Zumiez Inc Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Second Quarter Fiscal 2022 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's business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call are not based on historical facts and 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'd like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, the conference is yours.

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 second quarter and back-to-school, before handing the call over to Chris who will take you through our financial results and outlook in more detail. After that, we'll open the call to your questions. Reflecting back on this time last year, the US portion of our business is benefiting from several very strong tailwinds. The US consumer was primed to spend with a wallet fortified by another round of government stimulus and further enabled by local economies more broadly reopening after many months of closure. Zumiez's fresh off a record first quarter in 2021 posted the best second quarter in the company's history as we captured our fair share of that outsized demand. Over the past 12 months, those tailwinds have dissipated, headwinds have materialized and then intensified, particularly in our U.S. business. On top of difficult sales comparison a year ago, the operating environment has become increasingly more challenging due to lingering supply chain disruptions, higher logistics costs, a tight labor market, negative foreign currency exchange impacts and most acutely high levels of inflation leading to intense competition for declining discretionary dollars. While each of these factors was incorporated into our outlook for this quarter and thoughts on the year, inflationary pressure on the consumer intensified as the quarter unfolded. Beyond the macroeconomic factors, we have also continued to feel the pressure of skate hard goods declines on the business as well, a push to more value-added offerings away from our higher price point branded product. The combination of these factors led to our sales coming in $12 million beneath the bottom of our expected range. This sales shortfall coupled with inflationary cost pressures, only partially offset by other savings during the quarter, resulted in earnings well below our stated range. We're disappointed that our recent performance fell short of expectations. As we mentioned last quarter, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in the macroeconomic environment. We are actively adjusting our merchandise assortment and managing expenses in order to better position ourselves for the current operating environment. While comparisons do begin to moderate in the back half of the year, based on recent trends, we believe it is prudent to adopt a more cautious view on the remainder of 2022 that accounts for the increased pressure we've seen on the consumer. Despite the challenges with the business, there were bright spots on the quarter, including Fast Times in Australia performing exceptionally well to our plan, product margins remaining strong, while they're down slightly from the prior year, we have not given back the vast majority of gains we've made over the past few years. Our teams are able to mitigate the challenging operating environment, as well as a negative country and product mix impacts. Inventory was managed very well with an overall foreign exchange adjusted increase of only 4.4% and substantial work was completed on long-term initiatives including the opening of 34 new stores across our business since the same time last year. While the current environment has caused a near-term pause in our quarterly sales growth, our focus remains on creating long-term shareholder value. Zumiez's four-decade history of debt management through multiple business and fashion cycles coupled with our strong balance sheet gives me confidence that this slowdown is temporary. We've been through recessionary cycles before, and our experience has been that we lead into them, given the discretionary nature of our business and the impact of tough economic times on our customer base. In 2008 and 2009, we saw annual comparable sales down 6.5% and 10% respectively, only to be followed by comparable sales increases of 11.9%, 8.7%, and 5% over 2010, 2011, and 2012 respectively. Our customer-centric strategy and strong brand and culture are driving forces toward sustainable growth over time. Our brand partnerships have enabled unique self-expression for our customers. Our enviable footprint informs us of global trends. Our channels organization allows us to create synergies across sales channels and our business model gives our customers full control of their shopping experience; will continue to differentiate Zumiez in this challenging environment. This differentiation will allow us to capture new opportunities and emerge as an even stronger competitor when these market forces subside. With that, I'll turn the call to Chris to discuss the financials.

Thanks Rick, and good afternoon everyone. I'm going to start with a review of our second quarter results. I'll then provide an update on our third quarter-to-date sales trends before providing some perspective on how we're thinking about the full year. Second quarter net sales were $220 million, down 18.1% from $267 million in the second quarter of 2021 and down 3.7% from $228.4 million in the second quarter of 2019. Excluding the impact of foreign currency translation, net sales were down 16.4% compared with the prior year and down 3% compared to 2019. The year-over-year decrease in sales was primarily driven by the benefits from domestic stimulus in the prior year, as well as increased macroeconomic headwinds as inflation weighed on consumer discretionary spending during the current year quarter. From a regional perspective, North America net sales were $189.9 million, a decrease of 20.1% from 2021 and down 8.2% compared with the same period in 2019. Other international net sales, which consist of Europe and Australia, were $30.1 million, down 3.4% from last year and up 40.2% from pre-pandemic levels in 2019. Excluding the impact of foreign currency translation, North America net sales decreased 19.8% and other international net sales increased 10% compared with 2021. From a category perspective, all categories were down in total sales from the prior year during the quarter with men's being our most negative, followed by hard goods, accessories, women’s, and footwear. Second quarter gross profit was $75.1 million compared to $105 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 34.1% for the quarter compared with 39.1% in the second quarter of 2021 and 33.8% in the second quarter of 2019. While product margins were strong in most geographies on full price selling this quarter, the sales mix shift away from our higher-margin US business overshadowed this impact at the company level, resulting in a mixed-driven decrease of 17 basis points. The 500 basis point decrease in gross margin was primarily driven by lower sales in the quarter driving deleverage in our fixed costs, as well as rate increases in several areas. Store occupancy costs deleveraged by 220 basis points on lower sales volumes. Shrink increased by 120 basis points, as we saw a return to more normalized pre-pandemic levels. Web shipping costs increased by 80 basis points and distribution center costs deleveraged by 70 basis points. SG&A expense was $70.1 million or 31.8% of net sales in the second quarter compared to $73 million or 27.2% of net sales a year ago and $65.5 million or 28.7% of net sales in 2019. Compared to 2021, the 460 basis point increase in SG&A expense as a percentage of sales resulted from the following: 290 basis points in our store wages tied to both deleverage on lower sales as well as wage rate increases; 90 basis points related to other store operating costs, primarily impacted by lower sales levels; 90 basis points in corporate costs and 90 basis points in non-store wages. These increases were partially offset by a 110 basis point decrease in legal costs, due to a settlement recorded in the second quarter of 2021. Operating income in the second quarter of 2022 was $5 million or 2.3% of net sales compared with $32 million or 11.0% 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 $3.1 million or $0.16 per diluted share. This compares to net income of $24 million or $0.94 per diluted share for the second quarter of 2021 and 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 2022 was 44.7% compared with 26.8% in the year-ago period and 30.7% in 2019. The tax rate in the quarter is inflated due primarily to the allocation of income across entities and the exclusion of net losses in certain jurisdictions. We expect our annual tax rate for the year to be approximately 31%. Turning to the balance sheet, the business ended the quarter in a strong financial position; we had cash and current marketable securities of $166.2 million as of July 30, 2022, compared to $412 million as of July 31, 2021. The $245.8 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $271.2 million resulting in a reduction of shares outstanding over the last year of 23.6%. We also had capital expenditures of $20.6 million, partially offset by cash generated through operations of $58.7 million. As of July 30, 2022, we had no debt on the balance sheet and continue to maintain our full unused credit lines. We ended the quarter with $151.1 million in inventory, up 1.1% compared with $149.4 million last year. On a constant currency basis, our inventory levels were up 4% from last year. Second quarter 2022 inventory was flat to our second quarter 2019 inventory. 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 5, 2022 decreased 18.1% compared to the same 37-day period in the prior year ended September 6, 2021. Compared to the 37-day period ended September 9, 2019, net sales decreased 12.6%. Comparable sales for the 37-day period ended September 5, 2022 were down 19.7% for the comparable period in the prior year and decreased 15.3% from the comparable period in 2019. From a regional perspective, net sales for our North America business for the 37-day period ended September 5, 2022 decreased 19.5% over the comparable period last year and were down 15.4% compared to the 37-day period ended September 9, 2019. Meanwhile, our other international business decreased 2.7% versus last year and increased 25.1% compared with the same period of 2019. Excluding the impact of foreign currency translation, North America net sales decreased 19.4% and other international net sales increased 11.9% compared with 2021. From a category perspective, all categories were down for the third quarter-to-date, men’s by our largest negative category followed by hard goods, women’s, accessories, and footwear. With respect to our outlook, I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin, and earnings growth given the variety of internal and external factors that impact our performance. With that in mind, we are currently expecting total sales for the third quarter of fiscal ‘22 to be between $220 million and $228 million. Consolidated operating profit as a percentage of sales for the third quarter is expected to be between 0.5% and 2.5%, and we anticipate diluted earnings per share will be roughly $0.03 to $0.18. Now I want to give you a few updated thoughts on how we're looking at fiscal 2022. With the first half of 2022 behind us, we are more cautious in how we're looking at the full year and the potential impacts of the current operating environment, including inflationary pressures on consumer discretionary spending. While comparisons do begin to moderate in the back half of the year based on recent trends, we believe it's prudent to adopt a more cautious view on the remainder of 2022, balancing the headwinds we are facing. We now anticipate total sales will be down in the 18% to 19% range in 2022 as compared to 2021. This is inclusive of our third quarter guidance, which anticipates further pressure in the fourth quarter given the outsized inflation concerns in the current market and current trend lines. In fiscal 2021, we achieved peak product margins once again, representing our six years in a row of product margin expansion. As we have moved through the first half of the year, we have closely managed inventory and seen only a slight decline in product margin despite inflationary pressures and mixed pressures between categories and across countries. We currently believe we will continue to see some product margin erosion in the third and fourth quarter and are planning for the back half to be down slightly from the prior year. We continue to manage costs across the business. However, with our current sales projections, we are anticipating deleverage across our fixed costs of the business. We currently anticipate year-over-year operating profit dollars will be down approximately 73% to 77% for fiscal 2022, due to the drop in sales, inflationary cost pressures, and the return to normal for items like mall hours and training and events. Diluted earnings per share for the full year is currently planned to decrease less than operating profit related to the share repurchases earlier in the year. We currently anticipate 2022 diluted earnings per share to be between $1.30 and $1.55. We are currently planning our business assuming an annual effective tax rate of approximately 31%. We are planning to open approximately 35 new stores during the year, including approximately 16 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 $29 million and $31 million compared to $16 million in 2021, with the majority of the increase tied to the addition of stores in 2022 and we expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $21.5 million, down slightly from the prior year. We are currently projecting our share count for the full year to be approximately 19.5 million diluted shares. With that, operator, we'd like to open the call up for questions.

Thank you. Our first question comes from Sharon Zackfia with William Blair. Your line is open.

Hi, good afternoon. I guess, firstly, a question on the October quarter guidance relative to the current trend. It's obviously assuming kind of a greater falloff. And I'm curious if that's kind of what you've seen already as back to school has ebbed. I know you tend to do much better when there's kind of peak shopping periods, so I'm wondering if that's informing the guidance?

Sure. I'll go ahead and take that, Sharon. And obviously, we're seeing quite a few different things happening in the business right now. I mean, as we kind of lived through this roller coaster over the last few years and as we're thinking about kind of what's happened here in the back to school time, just with the pressure on the consumer tied to higher levels of inflation and the competition, we're seeing a shift away from our higher priced brands to value. We continue to see challenges as we mentioned in our prepared remarks around skate and the negative impact of FX, not to mention some of the more higher level of political challenges like the war in Ukraine and other things that are impacting supply chain. So I think I'll talk about the quarter here in a sec, but just kind of to further add some commentary on just what we're seeing as we kind of look at the business. I think we're definitely seeing credit card spend has increased pretty meaningfully here as we think about just the domestic business. We're seeing an increase not only in-store that's pretty dramatic with all of the offset really coming from our debit card and cash spend. We're also seeing an increase on the web, that's kind of giving away from other forms of payment. And then, as we talked about kind of this value product or our private label offering has really seen a spike. We're up almost 450 basis points through the first six months of the year in regards to a percentage of overall sales. So all of that is kind of playing into how we're thinking about the guidance. And as we think about the Q3 guidance, particularly we saw pretty soft results really across the quarter, or across the period to date, I should say and back to school. And so as we think about how we're planning Q3, we're actually planning to see a little more drop off here in the domestic business because I think it'll be a little tougher than the current trend lines. And then internationally, we're expecting to hold the trend lines better about where we're at through the first five weeks is sort of how our planning has played out. I think, on the expense side of the business, we are planning product margins down in Q3. We started to see some further fall off through the back to school timeline. Although, I do want to reiterate, we continue to be what I believe is a full price, full margin retailer. We've been really strong margins and if we look at our margins to '19, we're still significantly ahead of where we were pre-pandemic. So while we see a little bit of a backdrop to 2021 that was our sixth year in a row of positive product margin gains. So we're feeling really good about how the teams are managing inventory and how they're managing product margin. I think the bigger part of our gross margin decline that's factored into the guidance is really tied to some of the things that have hit us in the first six months of the year. We're seeing deleverage and cost pressure specifically around occupancy and distribution and shipping costs. On the SG&A side, we also are showing deleverage, again, a large portion of this tied to store wages and store costs as with those types of sales declines, we're going to see some pressure there. And then on the general corporate SG&A as well, we'll see some deleverage there. So that's kind of how we thought about Q3.

Thank you for that information. I know you presented a lot of numbers very quickly, but I often compare to 2019 because the past few years have been unusual. If I consider the guidance for the third quarter operating margin in relation to 2019, it seems to be down by around 700 to 800 basis points. It appears that for the fourth quarter, the difference might be more like 600 basis points. Is there any cost savings being implemented, or is there a more favorable situation regarding margins? I'm trying to understand the narrowing of that gap from one quarter to the next.

Sure. That's a completely valid question. As we look towards the fourth quarter, our annual guidance suggests that we anticipate Q4 will remain challenging based on current trends. It doesn't appear to be on the same level as Q3. In fact, we expect slight improvements across all segments as we enter Q4, primarily because of our performance from last year. We faced some significant closures in Q4 last year that we do not expect to repeat this year. Regarding the business trends, the U.S. has been our most challenging area, while international penetration is increasing in Q4, rising to about 21% of the business compared to 16% in Q4. As Rick mentioned, Australia has performed very well, and Europe and Canada have outperformed the U.S. We're seeing less reliance on domestic business. Additionally, we believe there are several other trends likely to show strength in Q4. To address your question, we expect sales to be stronger, which will help mitigate the decline. Our model shows that during downturns, a decrease in sales significantly impacts the bottom line, but when we exceed that threshold, we see a significant positive effect on profitability. That's our perspective on the business. With a smaller decline in sales in Q4, we won’t experience as much of a negative follow-up.

Okay. Thank you.

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

Yes. Hi. So just to kind of follow-up on the line of discussion on the P&L, given the pressures you're experiencing, what would you consider to be a normalized gross margin rate? I'm just wondering if you're thinking that it's kind of close to what it was in 2019? And then also how might you reduce SG&A without cutting muscle, so to speak, at this moment? And what seems like a feasible operating margin target over the next year or two for Zumiez?

Okay. Quite a bit there. Let me try to tackle the SG&A side first because this is one that we're obviously spending a lot of time thinking through and this might bleed into a little bit of our fixed cost around gross margin as well, just how we're thinking about it. But I think with this guidance, obviously, it's a disappointing result for us in a pretty challenging environment, but we're actively working to reduce costs wherever we can. Obviously, we're still investing in the business. I think I'd start off by saying, we still really believe in the long term. I think we're good long-term thinkers. We invest a lot in '08 and '09 and it pays huge dividends for us. So as we think about this time, we are continuing to think about the long term and how we continue to invest. That being said, we are also trying to manage during some pretty short-term challenges. So I think first and foremost, we're really trying to reduce hours across both our stores and distribution center where possible, like I think you've heard a lot of retailers trying to do that. I think we've been working very hard in that area. We've been trying to manage things like marketing and travel to really try to only hone in on those key areas that are driving the highest return. As you know, in these times it can be hard to get the full return that you're looking for. And then, I think anywhere where there's variable cost, we're looking to remove from the business at the same time managing corporate costs really closely. So we have had some success here unfortunately just not enough to offset the sales declines that we've reported and seen in the business. So that's kind of how we think about SG&A and where the big points of focus are. In regards to normalized gross margin percentage and operating margin percentage, I'll tell you, we still continue to believe that business can operate in the double-digit operating income. I mean, there's nothing that we've seen even here in this pullback that would tell us we don't believe that. I think the challenges that we're seeing in the business that were not unique to us is just how this sales drop-off is impacting us when we're also seeing increases in other areas. So like for example, domestically here, we're seeing the drop-off in sales to both 2021 and 2019. We've been able to take hours down to 2021. We're down about 2% in hour to 2021, we're down about 6% in hour to 2019 in our stores. At the same point, we've seen wage rate increase 7% to 2021 and 16.5% to 2019. Now I know other people have reported some of these facts and I just kind of caveat that with we're not always comparable with other retailers because of where all your stores are and how minimum wage has impacted us. But I think it still highlights the challenges that retailers are facing with the rising cost of minimum wage and labor overall in relation to sales trends. So I think over time that should moderate and we would expect that our sales will adjust from there as well. So I think long term, we continue to think that double-digit operating profit is where we can live. I think we've talked before, Jeff, just around some of the other areas of the business that are not contributing to that right now in our international business, specifically Europe. And I think over time, we'll continue to figure that out as well and that will also help drive the overall operating income level back to where we want it to be.

Okay. That's helpful. And then just sort of as a follow-up to that. And I know you mentioned labor being different in different regions, that's certainly a factor. But are you seeing a difference that's notable in regional or call it, store type or store class performance? In other words, I don't know, maybe a different kind of a shopping center mall or different regions performing differently based on demographic factors that you might be able to read into?

Sure. Let me address that. From a general standpoint, we usually divide our business into four regions: East, South, Midwest, and West. Although there are variations among these areas, overall, the performance has been quite poor across the board. The West has been the strongest area, while the Midwest and East have faced more challenges, although not significantly differing in volume. The geographic changes, particularly moving from the US to Canada, Europe, and Australia, have shown noticeable differences, with international performance being stronger as discussed. Regarding the types of stores—A centers, B centers, and C centers—we've observed fairly consistent performance across the board, though the lower volume centers have been a bit tougher. Overall, the performance has been similar across various store types, including our regular online stores versus outlet centers, with a notable difference where our brick-and-mortar stores have outperformed the web.

Okay. Thanks for taking my question. I'll take the rest offline.

Thank you. Please standby for our next question. Our next question comes from the line of Mitch Kummetz with Seaport. Your line is open.

Yes. Thanks for taking my questions. You guys in your press release and also in some of the comments on the call so far, you talked about adjusting the merchandise assortment focusing more on what's important to the consumer. And then Chris, you talked about the strength of private label on a relative basis. So I guess, I'm just hoping you can elaborate on what exactly you're looking to do with the assortments? And based on maybe what you've seen through the first half, what sort of confidence do you have in that those adjustments will maybe help drive some better results in the back half?

I'll start and then Chris can add to the conversation, Mitch. The main thing is, we have to respond to our customers, who tell us they want more value from us. Each customer defines value differently based on their preferences for pricing and product quality. Our product teams are focusing on several strategies, specifically three main areas, that will enable us to provide more value to our consumer base. During the back-to-school season, we noted that our private label sales increased significantly, as Chris mentioned, due to effective product bundling. We have multiple perspectives on value that we’re exploring, though I can’t disclose them all right now. I do believe we will enhance these as we progress through this quarter and into the fourth quarter. Our promotional strategies will likely differ in the fourth quarter compared to the bundling strategies that were effective in the third quarter. We have defined categories, one of which is private label, where we can increase offerings. In some categories, product availability has been low due to strong sell-throughs, so we will replenish these in the coming weeks, and we can also quickly replenish fast-selling categories.

I want to add some context regarding our private label segment. As Rick mentioned, this has been a business that allows customers to guide our direction. Our private label sales peaked at around 21% of total sales in 2015, but we've experienced a decline since then, dropping to about 11%. However, by the end of 2021, we increased it to 13%. It's notable that over the past six years, we've discussed the expansion of product margins. This highlights the effectiveness of our buying and sales teams in managing products and growing margins, even as private label sales decreased as a portion of our overall business. This demonstrates our resilience in an environment where other retailers have seen greater declines in product margins. We believe this shift in product mix will support us as we expect customers to return to value-added products.

I want to add to that, Mitch, that we will continue to introduce new emerging brands at a good pace in the latter half of the year, just as we did in the first half. These brands are a central part of our business, and we still see them resonate with customers and generate volume. This remains a long-term strategy for us, and as Chris mentioned, we are responding to customer demands for more value in our offerings. However, that does not mean we will stop launching young brands. There are some exciting opportunities to explore in this area. I believe that as we move out of this cycle, the distinctiveness of emerging brands will drive customer interest again, causing a shift back from private labels to branded merchandise.

Got it. Regarding the skate hard goods segment, there was a positive trend before COVID, which then intensified for about a year, but it has been more challenging over the last year. Can you provide some insight into the current volume of that business compared to 2018, before it surged? I'm not suggesting it will return to 2018 levels or drop below that, but I'm interested in understanding where it currently stands in relation to the significant growth you experienced until recently.

Yes. I think you've framed that well, Mitch. We had a tough period with hard goods from 2015 to 2018. Then in early 2019, we saw significant growth across all our global businesses, particularly in skate hard goods. 2019 was a good year, followed by the pandemic in 2020, which accelerated that business dramatically. Even the early part of 2021 was strong, but we began to see a decline around mid-2021. This is important context for understanding our current position in the cycle. I believe the pandemic and government stimulus significantly boosted demand, possibly shortening what would have been a longer cycle for skate hard goods. I’ll let Chris discuss the numbers and our current status further.

Yes. We peaked at 19% of sales in 2020 and dropped to 15% in 2021, indicating a decline. This has been one of our significant areas of decline over the past few quarters. As we concluded Q2, we are getting closer to a low point. It's difficult to predict where this will settle; it could be around 10% or 12%, or potentially even lower than 10%. Based on the trend lines and what we have included in our guidance for the rest of the year as we approach Q4, we expect to be near that low point in the latter half of this year and the first half of 2023.

Okay. That's helpful. Thanks guys and good luck.

Thanks.

Thank you. Our next question comes from Corey Tarlowe with Jefferies. Your line is open.

Hi, good afternoon and thanks for taking my question. So with inventories elevated across the retail industry at present and promotions also high, how are you thinking about your current positioning from an inventory and promotional perspective? And then maybe how are you expecting this to unfold over the next few quarters?

Sure. Corey, I'll begin and let Chris add his thoughts. We're proud to be a full price, full margin retailer, which reflects the strength of our brand and what we provide to our customers. Our buying teams globally have effectively minimized the impact of product margin declines compared to other retailers, and we've likely performed better than most. Sales have been a bit challenging partly because we haven’t needed to be as aggressive with markdowns as some competitors have. It's important for us to uphold the integrity of our brand and what it stands for. Our teams have done well managing inventory, and our focus is on finding new ways to offer the value our customers desire from our product assortment. We anticipate a more promotional market ahead, but the challenges may come more from our competitors having to lower their prices significantly rather than from us. Our goal is to communicate value through our unique strategies related to product mix and partnerships. We believe we've effectively managed our inventory throughout the cycle and remain optimistic about our current inventory levels. We can make informed decisions on a category basis to align with expected sales, allowing us to navigate our own path, which may involve less promotion than others. I think this approach is beneficial for us and for our brand. Chris, do you have anything you'd like to add?

No. I mean, I would just say our inventory, we feel really good about the cleanliness of it and where it stands; obviously, as we reported, up 4% on an FX adjusted ratio to 2021 and pretty even with where we were in 2019. I think the teams have done a really good job trying to manage the risk in inventory.

Got it. And then just because you mentioned by category, how is the customer responding to those categories where you might be having a little bit of, call it, lower merchandise margins as a result of competitive pressures?

Again, I don't quite think about that way. If we're driving lower merchandise margins, it’s often probably because of our value strategies around bundling and things like that. We're still only marking down product where we don't have the right to sell through and while we can't work with our brands on that topic, whether it be brand supporting through RTDs, return to vendors or through assistance and markdown dollars. So I think about it a bit differently, Cory, in terms of how our teams work through it. And so for me, it's - again, I think we've done a pretty amazing job through this environment of managing product margins. And we're still taking markdowns on items where we can't find a way to work through them, otherwise work with our brand partners.

Great. Very helpful. Thank you very much and best of luck. Thanks.

Thanks.

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

All right. So again, thank you everyone for your time today and we always appreciate your interest in what we're doing at Zumiez. And despite the challenges, I know that we here as a team remain incredibly confident in our long term position and the strategies we have to execute for earning and winning share in the marketplace. So thank you everyone again for your time and we look forward to talking to you in December when we release our third quarter results.

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