Earnings Call
Zumiez Inc (ZUMZ)
Earnings Call Transcript - ZUMZ Q4 2020
Operator, N/A
Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc. Fourth Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. Before we begin, I'd like to remind everyone of the Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez Inc. business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in the Zumiez'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. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the fourth quarter. Then I'll share some thoughts on the past year and what it means for Zumiez going forward, before handing the call over to Chris, who will take you through the financials and some thoughts on the coming year. After that, we'll open up the call to your questions. We're very pleased with our overall holiday performance given the challenging operating environment. For the fourth quarter, we delivered a total sales increase of 0.8% and comparable sales growth of 4.7%. The significant efforts of our teams helped to offset meaningful governmental temporary store closures in Canada and Europe, as well as reduced operating hours and store capacity restrictions across much of our business. Our fourth quarter was no different than how we performed throughout the rest of the year. Delivering results despite the headwinds we faced and driving full price selling while efficiently operating with a lean cost structure to deliver record diluted earnings per share of $1.68 for the quarter. Our results demonstrate once again the power of our brand and culture that have propelled us throughout this unusual year. For 2020, we delivered comparable sales growth of 13.6% and despite total sales being down 4.2% for the year, we achieved record diluted earnings per share of $3 for the year as we leveraged the tremendous work of our teams, and the strong foundation we've built over the past 40-plus years. On our Q4 earnings call a year ago, I talked about how Zumiez's then recent results were directly attributable to the execution of the long-term consumer-centric growth strategy that the Company has been building and evolving since our inception. I highlighted how this strategy requires significant agility in navigating the trend cycles and speed desired by our customer. I closed with comments about my confidence in our organization's ability to adapt to industry change over the next decade and how the Company was well positioned to continue winning with the consumer over the next 5 to 10 years as buying behaviors further evolve. That call took place a day before the U.S. President declared a state of emergency in response to the COVID-19 outbreak. While the number of daily new cases was escalating quickly, I don't think anyone anticipated the full impact that pandemic would have globally over the next 12 months. With respect to the retail industry, what we expected to happen over several years in terms of consolidations of winners and losers in retail has significantly accelerated. Our ability to respond to these dramatic changes that quickly unfolded and successfully navigate back-to-school and holiday seasons that were unlike anything we've ever experienced demonstrate the competitive advantages of our model and underscore the strength of our people and culture. Thanks to these cornerstones of our foundation, we enter fiscal 2021 with confidence in our ability to continue to gain share and drive results. Key to our success has been and will continue to be our dynamic teams, our one channel mentality, and our advanced in-store fulfillment capabilities, including Zumiez Delivery, which we expanded in the fourth quarter to take our best-in-class sales team directly to our customers' door. While elements of our model have and will continue to evolve in the years ahead, our overarching consumer-centric strategy rooted in strong brand and culture will remain constant. We built a business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate. We build an infrastructure in which the customer can shop with us to get what they want when they want, how they want as fast as they want. We've marked our business into a channel-less organization with inventory visibility from all touch points and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which the sale originates. The work to get here has been significant, but the path ahead will require further focus to move even faster to serve our customers. While much remains uncertain in the macro environment, as we balance the ongoing pandemic with the rollout of vaccinations across the globe, we remain steadfast in our commitment to continuing to invest in our future. We know that times of crisis create opportunities, with the right people, strategies, and resources in place. We are well positioned to emerge from this crisis a stronger brand than ever before. Before I close, I would like to thank all of our teams and our brand partners for their dedication and commitment to Zumiez over the last year. I'm immensely proud of our achievements to date and even more confident in our ability to drive future success. With that, I'll turn the call over to Chris to discuss the financials.
Chris Work, CFO
Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our fourth quarter and full year 2020 results. I'll then provide an update on our first quarter-to-date sales trends before providing some perspective on how we're thinking about the full year. Fourth quarter net sales were $331.5 million, up 0.8% from $328.8 million in the fourth quarter of 2019. The increase in sales was driven by a 4.7% increase in comparable sales and the net addition of three new stores during the year, partially offset by temporary store closures due to the pandemic during the quarter. Breaking down the comparable sales further, we saw meaningful digital strength with comparable web sales growing 31.8% for the quarter, while comparable sales for physical stores were down 3.1% year-over-year. Our stores were open for approximately 94% of the potential operating days during the fourth quarter of 2020. From a regional perspective, North America net sales increased $4.3 million or 1.5% to $285.2 million. Other international net sales, which consist of Europe and Australia decreased $1.6 million or 3.2% to $46.3 million. Excluding the impact of foreign currency translation, North America net sales increased 1.4% and other international net sales decreased 11.3% for the quarter. Both our European and Canadian operations were impacted by temporary COVID-related store closures in the fourth quarter and were only open for approximately 53% and 73% of the available operating days, respectively. During the quarter, the hardgoods category was our largest positive comping category, followed by accessories and men's. Footwear was our largest negative comping category, followed by women's. Fourth quarter gross profit was $129.7 million compared to $128.3 million in the fourth quarter last year. And gross margin was 39.1% compared to 39% a year ago. The 10 basis point increase in gross margin was primarily driven by an 80 basis point improvement in inventory shrinkage and obsolescence, and 40 basis points of leverage in occupancy costs, as well as a 20 basis point improvement in product margin. These improvements were partially offset by an 80 basis point increase in web shipping costs due to the increased web activity associated with the pandemic, a 30 basis point increase in distribution and fulfillment costs, and a 30 basis point negative impact related to the loyalty program deferred revenue adjustment made in the prior year. SG&A expense was $75.9 million or 22.9% of net sales in the fourth quarter compared to $79.5 million or 24.1% of net sales a year ago. The 120 basis point decrease in SG&A expense as a percent of net sales was primarily driven by 50 basis points of leverage in our store wages, a 50 basis point decrease in national training and recognition events, and a 40 basis point decrease in corporate costs, primarily related to governmental payroll credits and decreases in professional fees and other administrative expenses. These improvements were partially offset by a 30 basis point increase in web-related expenses such as advertising costs due to increased web activity. Operating income in the fourth quarter of 2020 was $53.8 million or 16.2% of net sales compared with operating income in the prior year of $48.9 million or 14.9% of net sales. During the quarter, we recognized flow-through on incremental sales of almost 180% based on the factors outlined above and our ability to adjust quickly in this challenging time. Net income for the fourth quarter was $42.8 million or $1.68 per share compared to net income of $37.9 million or $1.48 per share for the fourth quarter of 2019. Our effective tax rate for the fourth quarter of 2020 was 23.7% compared with 24.8% in the year-ago period. Looking at our full year results, from a sales and earnings perspective, 2020 was incredibly volatile quarter-to-quarter and across months within each quarter. For the year, sales declined 4.2% or $43.5 million, while diluted earnings per share increased 14.6% to $3. Our bottom line performance benefited from both our optimization efforts within the model as well as from the one-time adjustments we made in response to the pandemic around managing our payroll costs, reducing events, travel and training, managing marketing efforts, working with our landlords, receiving governmental subsidies tied to continue to pay our people, and reducing project and other expenses as feasible, given the uncertain nature of the environment. In 2021, we expect quarter-to-quarter volatility to continue as we transition back toward a more normalized sales and expense environment, which we'll discuss shortly. Turning to the balance sheet, the business ended the year in a very strong financial position. Cash and current marketable securities increased 49.5% to $375.5 million as of January 30, 2021 compared to $251.2 million as of February 1, 2020. The increase in cash and current marketable securities was driven by cash generated through operations, including the deferment of $30.1 million in payments with lower inventory levels, extended vendor terms, landlord obligations, and deferred payroll tax payments, as well as net income improvements related to abatements, credits, and expense reductions. We expect that this will be a reduction to our positive cash flow in 2021. The increase was partially offset by $13.4 million of share repurchases through the Company's stock buyback program prior to our store closing in March 2020 due to COVID-19 and other planned capital expenditures. As of January 30, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the year with $134.4 million in inventory compared with $135.1 million last year, a decrease of $0.8 million or 0.5%. On a constant currency basis, our inventory levels were down 3%. Overall, the inventory on hand is healthy and selling at a favorable margin entering 2021. Now to our fiscal first quarter-to-date sales results, total first quarter-to-date sales through March 6 decreased 3.8% compared with the same time period in the prior year ended March 7, 2020. Our stores were open for roughly 93% of the potential operating days during this time frame compared with no closures last year, due primarily to ongoing government mandated store closures, both domestically and internationally, as well as significantly lower levels of foot traffic, metering, and reduced hours. Total comparable sales for the quarter-to-date period ended March 6 decreased 0.4%. By channel, our quarter-to-date comparable sales decreased 6.9%, and our e-commerce sales increased 29.5%. From a regional perspective, our North America business has experienced a 6.1% decline in total sales in the first quarter through Saturday, March 6, while our other international business has seen an increase of 11.4%. There are several factors that have impacted the North America business, including the delay of U.S. tax returns, store closures for the winter storms in the south as well as short-term store closures in Canada. The quarter-to-date comparable sales decrease was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in average unit retail as well as an increase in units per transaction. Quarter-to-date, the hardgoods category was our largest positive comping category, followed by accessories. Footwear was our largest negative comping category, followed by women's and men's. Due to limited visibility in the business, we will not be providing guidance for the first quarter of 2021 or the fiscal year. That said, we do want to give you a few directional thoughts on how we are currently expecting the full year to play out. Starting with revenue, for the full year fiscal 2021, we anticipate that we will recapture lost sales from 2020 and drive total sales ahead of the levels that we experienced in 2019, absent a deterioration in the macroeconomic environment. On a quarterly basis, year-over-year comparisons between fiscal 2020 and fiscal 2021 will be challenged due to the seasonality shift caused by the pandemic. Throughout the year, we'll be comparing our results not only to 2020 but also to 2019, anticipating a return to more normalized seasonality, making the 2019 comparability more appropriate in some circumstances. Examining the high-level impacts by quarter from 2021 to 2020 and 2019, we note the following. In the first quarter of 2021, we've gotten off to a slow start. But there are significant contributing factors and offsets that lead us to believe there will be a positive correction within the quarter. Specifically, the delay of tax returns, significant closures due to snowstorms across the south, COVID-related store closures persisting early in the quarter and the 2021 domestic stimulus package signed today. If stores open as scheduled without meaningful further closures due to COVID or otherwise, we believe our results in the first quarter will be ahead of our results for the same quarter in 2019 and that our results will be meaningfully ahead of our results for the same quarter in 2020 when our stores were only open for approximately 50% of the days available during the quarter. In the second quarter of 2020, as restrictions began to lift, our stores were open for approximately 73% of the potential operating days during the quarter. In addition, we experienced a surge in demand, recapturing some of the lost sales from the first quarter of 2020, and producing a record second quarter 2020 for the Company in both total sales and earnings. We believe as seasonality normalizes in 2021 that sales in the second quarter will be down from fiscal 2020 in total, despite a more normalized operating environment, but will grow modestly from the second quarter of fiscal 2019. As we look to the back half of the year, we grew sales year-over-year in both the third quarter and fourth quarter of fiscal 2020 compared with fiscal 2019, despite the continued challenges of the pandemic in both the back-to-school and holiday seasons. Our current projection would show total sales growth in the third and fourth quarter of fiscal 2021 compared with fiscal 2020. Moving to gross margin, fiscal 2020 gross margin was down modestly, finishing 10 basis points below the 2019 levels. The primary cause was the increase in shipping and fulfillment costs related to the increase in web revenue penetration driven by store closures and the deleverage of store occupancy costs. These costs were mostly offset by improvements in inventory shrinkage and product margin. As we look to 2021, we are currently planning year-over-year growth in gross margin driven by a reduction in shipping costs as web revenue normalizes with stores being open and leveraging our occupancy costs on increased sales. Product margin improved by 70 basis points in 2020 versus 2019 and grew for the fifth year in a row. We are planning product margin in 2021 to be flat to down slightly year-over-year. Fiscal 2021 SG&A costs are expected to increase in excess of the sales growth for 2020 for several reasons related to the pandemic. The drivers of this include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021, governmental subsidies received in 2020 not anticipated to repeat in fiscal 2021, an increase in costs related to training and recognition events that were significantly reduced in 2020 due to the pandemic, an increase in marketing events and spending that were not possible with restrictions in 2020 and an increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results. In summary, we expect to see expansion in gross margin, while SG&A expenses grow ahead of sales for the reasons just outlined. On a net basis, however, we anticipate operating margins will be down slightly in fiscal 2021 as a percent of sales compared to fiscal 2020, while we expect operating margin dollars will grow year-over-year. We are currently planning our business assuming an annual effective tax rate of approximately 26.7% in fiscal 2021 compared with 25.6% in 2020. We are planning earnings per share to increase in fiscal 2021 compared to fiscal 2020 with significant variability quarter-to-quarter in comparison to 2020 and more normalized in comparison to 2019. We are planning to open 22 new stores in fiscal 2021, including approximately five stores in North America, 12 stores in Europe, and five stores in Australia. We are planning to close approximately five to six stores during the year. Capital expenditures are planned to be between $20 million and $22 million in fiscal 2021 compared to $9.1 million in fiscal 2020. The majority of the capital spending will be dedicated to new store openings and planned remodels. We expect the depreciation and amortization, including non-cash lease expense, will be approximately $23 million in fiscal 2021 compared with $23.5 million in fiscal 2020. We are currently projecting our share count for the full year to be approximately 25.5 million shares. Any share repurchases during the year will reduce our share count from this estimate. And with that, operator, we'd like to open the call up for your questions.
Operator, N/A
Our first question comes from Janine Stichter with Jefferies. You may proceed with your question.
Janine Stichter, Analyst
I wanted to ask a little bit more about the quarter-to-date trend. Maybe you could help us just parse out what you've seen over the last week or so as we start to see some of those tax refunds flow through? And then also curious what you're seeing in Australia, we're hearing really positive things about the trends there. I'm curious if you're seeing that in your business as well and maybe how you think about that as a proxy for what the U.S. hopefully looks like when we start to reopen. Thank you.
Rick Brooks, CEO
Yes. Thanks, Janine. So as we talk about the first quarter, I guess we gave results kind of here through the first five weeks. And I think generally, they were below where we thought they would be coming into the year, but I think there are some good reasons for that. So just to reiterate what we said on the call, overall, we were down 3.8% in total sales, while comparable sales were down about 0.4%. So on a weekly cadence, as we move through, this did get tougher as we move through February and then turned much better last week and now even into this week. So as we think about that and we try to dissect what we've seen here through the first five weeks, again, closures had challenged us. We talked about being closed about 7% of the time. But I think there are some other significant factors as well, including a delay in U.S. tax returns that, from our understanding, we're starting to get distributed more towards the end of February versus maybe as late January of the year before. Domestically, we called out some store closures related to some of the winter storms, specifically in the south. And we have had ongoing closures in Canada and Europe. Canada was closed about 28% of the operating days through the first five weeks, and Europe was closed about 70% of the operating days through the first five weeks. So our expectations, as we move here through the rest of the quarter is that the tax refund will get caught up, and we may already be seeing that in our results. Canada is substantially open. We are optimistic, hopefully, as we move through the quarter, we'll see more of Europe open up. And the stimulus bill signed today, we expect to have a positive boost for our business. If we look back at 2020, we definitely saw a meaningful boost in the summer with the first stimulus and then in January of this year as well. So I think that's kind of how we're thinking about Q1. Obviously, not quite where we'd like it to be to date, but I think there's good opportunity ahead of us. As it relates to Australia, I mean, they've done a great job of managing through this pandemic, really shutting down their borders and being very stringent about how they have operated. They, like all of us closed in March last year and were closed substantially through the end of April, but they also closed from the end of July until almost October. So they really did have a much higher level of lockdowns and seem to have actually driven a pretty great result. So we're really happy with how Australia has performed. I'll tell you 2020 was a great year for them down there, both on the top line and bottom line. I think our teams have really performed quite well while growing the business. This is an area where we still have a lot of growth ahead of us, and we're excited about how the business is coming to form down there. I think that's it.
Operator, N/A
Thank you. Our next question comes from Sharon Zackfia with William Blair. You may proceed with your question.
Sharon Zackfia, Analyst
I guess a few questions. I don't think you guys mentioned Zumiez Delivery during the prepared comments. I'm just curious kind of how that ended up unfolding and any learnings as we go throughout 2021 or maybe even potentially for your international markets? And then also, just curious whether you're seeing any issues with delayed inventory.
Rick Brooks, CEO
Okay, great, Sharon. I'll start by providing some context on Zumiez Delivery, which I know you're familiar with. I want to ensure that everyone understands our approach to this initiative. Our focus is on innovating for our customers and redefining how we serve them while optimizing our cost structure. We've long been engaged in localized fulfillment, and we have recently expanded our Zumiez Delivery pilot to 26 trade areas across the United States. This is important as it allows us to deliver a unique experience directly to our customers' doors, especially important during the holiday season as we faced constraints with third-party shipping capacity. It's crucial to see this as part of our efforts to innovate in customer service and enhance our one-channel business model. Looking ahead, we have a strong roadmap for future innovations aimed at improving customer service over the next three to five years. While I won't disclose specific initiatives, it's important to highlight the consumer themes driving our strategy. First is the increasing expectation for speed—consumers now demand immediate access to what they want, and we anticipate these expectations will continue to rise. Second, our research shows that Gen Z consumers prefer shopping in stores. Our initiatives will enhance our ability to foster human connections, regardless of whether they are digital or physical, with a focus on making our local stores central to that experience. Lastly, our Gen Z consumers navigate both local and global communities. They seek out local engagement while also wanting global brand access, which influences their shopping preferences. These themes will guide our innovation efforts as we aim to better serve our customers, gain market share, and improve our business outcomes. Zumiez Delivery is just one example of how we aim to innovate to meet rising consumer expectations. Now, I'll turn it over to Chris for more details on our Zumiez Delivery initiatives.
Chris Work, CFO
Sure. I'll just kind of jump into some of the data. Rick mentioned, we are operating in 26 trade areas. But this is something we started out two years ago in one trade area, really just to test and understand it. And obviously, with the shipping landscape that we had this year, we thought it was definitely prudent to roll out. So we did that. We did that right at the end of the third quarter, beginning of the fourth quarter. And the 26 trade areas account for about 5% to 10% of our daily deliveries. This encompasses about 150 stores, just to put some perspective around it. During the quarter, we were able to deliver almost 55,000 packages, which is just awesome to be able to bring that brand experience to our customers' door. From a cost perspective, it was comparable to that of our outside carriers. We definitely have some optimization down the road. I think one of your questions was just kind of what the key learnings are. And I phrase this up to a lot of you that followed us for some time. Five years ago, we closed our fulfillment center and moved to localized fulfillment, shipping 100% from stores. I think this is no different. There are lots of things we're going to learn, and we're going to optimize in the year ahead. I think with 26 trade areas, we've got some seasonality considerations we're going to work through. And we're going to look at how we roll it out to additional trade areas. So I would say we're overall very happy with the preliminary feedback from our customers and the work of our teams to put in and start to try to get something done that's pretty challenging to accomplish. The second piece of your question around international, this gets back to what Rick said of sort of innovating here in exporting, and like we've done with a lot of our pieces here, whether it's ship from store or reserve online, pay in store, reserve online, pick up in store, all of these tools are opportunities for us to move globally as well. And so we do that, we connect our teams. And as we have scale in certain markets, we start to roll out some of these tools. So overall, I think there is more opportunity for us. Delivery is just a domestic tool at this point. But as we gain scale, these will be things we look at as we operate around the globe. And then your second question, just around inventory and inventory levels. As you can tell, we ended the year in a pretty good spot for inventory. We're really happy with how our teams have managed through a very challenging time with inventory in 2020. Our inventory was down slightly. As you know, it's been down much more meaningfully across the quarters. So we did have some catch-up in the fourth quarter. We were able to get back in stock in many of the areas. It had been tougher over the year. We certainly have some areas of the business that are still more challenged from a supply chain perspective, and we're still chasing a little bit. Typically more of the labor-intensive areas, so the areas like screenable, we've been able to get up to speed quicker. Hardgoods and footwear were some that lagged. And I would say even still in footwear, we're still kind of chasing and trying to get where we want to be from an inventory perspective. So overall, though, as I mentioned in my prepared remarks, inventory ended the year super clean and was selling at a good margin heading into the year.
Operator, N/A
Our next question comes from Jeff Van Sinderen with B. Riley. You may proceed with your question.
Jeff Van Sinderen, Analyst
Just wondering, if you can speak a little bit more about the European business, including the digital component. And I guess what your overall outlook is for the European segment for FY '21?
Chris Work, CFO
Sure, I’ll provide an overview of our European business. Heading into the fourth quarter of 2020, Europe was one of our strongest regions. We highlighted both Europe and Australia as performing exceptionally well during the first nine months. Specifically, Europe had a good performance because half of its sales were generated online leading up to the pandemic. Even with store closures, we still saw growth in both physical markets and online. Our teams executed very well throughout the year, gaining market share. However, Q4 of 2020 was extremely difficult, with our stores closed for nearly half the quarter, including a significant portion of the holiday season. We faced challenges from reduced operating hours, government stay-at-home orders, and limited tourism, which are crucial for our business. As a result, we experienced our largest loss in years despite being on budget for the first nine months. Looking ahead, we are optimistic about Europe in the long term. Growing our presence in the region requires significant investment, which we believe positions us well to take advantage of this market. We consider ourselves the largest lifestyle retailer in our niche across Europe, and being a global retailer provides advantages in serving and identifying brands and customers. For 2021, we are still facing challenges, with our stores closed for 70% of the possible days in the first five weeks. Although we are increasing our web sales, we are experiencing some operational challenges due to these closures. Therefore, while we aim to strengthen our results, profitability may not materialize just yet. We are excited about our progress and remain hopeful for profitability in the next 12 to 24 months, focusing on our strategies to achieve this goal amidst any unforeseen developments related to COVID.
Rick Brooks, CEO
Yes. And I'd just add to Chris' comments, Jeff, that again fourth quarter could have been a worse timing for having shut off your store base, obviously, with November, December being the peak volume months for our business year, particularly when you combine with the strength of our business in the snow hardgoods arena, where we're the leader in the European marketplace, so really unfortunate timing because we were on plan through the first three quarters of the year. But I think the team, as Chris said, just did a great job of working right through it, and we remain, to be clear, bullish on it. In fact, I think that we're seeing some of the best real estate deals we've ever seen in our European marketplace. So as we said in our opening comments, we intend to add 12 new stores this year in Europe and really drive this business forward. And so we remain really positive on where we're at. I love the hard work of what our teams accomplished over this last year. And I'm very confident we're going to get the fourth quarter back when we head into it around this, it's just hard to imagine, across my figures not, Jeff. It's hard to imagine that it could be any worse than it was this last year in terms of the closures and the closure of the resorts, the snow resorts, than it could possibly in 2021. Fingers crossed.
Sharon Zackfia, Analyst
Yes, exactly. So just to follow up, you provided some insights on FY '21, which seems like it might be a unique recovery year. What are your current thoughts on the overall operating margin for the Company in the long term compared to the recent levels you’ve been experiencing?
Chris Work, CFO
Yes. Appreciate that, Jeff, and I appreciate your sympathy for the challenges of 2021 because it is going to be a roller coaster just as 2020 was. So hopefully, kind of the directional prepared remarks we gave help people outline that. But I think as we think about long-term operating margin, what we've talked about probably as recently as three years ago was trying to drive to the higher single digits. And here we are. And so I think we're really proud of our teams in their execution of that. I think it's come from multi-years of planning of not just financial planning but strategy and what do we need to do to make this happen? And what are the investments we need to make in the business? And how do we streamline our results? And you can take something like in-store fulfillment. I think it's been a huge contributor to these levels of results, but it's taken us years to put it in place, refine it and drive it to where we are today. So as we look forward, we do believe this is a business we can drive into those low double digits operating profit levels. And I think we have a path to do it. I think we're focused on how we drive that. We've got different metrics for different areas of the business. So in North America, where we're much more mature, there is not as much unit growth ahead of us. It is about looking at a reasonable sales level of growth and saying, how do we grow earnings significantly ahead of that? And that's going to drive around optimization and leveraging and really pushing ourselves on how we look at the business here in North America. Internationally, we have a lot of growth ahead of us. And we know Europe has a huge landscape for us, and we also have a lot of growth in Australia. And so in those markets, it probably looks like our historical U.S. market, where we're adding a lot of units. We're going to continue to grow total trade area sales. So those units will not only pick up the four-wall brick-and-mortar sales. They're going to help drive the omni experience and the whole experience within a trade area, so we'll see elevated growth on the top line, and we should see earnings flow through meaningfully ahead of that as we're using kind of both channels to leverage each other. So our focus is really there, and we think this is something we can drive operating profits into the double digits.
Rick Brooks, CEO
And I'd just add, Jeff, my, again, tying back to the comments I made around how we're thinking about innovating for the business and then being able to export. That will drive the sales and margin in the U.S. business, but we're also going to be able to export those tools and skills to the markets around the world as they gain the scale to leverage those advantages. And you need scale in the marketplace to be able to leverage the kinds of tools we're putting in place. And we've done that, I think, really well. And as Chris said, we're doing it in Europe now. But as these new innovations coming through, that will be the same process. So if you think about a three-to-five-year window, I would look back at what we've achieved the last three to five years and say, our goal is to continue that process of long-term investments that are going to yield both improved sales and improved margins. We optimize around the consumer behavior and innovate to serve them better. So I think the last five years is a roadmap of what the future will be, different initiatives but what we expect we can kind of roll out with new innovations, again, with the larger business, not only here in the U.S. but as Europe and Australia scale, those markets too.
Operator, N/A
Our next question comes from Jonathan Komp with Baird. You may proceed with your question.
Jonathan Komp, Analyst
Chris, maybe first, just to clarify, your commentary for the first quarter and second quarter compared to 2019. Are you implying that the first quarter could be up more compared to 2019 than the second quarter, which I think you said was up modestly? So I just wanted to clarify that.
Chris Work, CFO
Yes. I think as we look at the comparison, at least in Q1 and Q2, right, our commentary was that in Q1, we believe we will regain the sales lost in 2020, and we would be ahead of 2019. And as we look at Q2, we think we'll be down in sales to Q2 2020 and up over 2019.
Jonathan Komp, Analyst
Could you comment on the hard goods category? It seems like you might be attracting new customers through that segment. I'm interested in what your data indicates about capturing a new customer base and your ability to cross-sell them and encourage them to continue purchasing across the store or online in different categories.
Rick Brooks, CEO
Yes, Jon, I'll start. I know Chris will be able to share some data with you on this too. But if you look at the participation data in skateboarding, I mean, it's been pretty remarkable over the last... more than the last year, to be clear, over the last couple of years. And I think one of the exciting things for us is that there's been a lot of women taking up skateboarding for the first time. So that's been a super exciting aspect of our business. And again, you'll see that in the participation data from the industry groups out there that publish it. So I think from that side, yes, we are. And when we got on this skate trend, we're really beginning in '19, in early '19, I think that January, February of '19, where it just kind of exploded across the globe. We looked at that and said, we ought to own more share of that market because we've seen so much consolidation over the last decade in retail that we ought to own a bigger share. And so I know Chris and our product team actually predicted that, we thought we would trough this multiyear scale cycle. We predicted we'd see a skate peak as a share of our business at a higher level than it ever has previously through the cycle and simply because we owned more share in the market globally. And so I think, yes, we have seen new customers come in, particularly on the female side. We've also seen new customers because we are the destination now. We sold more of the particularly assembled component skateboards than anyone in the world at this point. So I think we benefited from that. And I'll let Chris share some of the data around that.
Chris Work, CFO
Yes, absolutely. I think, as Rick pointed out, this is a trend that's really run strong for us for two years. And like a lot of trends in our business, we definitely see ebbs and flows. The last skate cycle we saw was 2012 through 2015, and it was pretty tough. Between then and what we saw happened in really the beginning of '19. As you guys know, we typically start to break out some of our category performance, specifically in our 10-K here that will come out early next week. But normally, we have some movements between categories, but we actually had a pretty seismic movement this year with men's apparel, accessories, and women's apparel staying relatively constant year-over-year, but we saw hard goods, both the skate and snow side of the business, but primarily driven by skate, go from 13% of our business to 19% of our business. So if you look at that over a two-year stack, it's gone from 10% of our business to 19%. So I think you see really one of the higher levels of penetration we've ever seen. The offset to that was mostly in footwear, but this is a trend that we're really happy with. We're happy that we've got it. And we think it's something that could continue to propel us into 2021, albeit, we think we've got good plans across all of our categories to drive into this next year.
Jonathan Komp, Analyst
And then is that something just given the nature of the footwear you're selling, just any thoughts on why that hasn't translated? Or is there some sort of pent-up higher level of demand that maybe supply isn't meeting today?
Rick Brooks, CEO
I think these are really trend-related issues. We've always observed fluctuations in our business. You might recall that when skateboarding saw a decline last time, we transitioned into a significant footwear surge. These trade-offs in our business mix are not unusual for us. I believe Forward reached a near high at some point, but it has been on a downward trend over the last couple of years. This is just part of our normal cycles, and our objective is to maintain our share of our customers' spending. As they shift away from footwear, we've managed to recapture those dollars in skate products while also keeping a balanced mix in the apparel and accessory categories. I view this as a portfolio approach that covers all the lifestyle aspects we provide to our customers, along with our strategy for managing brands and introducing new ones. This is simply the typical evolution and changes within our business, which leads to these cycles. From 2012 to 2015, we experienced a significant skate boom, followed by a decline and some negative years, only to see footwear gain traction again. These fluctuations are standard for us. At the same time, we are examining footwear to determine how we can minimize any losses. We have strategies in place across all departments to not only boost overall volumes but also to mitigate declines so that they don't overshadow the progress we're making in other areas. Overall, I view this as standard portfolio management that we consistently observe over multiple years. Yes. I'll let Chris discuss our approach to unit growth economics. I'll briefly touch on the current environment in Europe, which reflects the real estate situation we see almost everywhere. We're experiencing some of the most favorable real estate markets in terms of economics that we've seen in a very long time, both in the U.S. and Canada, as well as in Europe and Australia. This positive trend is partly due to the consolidations happening in retail and its impact on landlords. For retailers with the necessary capital, it’s an excellent opportunity to expand globally. Before handing it over to Chris for insights on four-wall contributions, consider our performance in Europe on a country-by-country basis. As we expand into markets, we identify the critical points in our investments. We already have several profitable markets in Europe because we've made investments across multiple stores, allowing us to leverage those markets. With our established store base, we’re seeing significant growth in our web business concurrently. We aim to approach our European business with a focus on where the returns and tipping points are as we build out markets and increase our total volume. We'll utilize our omni-channel tools and strategies on a country-by-country basis. Extensive work is being done to understand where those tipping points are in our investments, which will inform our future expansion plans across larger and smaller countries, considering the economic tipping points in each market. However, I want to emphasize that we still expect our stores to be profitable on their own and to meet our economic standards for deals, which remains unchanged. Everything else follows the omni-channel model in terms of generating returns. Now I'll let Chris explain our perspective on store economics.
Chris Work, CFO
Sure. I'll add to what Rick mentioned about Europe. First, we need to disregard 2020 since the stores were closed. Looking at the past several years in Europe, one of the reasons we feel confident is the improvement in performance of our store classes over time. This acquisition for us took place in 2012. From 2012 to 2015, we focused on testing and exploring new markets, including those with snow and without, as well as locations in countries like Germany and Switzerland. We aimed to understand whether high streets, off-high streets, or malls were better for our expansion. A key aspect of our model is our high web penetration, which serves as a good indicator of where our customers are. Additionally, with operations in 14 different languages across Western and parts of Eastern Europe, we gain valuable insights into where stores might succeed. As we moved through the middle of the last decade, we shifted from merely testing to more scientifically placing our store classes. We observed that each class of stores became stronger as we learned what worked best. For instance, when we placed stores in malls or street locations, we fine-tuned our approach based on the results. Looking forward, after 2020, we anticipate these groups of stores will continue to strengthen, similar to our experience in North America. Regarding unit metrics, as Rick noted, we evaluate them on a four-wall basis but recognize that every new store leads to increased web traffic in the surrounding area. We aim for a cash-on-cash return within 18 to 24 months and expect to achieve a high internal rate of return over three to five years. In established markets with lower risk, our approach may differ compared to newer, higher-risk markets. As I've stated before, and as Rick emphasized, we are pleased with the progress we are making. We're approaching a tipping point where our corporate support can effectively back these stores, and if we can maintain our execution over the past few years, we believe this market will become profitable for us.
Rick Brooks, CEO
In fact, just to finish Chris' thought there, Jon, we use the same metrics globally for returns on four-wall returns on stores. So we don't change those metrics from what we've learned historically that we do hold ourselves to very high standards on cash-on-cash payback as well as internal rate of returns, internal rate to thresholds.
Operator, N/A
Our next question comes from Mitch Kummetz with Pivotal Research. You may proceed with your question.
Mitchel Kummetz, Analyst
I think I've got three of them. So first, on your inventory, I guess, for the quarter, your product margins were up. I think you said, Chris, 20 bps. I would have thought maybe there would be a little bit better. But then, Rick, you also made a comment about the ski season in Europe, not really happening. So I'm wondering, was there any snow clearance that took place in the quarter that negatively impacted product margin that you now have an opportunity to lap in Q4 of '21 that could be an opportunity? Or am I reading too much into something?
Chris Work, CFO
Yes. I'll go ahead and take a crack at it and let Rick jump in if there's anything to add. I'll tell you, as you look at Q4, it is really the tale of two tapes. I think we have here in the U.S. In Australia, we performed extremely well. And both in terms of sales and in terms of product margin in Canada and Europe, where we had pretty significant closures, specifically closures during the important holiday period and also a user in Europe where snow is such an important part of Q4, and the resorts weren't open and tourism wasn't happening. They had an impact on the business, and they had an impact on inventory. So I think you have kind of the two tapes being we saw stronger product margin than the consolidated results in the U.S. and Australia, and we saw tougher product margin in Canada and Europe where we were closed.
Rick Brooks, CEO
You're absolutely correct, Mitch. As Chris mentioned, the store closures, especially in Europe due to winter conditions, played a significant role. We didn't want to hold onto excess inventory, leading the market to become very promotional. We engaged actively and successfully cleared inventory, although it's never at the desired level. The situation in the U.S. is different, as we successfully sold nearly all of our snow-related products here. We are in a strong position in the U.S., but we have various strategies in place with our brand partners in Europe regarding our snow products and preparations for next year. As you pointed out, we did not want to retain that inventory, so we effectively moved it and implemented markdowns in Europe to facilitate this.
Mitchel Kummetz, Analyst
Got it. And then on your digital business, Chris, it sounds like in terms of your 2021 gross margin outlook, you expect less shipping, so that would imply your digital percentage comes down. Can you just remind us where did digital land in 2020 versus 2019 in terms of its penetration? And where do you think that ends up in 2021? And then I have one final question.
Rick Brooks, CEO
I'm going to address this, Mitch. It won't be surprising because I've mentioned this many times in recent years, but we don't view these as critical metrics, especially given our one-channel business model. We can manage costs at the operating level regardless of whether the sale is physical or digital. I want to reiterate that our aim is to empower customer choice at all points of interaction. Customers decide how they want to engage with us and choose their preferred journey. Our role is to enhance the experience for both the customer and our business based on those journeys. This is why we don't concentrate heavily on the physical versus digital sales mix. Instead, we plan to adapt and innovate based on customer behaviors to satisfy their needs. That being said, we will share the data, and I'll let Chris take over with the details.
Chris Work, CFO
Yes. And I'll just kind of quantify for the year. So we did end up at about 26.4% in web penetration compared to 16.6% last year. So that gives you kind of a perspective of how much we grew. So the web was up 51%, 51.5% compared to the prior year. And our store comp was down 4.1%, with total store sales down about 15.8%. So you do get a feeling of how we've moved across channels. I think to my expense comments, that type of growth in web has an impact on gross margin. Now they're so integrated, I'm not so sure it has the same impact on operating profit. I actually think, over time, part of our ability to grow operating profit to the levels that we have is a function of our integrated fulfillment. So that's how we think about it.
Mitchel Kummetz, Analyst
Okay. We're a little afraid to ask about digital, Rick, but thanks for giving the numbers.
Chris Work, CFO
Sorry, let me just clarify because you mentioned 2021, and I didn't address that. As we look towards 2021, we are actually aiming for results between those two levels. We believe that web penetration will not be as high as it was in 2020 since we will be opening our stores and we expect people to return to in-store shopping. I often remind everyone that we have customers who desire that physical experience. They were among the last to enter lockdown and among the first to return. Therefore, we anticipate that web penetration will be lower than it was in 2020, but we still believe it will increase from the levels of 2019, which aligns with our business plan.
Rick Brooks, CEO
Mitch, I love you too. Just so I say that I still have you made.
Mitchel Kummetz, Analyst
I anticipated your response. Regarding footwear, I understand that you navigate these cycles well, and I appreciate your approach to portfolio management. However, I'm curious about a competitor that reported today and discussed their overall footwear business. They categorize their offerings into two segments: fashion athletic, similar to yours, and a casual segment. Unlike them, you don't seem to have much in the casual footwear category, and they noted that this casual segment is outperforming the fashion athletic one. I'm wondering if this presents a potential opportunity for you if it aligns with your customer base. How do you view this situation?
Rick Brooks, CEO
Yes, Mitch. We are making strong efforts to ensure our footwear business performs at its highest level. Currently, there are only a few major brands driving our global footwear business, as many smaller brands have exited the market. It's important to recognize that our relationship with these key brand partners influences our business operations. We have a strong partnership with Nike and Vans, which makes us a significant player in our retail niche alongside their direct channels. This relationship also means we have to operate within certain boundaries. However, we are committed to experimentation and will be introducing new brands in our footwear business over the coming months. Our focus remains on advancing the business, and we aim to explore all opportunities to innovate. We strive not to experience downturns in any of our business areas, so we will continue to actively seek new avenues, optimize our existing brand portfolio with our partners, and work hard to minimize losses during this period.
Operator, N/A
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Rick Brooks for any closing remarks.
Rick Brooks, CEO
All right, well, thank you very much. And always, as always, I really appreciate everyone's interest in Zumiez and what we're doing and where we're going. So again, I want to thank all of our partners and our employees, what I think was just a really remarkable year. There are not many specialty retailers who can say they had their most profitable year ever, not many non-as such retailers can be saying that at this phase. So we're really proud of our teams. We're proud of our brand partners for supporting us through this cycle. So, thank you, everybody, and then we look forward to talking to everyone with first quarter results here in a few months. Thanks.
Operator, N/A
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.