the year, I know you're not giving official guidance but you did provide some color. I think you said sales down low singles. I think you said EBIT down double-digits. I feel like maybe there was a low double, but anyhow, I think when I do the math around that, I come up with like an operating margin of around 12% for the year, which is obviously down year-over-year, but still way up from 2019, I think, up nearly 400 basis points or so, maybe a little less than that from 2019. Is there any way you can kind of walk us through the margin bridge from '19 to '22? I mean, I imagine a lot of that is product margins, some of that's occupancy leverage. Is there any way to maybe kind of talk about some of those bigger puts and takes and maybe the stickiness of them?

Sure. I'll do my best to address your question. In 2021, we saw an increase of around 350 basis points compared to 2020. Our guidance today is a bit softer than what you mentioned, but if we consider a decline of about 200 basis points, we would still be in the solid double digits for operating profit as a percentage of sales. If we reflect on 2016, when our operating profit was at 4.6% of sales, we aimed to reach high single digits and eventually double digits, and we've achieved that goal. This year’s performance was significantly bolstered by stimulus effects, but being in double digits puts us in a good position moving forward. I'm grateful for your acknowledgment of the growth since 2019, as it is quite substantial. In terms of product margin, we've seen consistent growth both domestically and internationally. For the comparison between 2021 and 2022, we anticipate maintaining product margins, but expect some growth challenges due to our international businesses expanding faster than our North American operations, which tend to have lower margins. While we might face some mix challenges, we believe our six years of product margin improvements will serve us well. As for occupancy, looking at 2021 versus 2022, we might see some slight deleverage due to a decline in top line revenue, however, over the years, we've made significant gains in occupancy by effectively managing sales and working with our landlord partners. On the inflation front, supply chain and labor costs have impacted gross margins, but we've focused on increasing sales to mitigate these effects. We have also implemented initiatives to manage expenses. Nevertheless, managing gross margin has become more challenging. Examining SG&A, we anticipate more difficulties when comparing 2021 to 2022. As sales decrease, we expect some deleverage, and we also foresee store labor returning to pre-pandemic levels, along with increased travel for our teams as we resume more in-store events, including two large events planned this year after shifting one to ensure employee safety. Regarding long-term SG&A trends, we have unified our cost structure for both in-store and digital experiences, which has significantly helped in inventory and cost management throughout the ups and downs of our operational shifts. This unified structure has allowed us to adapt effectively during periods of store closures and openings, ultimately leading to improved operating profit margins. There’s a lot to unpack here, but those factors are key in understanding our progress in operating profit margin over the past few years.

Yeah. Mitch, I'd just add to Chris' thoughts, too, about the part of what we've been able to do, I think, over that longer time period, again, is build this one channel model. But the most important part of that is it's so much better for our customers because we are faster in every sense, in every way, how they can see product, they can see local availability through our local assortments, right? And we can also Zumiez deliveries come into play because we can deliver it quickly when they need it and with a great brand experience. So, this goes back a lot to culture and brand, what we're doing for our customers and how we're empowering our people to do it by localizing the experience for our customers, connecting our customers, and our people even more together. And I think those things, also for the long term, are really built not only a more optimized business model but a better experience for our customers.

All right, guys. Thanks, and good luck.

Thanks, Mitch.

Thank you. Our next question comes from Corey Tarlowe with Jefferies. You may proceed with your question.

Good afternoon and thank you for taking my questions. My first question has to do with trends that you're witnessing from a product perspective. What have you observed in terms of trends by product category that resonated with your customers in the fourth quarter and into the first quarter?

I'll start by highlighting that we shared the top-performing departments for the fourth quarter, and shoes was at the forefront. This might seem unexpected given the current inventory constraints, but our shoe business has performed well. I appreciate the support from our shoe partners as we navigate the supply chain challenges. As Chris mentioned, our sales this quarter also reflect this positivity. There's a potential opportunity for improvement as inventory levels enhance moving forward. On the other hand, we’ve faced challenges with skate hardgoods, which isn't new for us. We managed to achieve gains last year despite significant losses in that category and expect those losses to decrease this year as we move past them. We're targeting a return of skate hardgoods to historical sales levels, which should alleviate some of the pressures. We also have several positive trends working in our favor, including strong performance in men's and women's apparel, long bottoms, shorts, and graphic tees. We continuously introduce new brands, having launched 100 last year despite a challenging environment. Our teams have done an excellent job of exploring new and interesting local brands for our customers. Ultimately, it comes down to our business model, which emphasizes brand and category diversity, covering the entire lifestyle. We'll continue to manage through the ongoing supply chain challenges in close partnership with our suppliers. Chris, do you have anything else to add?

No, I think you covered it.

That's great. And just to follow up on that last part about the supply chain challenges that you are witnessing. What's embedded in the first quarter earnings guide in terms of freight headwinds? And then how should we be thinking about this headwind throughout the upcoming fiscal year? And what mitigation strategies do you have in place?

I'll go ahead and take a shot at answering that, and then Rick can add anything. When I think about supply chain, it's closely related to inventory management. We are quite pleased with our inventory situation as we close the year, having decreased by about 4%. This isn't necessarily the norm among our peers, but we believed it was crucial to be cautious given the current circumstances. A significant portion of our business revolves around screenables, which gives us flexibility. Our buying teams deserve recognition; they have effectively planned how to approach the business, determining where to invest and when to proceed cautiously based on sales performance. Overall, our teams have excelled at managing through the supply chain issues we've faced for the last 18 to 24 months, starting back in the first quarter of 2020. As we move into the first quarter, things remain similar. There are certainly some areas impacted more than others, but our teams have handled those challenges well. On the inbound side, effective collaboration with our brands and maintaining strong relationships has been pivotal. We've built solid partnerships with great brands, allowing us to navigate challenges. On the consumer side, we've also faced challenges, especially regarding costs, but we have reliable business partners and are committed to innovation. We're even taking the initiative to deliver some products ourselves. This approach enhances the customer experience and has allowed us to improve delivery speed with our employees representing Zumiez positively. From a supply chain standpoint, we continue to address various aspects to enhance our operations. While our plan includes some inflation, we are working diligently to manage it as effectively as possible.

Yes. The only thing I'd add, Corey, is that this is our fifth or sixth year of achieving peak product margin results. That doesn't happen by accident. Even during many of those years, we faced declines in our private label but still managed to drive peak product margins. This reflects our organization's commitment and focus on continually improving inventory turns and managing inventory effectively. In many ways, better inventory management leads to fewer markdowns and reduces the need to move inventory around. It connects to localizing assortments and the concept of trade areas. Over the years, these consistent strategies have helped enhance our product margins across the entire business. Additionally, we're seeing product margin gains in our international entities as well, even from a lower starting point than in the U.S. This is a testament to our ongoing commitment to improvement. Moreover, it helps reduce risks to our business as we enhance and manage our inventory turns.

That's great. And then if I could just squeeze one final question in. What's your outlook for the promotional environment? It sounds like you're expecting product margins to stay flat, I believe. But most other retailers, it seems, are embedding a little bit more of a cautious outlook as it relates to promotions, at least throughout the remainder of this year. I would be curious to hear your thoughts there. Thanks.

I’ll start by addressing the overall outlook. Our goal is to maintain product margins, which is reflected in the planning Rick discussed regarding our brands. We believe in offering full-priced brands and have never focused on discounting or marking down our entire store. Our strategy revolves around introducing unique brands that can be sold at full price while supporting them to maintain their brand equity. This approach is why we manage inventory closely and can plan our business effectively. Additionally, it is no coincidence that we have seen product margin gains over the past six years. Our teams have been strategic in how we source and develop products and collaborate with brands for long-term success. This consistency is a testament to our buying and sales teams and their ability to create a plan that continues to drive growth.

And I don't have a lot to add to Chris' comments. I mean, we never really want to mark down product, period. And that doesn't mean we don't provide value for our customers, and that's where our private label comes into play, how we assemble packages, what's in those packages of offerings as we run promotions. But those are about value for our customers but at full margin for us to effectively and using our products to drive a high-margin sale still. And the last thing I'll add to this comment is, again as Chris said, our success isn't by accident. We have a number of initiatives that we have in play looking forward. And so, we're going to continue to drive at this hard because we think it's fundamentally doing a great business. We have to be faster in all respects of meeting consumer demand. And so, we're looking at ways to improve speed throughout our supply chain. And there's a number of initiatives, I think, that we have in play over the next few years that's going to address that even more.

Great. Thank you very much and best of luck.

Thanks.

Thank you. Our next question comes from Jeff Van Sinderen with B. Riley. You may proceed with your question.

Hi, there. This is actually Katherine Knop for Jeff today. I just have a couple of questions for you guys. First, can you speak a little bit more about how you're managing labor cost pressures and what are you doing to mitigate those pressures?

Sure. I'll address the labor aspect. Firstly, regarding store labor, this has been quite a tumultuous period due to store closures and the fluctuation in customer traffic based on their sense of safety. Additionally, there has been an expansion of minimum wage across the country, which affects how wages for other positions are structured. All these factors have posed significant challenges over the past few years. We have had to reassess our scheduling and staffing strategies to effectively serve customers while also managing costs, which has been difficult. Like many retailers, we have experienced an increase in labor costs during this time. The key to managing this is having a solid staffing strategy in place, which contributes to overall cost increases as well. We recognize that labor will continue to be an area of growth in the near future, and we must also keep an eye on other cost areas. Our teams are skilled at identifying offsets while still investing in our workforce, which is crucial because our brand and culture rely heavily on our people. Although this presents its challenges, our teams are actively engaged in finding solutions.

Great. Thanks. And then one final question from me. What are your plans to pass through price increases to customers? I mean, how do you guys see that impacting overall sales?

Sure. I'll take a crack here and let Rick jump in. I think price to customers is really what the market will support. And I think what we try to do is to really think about where are we seeing price increases? Where is it fair to pass prices through? And we just have a diligent process to let that happen where we think it can. And I think in this environment, as a consumer and as a CFO of a company, I think we're kind of getting used to it, right, because the costs are going up. And I think our brand is supporting it because you can tell we were able to grow product margin. And I think that growth is inclusive of taking prices up to be able to navigate this. It's really hard to talk about the overall percent we've increased because this is a category by category, department by department analysis. Some areas, we are taking prices up. Some areas are probably staying a little more stagnant. It just really depends on what the cost structure is behind it that supports it. But we have seen overall price increases across the business, and our strategy will be to continue to manage that based on what our inbound supply chain and brand costs are.

I would like to add that, as Chris mentioned, there are always various factors to consider. We can improve and become more efficient in our operations. However, I think of it differently. We need to assess our product cost inputs and the impact of cost increases. Additionally, I focus on the wallet share of our customers because we believe that, regardless of our business mix, we should maintain and strive to grow our customers' wallet share. Even if the average unit price rises and we see a decrease in unit sales, we can still achieve dollar growth and overall sales increases, which is what we've done over the past year. It's important to remember that we need to offer great products and unique items that customers can't find anywhere else. If we succeed in this and provide excellent service, we will maintain and increase our wallet share over time, which has been our track record. We've gone through similar situations in the past, like the dot-com bubble and the major growth phase in the late '90s and early 2000s, as well as the spending increase leading up to 2007 and 2008. We understand how to navigate these cycles effectively, and throughout all of them, we've managed to grow our customers' wallet share, regardless of unit sales, dollar amounts, or average unit prices.

Great, thanks for your time.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Rick Brooks for any further remarks.

All right. Well, again, I would just like to say again, thank you to everyone. Thank you to all our brand partners. Thank you to all our employees, and thank you to our investors out there who follow us so closely and pay attention to what we do. We greatly appreciate it. And we'll look forward to talking to you all in early June. Thank you.

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