Earnings Call
Zumiez Inc (ZUMZ)
Earnings Call Transcript - ZUMZ Q3 2024
Operator, Operator
Good afternoon, ladies and gentlemen. And welcome to the Zumiez Inc. Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in 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 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 Inc.'s filings with the SEC. At this time, I'll turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?
Rick Brooks, CEO
Hello, and thank you, everyone, for joining us on the call today. With me is Chris Work, our Chief Financial Officer. I'll begin with a few remarks about our third quarter and the start of the holiday season before touching on our strategic initiatives. Chris will then take you through the financials and our outlook for the balance of the year. After that, we'll open the call to your questions. When we shared the outlook for 2024 during our Q4 earnings call back in March, we believed that we could build on improving trends that we were experiencing at that time and deliver total sales growth for the full year. I'm pleased to report that our third quarter results demonstrate further progress towards our goal as comparable sales increased 7.5%. Our top-line performance was fueled by the North American business as comparable sales in the region accelerated from mid-single digits in the second quarter to low double digits in the third quarter. U.S. and Canada sales results more than offset some expected and some unexpected softness in our international regions. Total sales of $222.5 million were in the middle of our guidance range as warm weather in Europe hampered demand for snow-related apparel and hard goods late in the quarter. However, thanks to our continued focus on profitability, we reached the high end of our guidance range for earnings at $0.06 per share. Much the same as the prior quarter, our third-quarter comparable performance was driven by contributions from multiple areas of our business. Our men's category continued its positive momentum, growing year-over-year for the fourth consecutive quarter at an accelerating pace. Our women's category, which turned positive in Q1, again accelerated meaningfully after posting strong double-digit growth year-over-year in Q2, while footwear also experienced a noticeable pickup in sequential demand, driving comps into the low double digits from the mid-single digits in the second quarter. The fourth quarter and holiday season are off to a good start and have us in a good position to deliver a meaningful improvement from our 2023 results. While we're pleased with the progress we've made returning to positive comparable sales growth, improving profitability and driving cash flow, we believe the business is capable of much more. As we look ahead to 2025, we will continue to focus on the following strategies to grow sales and drive profitability. First, accelerating top line expansion through strategic investments to ensure we are winning with our customers. Our strategy is to continue to focus on three key areas, injecting assortments with newness. We are on track to introduce well over 100 new brands in 2024 following the launch of 150 brands in 2023. These new brands constitute a larger portion of our sales this year compared to last year, demonstrating that they resonate with our customers. We recognize that our customers rely on Zumiez to discover new and unique products, and we remain committed to continuing to fulfill that expectation. Private label expansion. Private label represented approximately 12% of sales in 2021 compared to 18% in 2022 and 23% in 2023. We have continued to see our private label share grow in 2024 as year-to-date private label represented over 27% of total sales. The increase in penetration is a testament to our team's ability to capitalize on both trend and value-conscious consumers, providing another avenue for growth. Customer engagement. We continue investing in our people and technology to maintain best-in-class service, both in stores and online, aimed at enhancing our relationship with customers and connecting with them in a more personalized and relevant way. Along with these top line initiatives, we will continue to focus on profitability, both in Europe and in North America. In Europe, we have pivoted from our store expansion strategy concentrated on enhancing the productivity of our nearly 90 stores across nine countries and our pan-European web business that currently serves the European market. While our work has yielded progress, it has been slowed by what continues to be a difficult cycle in Europe, which in the past couple of months has been impacted by unfavorable weather. Despite that setback, we are confident that by focusing on full price selling for our existing footprint, we can unlock the potential for the business and create value. There's no doubt that trends emerge locally and grow globally, and our current penetration of the relevant markets is a significant advantage to Zumiez over the long term. Overall, we believe we can achieve profitability in Europe with this new focus as we've done in other international markets like Canada and Australia. In North America, we've taken actions to improve our cost structure. Along with our plan to close approximately 31 underperforming North American locations in 2024, we're implementing comprehensive operational efficiencies across our business. This includes optimizing store labor through targeted staffing model adjustments, particularly for lower volume stores. We've executed structural changes to reduce shipping and logistics costs company-wide and have significantly reduced discount selling compared to previous elevated levels. These strategic cost management initiatives are part of our broader effort to streamline operations and improve margin performance. Carefully crafted initiatives have already demonstrated their value, helping us accelerate sales growth while simultaneously expanding margins, all while we continue to operate in a challenging retail environment. While we recognize a significant amount of work ahead, we remain optimistic that these strategic initiatives will continue to drive near-term results and ultimately help return Zumiez to its historical performance and beyond. Our path forward is clear: stay focused, be adaptable, and create value for our customers, our brand partners, and our shareholders. To that end, I want to thank the entire Zumiez team for their hard work and dedication to fostering a culture that has served as a cornerstone of the company's foundation for over 45 years and will be the driving force behind our future success for many years to come. With that, I'll turn the call over to Chris.
Chris Work, CFO
Thanks, Rick. And good afternoon, everyone. I'm going to start with a review of our third quarter results. I'll then provide an update on our fourth quarter-to-date sales trends and some perspective on how we're thinking about the full year. Third quarter net sales were $222.5 million, up 2.9% from $216.3 million in the third quarter of 2023. Comparable sales increased 7.5% for the quarter. The shift in the retail calendar had a negative impact on our results, decreasing net sales growth by approximately 510 basis points during the third quarter. Comparable sales results as reported, considering the calendar shift, represent a more accurate measure of operating results. Our third-quarter performance was driven by our North America business, which was positive for the third consecutive quarter. This strength was partially offset by a decline in international sales as we put greater emphasis on full price selling in Europe, which benefited margins but pressured our top line. From a regional perspective, North America net sales were $186.8 million, an increase of 2.9% from 2023. Other international net sales, which consist of Europe and Australia, were $35.7 million, up 2.7% from last year. Excluding the impact of foreign currency translation, North America net sales increased 2.9% and other international net sales decreased 0.3% year-over-year. Comparable sales for North America were up 10.4%, and comparable sales for other international were down 5.6% for the quarter. From a category perspective, men's was our largest positive comping category, followed by women's and then footwear. Hard goods was our largest negative comping category, followed by accessories. The consolidated increase in comparable sales was driven by an increase in dollars per transaction and an increase in transactions. Dollars per transaction were up for the quarter, driven by an increase in average unit retail and an increase in units per transaction. Third quarter gross profit was $78.3 million compared to $73.2 million in the third quarter of last year. Gross profit as a percentage of sales was 35.2% for the quarter compared to 33.8% for the third quarter of 2023. The 140 basis point increase in gross margin was primarily driven by 70 basis points of improvement in product margin, 60 basis points of leverage in store occupancy costs, and 60 basis points of benefit in web shipping costs. These improvements were partially offset by a 30 basis point detriment related to inventory shrinkage and a 10 basis point detriment related to increased incentive compensation. SG&A expense was $75.9 million or 34.1% of net sales in the third quarter compared to $73.4 million or 33.9% of net sales a year ago. The 20 basis point increase in SG&A expense as a percent of net sales resulted from 50 basis points from increased incentive compensation; 20 basis points of deleverage in non-wage store operating costs, offset by a 40 basis point reduction related to employee training. Operating income in the third quarter of 2024 was $2.4 million or 1.1% of net sales compared with an operating loss of $0.2 million or 0.1% of net sales last year. Net income for the third quarter was $1.2 million or $0.06 per share. This compares to a net loss of $2.2 million or $0.12 per share for the third quarter of 2023. Our effective tax rate for the third quarter of 2024 was 63.4% compared with a modest tax expense in the prior year quarter despite a pretax operating loss. The change in our effective tax rate was primarily due to the allocation of 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 $99.3 million as of November 2, 2024, compared to $135.8 million as of October 28, 2023. The $36.5 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $25.2 million and capital expenditures of $14.2 million, offset by $3.7 million in cash provided by operating activities. As of November 2, 2024, we have no debt on the balance sheet. We ended the quarter with $187.2 million in inventory, up 6.5% compared to the $175.9 million last year. On a constant currency basis, our inventory levels were up 5.6% from last year. Given our recent sales performance and current trend, we feel good about our ending inventory balance for the third quarter and expect to continue receiving newness as we move to the important holiday selling season. Now to our fourth quarter-to-date results. In discussing our fourth quarter results, it is important to recognize the significant calendar shifts and holiday movements impacting sales in the quarter. These include one less week in the current year, with the fiscal fourth quarter of 2024 being a 13-week quarter and fiscal 2023 being a 14-week quarter; a shift in the retail calendar, which we expect to have a modest negative impact on the fourth quarter of roughly negative 50 basis points, but benefited the quarter-to-date sales we are reporting by approximately 790 basis points; and Christmas is falling on a Wednesday this year, which we expect will condense more December volume around the holiday and on a comparable basis drive more sales into December. With that said, comparable sales for the 31-day period ended December 3, 2024 were up 2.9% from the comparable period in the prior year. Total sales for the 31-day period ended December 3, 2024 increased 10% compared to the 31-day period in the prior year ended November 28, 2023, and benefited from the previously mentioned calendar shift. From a regional perspective, net sales for our North America business for the 31-day period ended December 3, 2024 increased 10.8% compared to a 31-day period ended November 28, 2023, while international business increased 7.3%. Excluding the impact of foreign currency translation, North America net sales for the 31-day period ended December 3, 2024 increased 10.9% from the prior year, and other international net sales increased 8.3% compared with 2023. Comparable sales for North America increased 5.5% for the 31-day period ended December 3, 2024, compared to the same weeks in the prior year, while comparable sales for our other international business declined 5.9%. From a category perspective, women's was our largest positive comparable sales growth category, followed by men's. The hard goods category was our largest decline in comparable sales, followed by footwear and accessories. The comparable sales increase was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transaction increased for the 31-day period due to an increase in average unit retail and an increase in units per transaction. With respect to our outlook for the fourth quarter of fiscal 2024, 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. We are anticipating that total sales for the fourth quarter will be between $284 million and $288 million, representing growth of approximately 0.7% to 2.2% from the prior year. Total sales growth for the fourth quarter will be negatively impacted by the additional 53rd week included in the prior year as well as the retail calendar shift. The total impact of these items will be a detriment to sales growth of approximately 520 basis points in the quarter. Comparable sales growth for the 13 weeks ended February 1, 2025 is expected to be between 6% and 7.5%. Comparable sales growth is not impacted by the 53rd week or calendar shift and represents a more accurate measure of our operating results. We expect that our fourth quarter 2024 product margins will increase between 180 basis points and 210 basis points from the prior year. Consolidated operating income as a percent of sales for the fourth quarter is expected to be between 7.3% and 8%, and we anticipate that earnings per share will be between $0.83 and $0.93 compared to a loss of $1.73 per share in the prior year, which is inclusive of the $41.1 million goodwill impairment in 2023. Lastly, with the upcoming change in U.S. government leadership and both potential for change in international relations, we are anticipating that some of our imported goods may be subject to new significant tariffs in 2025. We are currently evaluating our product inflows from impacted regions and making determinations as to whether we pull forward some inventory purchases from these areas in fiscal 2024. Depending on the amount of inventory that we take in early, we anticipate that our ending 2024 inventory could grow more than our current sales trends and that it will have an impact on the timing of operating cash flows. We are also evaluating other regions not impacted by these tariff actions for potential future production. Now I want to give a few updated thoughts on our fourth-quarter guidance rolls into our full fiscal 2024 results. Inclusive of our fourth-quarter guidance, we anticipate that total sales will increase in the 2% to 2.5% range for fiscal 2024 compared to 2023 despite the anniversary of the 53rd week and store closures previously reported. The 53rd week will have a negative impact on annual sales growth of approximately 150 basis points. After two years of difficult performance in product margin, we believe that with a more stable sales environment and a full price strategy in Europe, we will grow product margin for the full year in fiscal 2024. With sales growth in 2024, we anticipate we will leverage SG&A costs year-over-year beyond the benefit we will receive in moving past the $41.1 million goodwill impairment charge we recorded in the fourth quarter of 2023. With the previously mentioned assumptions, we believe we'll turn positive operating margins for the full year. While effective tax rates are likely to fluctuate significantly by quarter, we anticipate that our full-year effective tax rate will be roughly 80% in fiscal 2024 using the high end of our guidance. We are planning to open seven new stores during the year, including three in North America, two in Europe, and two stores in Australia. This is down from 19 stores in 2023 and 32 stores in 2022 as we focus on optimizing our current footprint. We are planning to close approximately 33 stores in fiscal 2024, with 31 of those closures in North America. The number of closures could go up or down depending on our operating results in each location as well as our ability to work with our landlord partners. We expect our capital expenditures for 2024 to be between $14 million and $16 million compared to $20.4 million in fiscal 2023 and $25.6 million in 2022. The reduction is primarily due to fewer planned store openings. We expect that depreciation and amortization, excluding noncash lease expense, will be approximately $23 million and consistent with the prior year. We are currently projecting our diluted share count for the full year to be approximately 19.3 million shares. And with that, operator, we'd like to open the call up for questions.
Operator, Operator
Our first question comes from Mitch Kummetz with Seaport.
Mitch Kummetz, Analyst
Chris, I'd like to begin with the comp guidance for the fourth quarter. If I understood you correctly, you're indicating a range of 6% to 7.5%. Currently, you're at 2.9% for the quarter to date. Can you help me understand how to bridge that gap? I assume you're anticipating a strong December. Can you confirm that and share what gives you confidence in achieving that?
Chris Work, CFO
You've got your numbers correct. We believe the comparable sales guidance will be around 6% to 7.5%, and currently, we are at approximately 2.9%. As we consider the fourth quarter and how it is shaping up, I mentioned in our earlier remarks the impact of the calendar shift in the third quarter. We typically conduct thorough planning, so we reviewed past periods when Christmas fell on a Wednesday to analyze the sales patterns throughout that quarter. Based on our findings, we anticipate a higher concentration of sales around the Christmas period. Therefore, November becomes somewhat less significant from a comparable sales perspective, while December gains more importance, and January is expected to be a bit less significant as well. Due to the calendar timing, we expect a notable increase in December sales. This presents some challenges for our guidance since we have fewer sales recorded at this point compared to other fourth quarters. However, we believe this will accelerate. We recently finished a quarter with a 7.5% comparable sales growth and are pleased with the business trajectory, especially in our apparel brands, which are performing well. Our footwear business has returned to positive growth through the third quarter, although this has softened as we entered November, which we anticipated. As I mentioned earlier, we expect sales to concentrate around peak periods. Speaking of peak periods, the Black Friday weekend was quite successful for us. I want to note that Black Friday this year was closer to Christmas compared to last year. From Thanksgiving through the day after Cyber Monday, we saw an increase of about 9.9% in comparable sales, and importantly, our product margin improved by 310 basis points. Last year, we were very promotional in clearing inventory, especially in the footwear category, which contributed to its negative performance so far this quarter. We still have substantial volume ahead, which is crucial for our Q4 guidance, but the data shows trends that give us confidence moving forward. We are generally aligned with our plans in North America, which boosts our confidence for Q4 planning.
Mitch Kummetz, Analyst
And Chris, you started to answer my follow-up question, which is around footwear because it went from a low double-digit positive comp in Q3 to negative for Q4 to date. Is that just a category that is more where demand is just more concentrated around peak buying than maybe apparel is? Would that explain it? Is that the category that you expect pretty meaningful inflection from November to December?
Chris Work, CFO
We believe there are times when footwear sales will be much stronger, particularly in the third quarter, which performed well. There seems to be a concentration around peak times for purchasing. Footwear often aligns with personal preference, and we notice an increase in sales post-Christmas, sometimes driven by gift cards rather than traditional gifts. There are distinct periods for footwear sales. In November, following our third quarter, we believe the trends are influenced by discounting from the previous year, which correlates with what we've observed in margins. Our margins have improved significantly, with footwear being a key contributor. When we analyze sales, our bigger challenge in November has been in discounted footwear. We're currently down compared to last year, but that's acceptable as we focus on full-price, full-margin sales. We'll see how things develop as we enter the peak volume season around Christmas and afterwards.
Mitch Kummetz, Analyst
And then maybe lastly on occupancy. What are you expecting in the fourth quarter? Obviously, on a 6% to 7.5% comp, normally you would probably get some good leverage there, but then I know you're going 13 weeks versus 14. How does that kind of impact occupancy as well?
Chris Work, CFO
There's a few things going on in occupancy as well as the fact that, as we disclosed in our call today, we're going to have some closures. We're planning 33 closures this year, and we've closed 10 stores quarter-to-date, so through the third quarter, I should say. So we have the bulk of our closures here to happen in the fourth quarter. So we'll see a few different movements that will be tied to occupancy. As you would expect, the occupancy on some of our closing stores can be higher as a percent of sales because we don't have a lot of sales in those stores we're closing. So we'll see a few movements on occupancy. I think overall, we would expect to leverage occupancy. We've done a good job over the last couple of years of trying to get some leverage out of occupancy on a lower comp. Obviously, we deleveraged on a negative comp. But this is going to be a little bit fluid on this type of comp; we would hope to get some leverage on occupancy.
Operator, Operator
Our next question comes from the line of Richard Magnusen with B. Riley.
Richard Magnusen, Analyst
I was wondering what more can you tell us about any promo strategy and ability to be agile inventory apart from the point forward of inventory you just discussed, as you progressed through the post-Black Friday holiday season? And are there any particular trends that you believe have yet to deliver in this latter part beyond what you've mentioned so far?
Rick Brooks, CEO
I don't believe so, Richard. Our promotional strategy remains consistent throughout the year. We've emphasized the significance of our private label in providing value to our customers, which doesn't solely refer to lower prices. Value encompasses offering appealing products at a favorable price point. For instance, we might bundle products together, providing consumers with a collection that offers excellent value and includes trendy items. Our promotional and pricing strategies, aside from the notable markdowns in footwear discussed earlier due to atypical situations, generally stay constant and are year-round. We maintain a less promotional approach compared to our competitors, which positively influences our results by highlighting our unique positioning in product selection, the trendiness of our private label offerings, and the effectiveness of our value proposition for customers. I appreciate this position as a leader in trendiness and product uniqueness, as it positively impacts our margins and profitability. We do not alter our pricing structure significantly. Looking ahead to the remainder of the holiday season, we anticipate a heightened focus on promotions, but our emphasis will be on delivering unique offerings. We do address markdown issues when they arise, but what customers typically find in our stores is exciting merchandise, and we aim to provide value through our promotional bundles.
Chris Work, CFO
And Richard, I'll just take the second part of your question on trends. What we're really proud of is what we've seen here through the third quarter in our apparel categories. I think we've really seen some acceleration there really tied to a few different things. Our private label brands that we talked about in our second quarter call have continued to do well, as have our newer brands that we've launched within the portfolio. They are representing a larger portion of our overall sales. And I think that's a really good thing for us long term because it's that continued newness that Rick talked about in our prepared remarks that really drives sales in the peak period. So I think we're feeling good about our offering heading into Christmas here over the next month, and we'll look forward to kind of seeing how that performs.
Operator, Operator
Our next question comes from Corey Tarlowe with Jeffries.
Corey Tarlowe, Analyst
I was wondering if you could parse out for us as you think about your endeavor to become more profitable in the U.S. and Europe. And what the different moving parts to be? And then I think you can maybe rank the opportunity by category or by segment as you think of the bridging margin from what it is today to where you think it could go over time? And then I just have a follow-up on hard goods as well.
Chris Work, CFO
Well, Corey, I'll keep this high level. As you can imagine, operating in various global regions complicates the answer. Overall, domestically, our priority is to grow sales back. We peaked during the pandemic in 2020 and 2021, with strong sales leading up to that point. Our focus is on returning to those sales levels, which will enhance our profitability. We are also examining the P&L for various opportunities and planning how to steer the business back into profitability and beyond. It begins with product margin beyond sales, pushing for product margin growth initiatives. Being a full-price, full-margin retailer is crucial for differentiation and accelerating profitable growth. Additionally, we've focused on tightly managing costs over the past couple of years, addressing everything from shipping costs to occupancy rates and payroll management in stores. This includes evaluating lower-volume stores to challenge staffing structures and hours. Our teams have responded well and we've managed to reduce significant costs. We have also made tough decisions domestically, which involved eliminating roles and cutting back on events, training, and travel temporarily due to our current situation. Internationally, the situation is similar yet distinct. Sales growth is essential, and we need higher-producing units while maintaining focus on this aspect. Our experience with Canada and Fast Times in Australia shows that driving sales is key to profitability. In addition, we've found that product margins are lower in Europe and Australia compared to North America. We have plans to address this. Because our international entities have historically expanded, we anticipate some SG&A growth, but this has to be controlled relative to our sales to ensure proper flow-through. We're managing these entities accordingly while also seeking to apply successful techniques from Zumiez to help them optimize their SG&A operations.
Corey Tarlowe, Analyst
Regarding hard goods, this category has been under pressure for quite some time and was the weakest performer in Q3. How is it performing as we move into Q4? Are there any signs of improvement in this category, and when do you anticipate a turnaround? Any insights on this would be greatly appreciated.
Rick Brooks, CEO
The answer to the question is similar here to what we talked about in Q3, which is it's still a tough department for us in terms of results. But the green shoot is really happening in Australia, which went into the downturn of the skate cycle a little earlier than the rest of our businesses. They've been positive, I think, Chris, for five consecutive months now.
Chris Work, CFO
Yes.
Rick Brooks, CEO
We're seeing some positive trends in the skate hard goods category, although we're still facing challenges in other areas of the business. We're hopeful that these trends indicate we're nearing stabilization. Our goal is to stop incurring losses and to eliminate the drag on the business, allowing for a potential rebound. As we mentioned in the previous call, our experience with hard goods cycles is quite unique right now. Typically, these cycles last about eight years, but the pandemic caused a significant amount of volume to shift into 2020, at which point we reached a peak in sales mix. Currently, we're at what I believe is an all-time low for that mix, which suggests we might be nearing the bottom.
Operator, Operator
Ladies and gentlemen, at this time, I would like to turn the call back over to Rick for closing remarks.
Rick Brooks, CEO
Again, I just want to offer my thanks to everyone for your continued interest in Zumiez. And of course, I wish everyone a happy holidays. Thanks, everybody.
Operator, Operator
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.