Good afternoon, ladies and gentlemen, and welcome to the Zumiez's Inc. Second Quarter Fiscal 2023 Earnings Conference Call. Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zumiez's 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 would like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, the floor is yours.

Hello, everyone. And thank you 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 the start of the back-to-school season before handing the call over to Chris, who will take you through the financials and some thoughts on the third quarter and the rest of the year. After that, we'll open up the call to your questions. As you forecasted back in May, our results have continued to track below prior-year levels. That said, our second quarter sales improved from the previous quarter trend line and finished ahead of our guidance. The operating environment in the U.S. remains challenging with significant multi-year inflationary impacts weighing on consumer discretionary spending, continued competition with spending on travel and experiences, and higher levels of discounting to clear excess inventories. While this backdrop does not set up well for our full-price selling model, we know from experience that these down cycles are temporary. And, our focus is on best positioning the business to capitalize on market conditions as market conditions improve. This means staying close to our customers, adjusting our assortments to ensure we have diverse and differentiated merchandise they seek, and providing the world-class customer service they've come to expect from us. While we're not where we want to be from a results perspective, we made progress in the second quarter. And, the work we've done this year against the plan we outlined in our earnings in March has positioned the business for further improvement in the second half of 2023. The sequential moderation in our sales trend in Q2 has continued in the third quarter as we move into the back-to-school season and higher volumes. Through Labor Day, third quarter-to-date sales are down 7.7% compared with down 11.6% in Q2 and 17.1% in Q1. Given that back-to-school has historically been a good indicator for holiday demand, we're optimistic about continued improvement in the business through the peak selling period this coming holiday season. For the tough first half, I'm confident that by staying the course, we will emerge from this turbulent period even stronger. This means being diligent with our spending, focusing on the strategic investments that we believe will create significant long-term benefits for our customers and our shareholders while managing carefully in the short term what we can control. Some of the long-term strategic investments we believe are important to push forward include continued investment in our people through best-in-class training and mentoring; optimizing trade area performance by ensuring that we have the right number of stores to serve our customers in each market and getting the right product in the right places to serve them as quickly as possible. Continuing to work with brands to increase speed and flexibility, while increasing margins; investing in innovative approaches to generate human-to-human connections with our customers and engage with them in new ways that enhance the shopping experience; continuing our international expansion, with a focus on Europe and Australia. We know that brands emerge locally and grow globally, and our international presence provides us opportunity to better serve both our customers and our brand partners. While we continue to optimize these operations with many of the initiatives we have proven across North America, we feel good about the progress we made internationally this year, where first-half comparable sales in our other international businesses increased 8% and total sales increased over 14%. Before I turn the call over to Chris, I would like to thank everyone in our organization for their continued hard work and dedication. You're the foundation of our unique culture and the reason I'm certain that Zumiez's history of delivering long-term value for its shareholders will continue for years to come. With that, Chris will now 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 $194.4 million, down 11.6% from $220 million in the second quarter of 2022. Comparable sales were down 13% for the quarter. The decrease in sales was primarily driven by our North America business, offset by more favorable results for our other international business. During the quarter, we continued to see softer sales, primarily driven by ongoing inflationary pressure, increased competition for discretionary spending, and higher levels of discounting in the market. From a regional perspective, North American net sales were $159.7 million, a decrease of 15.9% from 2022. Other international net sales, which consist of Europe and Australia, were $34.8 million, up 15.5% from last year. Excluding the impact of foreign currency translation, North America net sales increased 15.7% and other international net sales increased 11.8% compared with 2022. Comparable sales for North America were down 15.8%, and comparable sales for other international were up 3.7% for the quarter. From a category perspective, all categories were down in comparable sales from the prior year during the quarter with hard goods being our most negative, followed by footwear, accessories, women's and men's. Total dollars per transaction were up for the quarter, driven by an increase in average unit retail, partially offset by a decrease in unit per transaction. Second quarter gross profit was $61.7 million compared to $75.1 million in the second quarter of last year. Gross profit as a percentage of sales was 31.7% for the quarter compared with 34.1% in the second quarter of 2022. The 240-basis point decrease in gross margin was primarily driven by lower sales in the quarter, driving a deleverage on our fixed costs. The key areas driving this change were as follows: store occupancy costs deleveraged by 210 basis points on lower sales volumes, product margins decreased by 70 basis points, and buying and private label costs deleveraged by 20 basis points. These decreases to gross margin were partially offset by a decrease of 30 basis points in web shipping costs and a 30-basis point decrease in inventory shrinkage. SG&A expense was $72.2 million or 37.1% of net sales in the second quarter compared to $70.1 million or 31.8% of net sales a year ago. The 530 basis point increase in SG&A expenses as a percent of net of sales was driven by the following: 210 basis point increase due to both deleverage of store wages on lower sales as well as increases in wage rates that could not be offset by hours reduction; 160 basis point increase due to deleverage of non-wage store operating costs; 80 basis point increase in non-store wages; and a 60 basis point increase in training and events due to event timing. Operating loss in the second quarter of 2023 was $10.5 million or 5.4% of net sales compared with operating profit of $5 million or 2.3% of net sales last year. Net loss for the second quarter was $8.5 million or $0.44 per share. This compares to net income of $3.1 million or $0.16 per diluted share for the second quarter of 2022. Our effective tax rate for the second quarter of 2023 was 8.5% benefit compared with 44.7% provision for income taxes in the year-ago period. The decrease in our effective tax rate was primarily due to increase in net losses and allocation of those losses across the jurisdictions in which we operate. Turning to the balance sheet. The business ended the quarter in a strong financial position. We had cash and current marketable securities of $140 million as of July 29, 2023, compared to $166.2 million as of July 30, 2022. The $26.2 million increase in cash and current marketable securities over the trailing 12 months was driven primarily by capital expenditures of $27.3 million. As of July 29, 2023, we have no debt on the balance sheet and continue to maintain our full unused credit facility. We ended the quarter with $156.7 million in inventory, up 3.7% compared to $151.1 million last year. Inventory growth was driven primarily by store count increases in our international business, while inventory in North America is down 3.5% from the prior year. On a current constant currency basis, our inventory levels were up 2.3% from last year. Now from to our third quarter-to-date results. Net sales for the 37-day period ended September 4, 2023, decreased 7.7% compared to the same 37-day period in the prior year ended September 5, 2022. Comparable sales for the 37-day period in September 4, 2023, were down 8.6% from the comparable period in the prior year. From a regional perspective, net sales for our North American business for the 37-day period ended September 4, 2023, decreased 10.1% over the comparable period last year. And, other international business increased 14.7% versus last year. Excluding the impact of foreign currency translation, North America net sales decreased 9.9% and other international net sales increased 8.5% compared with 2022. From a category perspective, the men's category had a positive comp for the 37-day period ended September 4, 2023, while all other categories were negative. Footwear was our most negative category followed by women's, accessories, and hard goods. Total dollars per transaction were up for the period, driven by an increase in both average unit retail and units per transaction. With respect to our outlook for the third quarter of fiscal 2023, I want to remind everyone that formulating in 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. Our Q3-to-date results have continued to show incremental progress to the trends experienced in the first and second quarter, but are still trending below year-ago levels as consumer demand remains under pressure from the continued impact of high inflation on discretionary spending. With that in mind, we are planning total sales for the third quarter will be between $211 million and $216 million. We expect that our third quarter 2023 product margins will be down slightly from the third quarter of fiscal 2022, due primarily to the mix of sales year-over-year. Consolidated operating margins for the third quarter are expected to be between negative 1.5% and negative 2.5%. And we anticipate a loss of $0.15 to $0.25 per share. Similar to the first half, the decline in earnings is largely due to deleveraging the cost structure on a lower sales base, coupled with margin pressure. Our biggest areas of deleverage continue to be tied to fixed costs such as occupancy expense, base hours in our store that are driven by mall operating hours, fixed payroll costs across the business, and other corporate costs. As has been our practice this year, we are refraining from giving specific annual financial guidance due to the uncertainty and volatility in the macro environment, but I do want to provide some context around how we currently believe the business will trend throughout the year. We have seen the trend line of sales results to the prior year get stronger as we have moved through 2023 and expect that to continue as we move through the back half of the year when compared to fiscal '22 results. In fiscal 2022, product margins were down 50 basis points from the prior year after six consecutive years of growth. The majority of this year-over-year decrease was driven by our fourth quarter 2022 product margin, which was impacted by increased discounting as we work to right-size the inventory balance. We anticipate the front half of 2023 would also run down in product margin as we continue to work through aged inventory, and the market remains promotional. For the first six months of fiscal 2023, margin decreased 70 basis points from the first half of 2022, which included the mixed impact of our international business, which has a lower product margin and is growing as a percentage of total sales. As we transition to the back half of the year, we believe that product margins could stabilize as inventories come in line and comparisons get easier. Our model is sensitive to sales fluctuations, and we have seen deleverage as sales decline in fiscal 2022 and also year-to-date in fiscal 2023, while the opposite was true in 2021 when we experienced record sales and operating margins driven by meaningful leverage. We continue to diligently manage expenses as we navigate this current environment and are positioned to take advantage when conditions improve. We have seen a reduction in our bottom line results during 2022 and 2023, creating significant variability in our consolidated tax rate. This is tied to the distribution of income across our current tax jurisdictions. Given this, we are expecting a tax expense could be in excess of pretax income for the full year. We are planning to open 19 new stores during the year, including approximately five stores in North America, 10 stores in Europe, and four stores in Australia. We expect capital expenditures for the full 2023 fiscal year to be between $19 million and $21 million compared to $26 million in 2022. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $23 million. We are currently projecting our share account for the full year to be approximately 19.5 million diluted shares.

Our first question today will be from Mitch Kummetz of Seaport. Your line is open.

Thank you for taking my question. I have three questions. Chris, regarding the sales forecast, the range you provided indicates a decline in sales of 9% to 11%, but you're performing better than that so far this quarter. This suggests that you anticipate more challenging results for the rest of September and into October. Could you elaborate on that? Additionally, after the peak back-to-school season, have you noticed any softening in the weekly sales numbers since around mid-August?

Sure, Mitch. I'll attempt to address that. The guidance we provided indicates a decline of 9% to 11%, which is slightly worse than our current performance. As we moved through August and the back-to-school season, we are encouraged to see that our trend has improved from where we were in Q2, although it has been inconsistent. It started off a bit slow, but weeks two and three were our strongest, while the last couple of weeks have shown some softness. We've analyzed this from several angles, recognizing that the timing of when different markets return to school affects the overall results. We are also considering the demand for back-to-school shopping based on historical data, which suggests a decrease in demand after the peak period. Therefore, we are adjusting our current performance expectations based on the existing market conditions, hoping to exceed our guidance.

Okay. And then I know you're not providing specific guidance beyond 3Q, but you talked about kind of the improvement in the run rate. When I look at the trajectory on your sales growth down 17% 1Q, down 12% 2Q, the midpoint of 3Q is down 10%. Are you thinking that 4Q sales growth will land somewhere kind of in the, I don't know, upper mid-to-lower high single-digit negative range? Is that kind of the trajectory that you think the business is on?

I'm going to refrain from providing specific guidance for the fourth quarter. However, as we consider Q4, we've traditionally been able to gain valuable insights from the back-to-school season in terms of business trends. Although this back-to-school season has been softer for us, the data we've gathered so far indicates a positive trend moving into Q4. We expect sales to improve sequentially from Q3 to Q4, anticipating a stronger performance than what we saw from Q1 to Q2 and from Q2 to the Q3 guidance provided. We believe this trend will advance due to several factors: primarily, our ongoing ability to deliver better results. Breaking down back-to-school further, we are pleased to see that Men's, our largest category comprising 50% of the business, was our top performer in Q2 and showed positive growth during back-to-school, which we view as a positive sign for the business. Historically, periods like '08 and '09, as well as 2015 and 2016, showed that Men's was key to recovery after tough times. We're also encouraged by customer behavior during this period, where we faced challenges with transactions during back-to-school, yet observed increased average unit retail prices and unit sales when consumers did shop. This gives us confidence going forward. Additionally, as we consider comparisons with previous years, Q4 of 2022 was our weakest quarter compared to pre-pandemic levels. We believe that some of the significant challenges we've faced in footwear and hard goods will lessen as we enter the fourth quarter, allowing for a promising incremental improvement. While we're not providing guidance at this moment, we will share more details when we report at the end of November.

That's helpful information, thank you. Regarding SG&A, it's worth noting that SG&A dollars increased by $2 million in the second quarter compared to last year, following four consecutive quarters of a year-over-year decline. How do you plan to address this in the third quarter from a dollar perspective? Is there a projection for SG&A dollars moving forward? I understand you're not providing guidance for the fourth quarter, so discussing next year may not be feasible, but should we anticipate higher SG&A dollars next year compared to this year, or is there a possibility for cost reductions? I have a couple of questions about this.

Yes, there's quite a bit to discuss. I'll start with a broad overview of how we view SG&A and its relevance to our current situation. We operate with a highly fixed cost structure, which includes expenses from our store system, corporate overhead, and online operations. This has posed some challenges in 2022 and 2023, especially with declining sales impacting our business leverage, contrasting with the improvements seen in 2021 during a sales increase. Looking back at the full-year SG&A for 2022, it decreased by 1.8% compared to 2021, and increased by 4.6% from 2019. Considering inflation and changes in our cost structure during that period, we view this as relatively positive. In the first half of this year, SG&A rose by about 0.6%. Overall, we feel optimistic. Our Q3 guidance indicates a slightly higher spending rate due to timing factors, yet we continue to invest in our business, which we believe is essential for long-term value, despite tougher results currently. We've built a strong balance sheet and are in a solid financial position, while also being cautious about our spending approach. We're actively managing fixed costs where possible, reevaluating our store payroll model, and leaving some positions unfilled. While making these adjustments, we're careful not to compromise long-term initiatives. Going forward, we aim to increase sales at a rate significantly higher than that of SG&A. Since we haven't made extensive cuts to SG&A, we feel we maintain the right balance to drive sales in the future. This will be our main focus as we transition into 2024. For 2023, we do not anticipate significant growth in SG&A, but rather the impacts of ongoing inflation affecting various players in the industry.

Okay. Thanks, again.

And we have our next question will be coming from Jeff Van Sinderen of B. Riley. Your line is open.

Hi, everyone. Wonder if you guys could talk a little bit about what you're seeing in the sales and margin performance of your private-label product.

I'll discuss it from a numerical standpoint, and I encourage Rick to add his thoughts. Throughout this year, we've noticed that consumers are actively looking for value, which is evident not just in the broader market but also in our business. The proportion of private label products has consistently increased. This trend has continued from 2022 into the first and second quarters of this year, and it has significantly risen in the third quarter as expected during the back-to-school period. We're proud of our teams for their execution because, alongside the value aspect, they've managed to bring excellent products to market. This has had a positive impact across our various business segments, especially in apparel. Overall, we're seeing encouraging trends in private label. We've also implemented bundling and package deals in our stores related to private label, which has been advantageous. Moreover, we're observing growth internationally, particularly with some of our brands in Europe, and our Fast Times and Australia teams are promoting private label products as well. Overall, we're quite optimistic about this area of our business.

I would just add, Jeff, that what Chris described is what's driving our success. The effectiveness of our bundling promotions is contributing to the gains in units per transaction, and I am very proud of our sales teams for leveraging this with our customers. Furthermore, we have not only maintained our average unit retail gains, but we've also seen an increase in units per transaction during back-to-school. This is a testament to our sales team for successfully selling those bundles and achieving some of the highest dollars per transaction we've ever seen during this season, which reflects well on our position with our core consumer.

That's helpful. Just as a follow-up to that, I'm wondering if you can provide any insights on the current concentration of private label products.

Yes. I can speak to that. We are about 21.5% through the second quarter compared to about 17% last year. So, it's about a 450 basis point increase year-over-year as a penetration of total sales.

Okay. Interesting. I have a question for you. How are you managing the return to the office at this time? I understand there is some resistance out there. What is your current policy for bringing employees back to the office?

We have steadfastly, throughout the entire pandemic period and into where we're at today, Jeff, we've always considered ourselves to be an office environment where people are going to be here. Of course, our store employees are in the office every day as are our DC teams in the office every day down in our DC facility. So, we believe that collaboration is key at central so that throughout the pandemic, whatever the rules were, we definitely follow them, but if we could have 50% capacity. We're rotating everyone in 50-50 over alternating weeks. And so pretty much for us, everyone's back. We have some exceptions for certain specific situations, but pretty much on the fall, we've been back.

Okay. Good to hear. And then I have one more sort of broader question for you. I think you were kind of running on average about an 8% to 10% operating margin, call it pre-COVID. But of course, we have elevated labor expenses now and other inflationary inputs. What do you think is a normalized operating margin for the company? Are we looking now probably mid-single digit, do you think? Or just assuming sort of modest sales recovery, call it maybe a mid-single-digit positive comp, all else being roughly equal, how do you think about that?

Yes, Jeff, we've put in a lot of effort into this. The setbacks we've experienced in recent years have been quite tough. However, when we analyze the situation from various angles, I believe it primarily relates to sales. This presents a significant challenge for our business. After 2014 and 2015, we discussed our aim of returning to high single-digit operating profits, which we successfully achieved and even reached double digits. We remain optimistic that if we can improve sales and manage other factors to counteract some inflation, we can enhance product margins. Our international business still shows substantial growth potential, making that high single-digit target realistic, and that is our focus. As we consider the business's recovery and anticipate sales returning, our goal is to create a model that aligns with achieving high single digits and possibly even exceeding that target. This still feels attainable for us.

The next question will be coming from Corey Tarlowe from Jefferies. Your line is open.

Great. Thanks. I think you cited some encouraging trends in Men's. I was wondering if there's anything into back-to-school or into the third quarter that has maybe surprised you from a category or fashion trend standpoint that you can talk about?

I'll start and let Chris add in, Corey. As we've discussed, one key aspect is the strength of our private label business, which has clearly shown strong trend-driven growth. Our teams have done an excellent job staying current with trends, and we planned for this well in advance. Most of the private label categories involve cut and sew products, and we executed our strategy effectively for back-to-school, thanks to our private label product teams and the overall team strategy that involved successful bundling, both in stores and online, to provide value for our customers and drive growth in DPTs as well as margins. Another important factor is the emergence of new brands. We're encouraged by our pipeline of emerging brands in 2023 and have seen month-over-month improvements in the number of brands launched in 2022 and 2023, which are gaining traction within our overall sales mix, continuing into the back-to-school season. So, for men's, the key drivers for positive performance during the back-to-school period are the on-trend private label product quality, the effectiveness of our sales teams in selling multiple units, and the introduction of new brands along with significant improvement in our screenables business. This presents an exciting opportunity for us as we look to maintain month-over-month growth and see these new brands from 2022 and 2023 become significant growth contributors in the printable and screenables segments of our business.

Great. That's very helpful. And just on product margins, you gave some helpful color as to how they've trended over the last couple of quarters, could you maybe unpack for us how you're thinking about promotions ahead and how you think about product margins into the back half and how that might unfold as we head into holiday?

Sure. As we consider product margin, we noted in our earlier comments that we have experienced a decline of 70 basis points year-to-date. I want to emphasize that the mix component we mentioned is quite significant. With our international business growing and sales increasing, our domestic business is facing more challenges, and the international margin is considerably lower than our domestic margins. Therefore, when we say we are down 70 basis points, most of that is due to a mix challenge rather than a decline in product margin itself. As we look ahead, we anticipated facing some product margin challenges this year, exacerbated by the need to clear out some inventory leftover from last year, contributing to the 70 basis point decline as we managed inventory in the first half. Looking to the second half, we believe we have opportunities to improve product margin. However, we expect it to be slightly down in the third quarter due to the mix and specific inventory clearance efforts in the footwear category. Overall, the aging of our inventory looks good except for footwear, which has been widely discussed as a challenge in the market. We are not exempt from this, but our teams have effectively managed the situation. This will continue to be a part of our planning model and is factored into our Q3 guidance. Additionally, we have seen an increase in private label as a percentage of sales, which is advantageous for us. We believe we can continue to enhance margins both domestically and internationally, as most of our product initiatives aim to achieve that alongside boosting sales. Moving forward, we hope to see more opportunities to improve product margin compared to the first half of the year, despite the ongoing mix shift in our sales.

Great. Thanks so much, and best of luck.

That does conclude our Q&A session for today. I would like to turn the call back over to Rick Brooks, CEO, for closing remarks. Please go ahead.

All right. Thank you very much, everyone, for your time today. We greatly appreciate your interest in Zumiez, and we look forward to talking to you in late November about third quarter results and early reads on the holiday season. Thank you, everybody.

Thank you all for joining today's conference call. This does conclude today's call. You all may disconnect and have a great wonderful day.