Earnings Call Transcript - ZUMZ Q3 2025

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to the Zumiez, Inc. Third Quarter Fiscal 2025 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 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 filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer, Mr. Brooks?

Richard Brooks, CEO

Hello, and thank you, everyone, for joining us on today's call. With me today is Chris Work, our Chief Financial Officer. I'll begin with remarks about our third quarter performance and the momentum we're building as we head into the holiday season before discussing our strategic priorities. 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. We're very pleased with our third quarter performance delivering top and bottom line results that were up meaningfully versus last year and exceeded our expectations. Comparable sales grew 7.6% on top of a 7.5% increase in the year ago quarter, representing our sixth consecutive quarter of positive comparable sales growth. Once again, it was our North American business fueling our performance as comps in the region accelerated to double digits, bolstering our confidence heading into the critical holiday season. After a successful back-to-school period, sales remained strong throughout the quarter, reflecting the effectiveness of our merchandise assortments and attracting customers who pay full price even during less busy seasons. Encouragingly, our third quarter comp performance was driven by contributions from multiple areas of our business, led by women's and hard goods, which were up strong double digits along with low to mid-single-digit gains from both accessories and men's. High single-digit comps and robust full price sales boosted gross margin, which combined with improved expense efficiency raised operating income significantly year-over-year. Earnings per share reached $0.55 in the quarter, well above the high end of our guidance of $0.29. Looking forward, we are increasingly confident in closing out the year with strong holiday results. The fourth quarter is off to a good start with comparable sales through this past Tuesday, up 6.6%, including an 8.7% comp gain over the Black Friday, Cyber Monday period, which bodes well for the remainder of the holiday season. We are pleased with the momentum we have seen in our results as the year has progressed and are encouraged that we're now seeing comparable sales growth on top of comparable sales in the prior year. We believe that our strategies have the company well positioned to build on our progress over the near and long term. Due to this, we remain focused on the same three strategic priorities that have driven our success. First, driving revenue growth through customer-focused strategic initiatives. Our commitment to refreshing our product mix with innovative, distinctive offerings continues to generate exceptional customer response. Momentum from introducing over 100 new and emerging brands annually has carried forward into 2025 with these new and emerging brands representing an increasingly important component of our sales mix and validating our merchandising strategy. Private label performance remains a standout success story, continuing to reach new heights and representing our highest penetration levels in company history. This sustained expansion demonstrates our organization's ability to identify emerging trends and create compelling products that resonate with our customers, while simultaneously enhancing our margin profile. Our investments in delivering exceptional customer experiences across both physical and digital touch points continue to yield results. The enhanced staff development programs and technological capabilities we've implemented allow us to engage with customers through increasingly personalized and meaningful interactions, strengthening the relationships that have been the foundation of our success. Second, sustaining our rigorous commitment to profitability optimization across our geographic footprint. Within North America, our premium pricing strategies continue to support both margin expansion and market share growth. While the operational improvements we've executed throughout the year are generating meaningful benefits. Our continued focus in this area is key to establishing a more efficient and profitable business framework that positions us for sustained success. Regarding our international operations, while Europe continues to face challenging market conditions, we remain committed to our long-term strategy in these markets. We're actively working to drive revenue through our distinctive product offerings, while maintaining our commitment to premium pricing and disciplined expense management. While European comparable sales are down low single digits, the trend line improved from the second quarter, and we continue to see product margin gains through disciplined full-price selling. We have confidence in the long-term potential of these markets, particularly given our ability to identify trends locally in each of the markets before they expand internationally. Third, capitalize on our solid financial foundation to manage volatility by funding strategic expansion. Our financial position remains exceptionally strong, providing us with the flexibility to continue investing in our strategic objectives, while delivering value to shareholders. This financial stability enables us to navigate the ongoing uncertainties in the macro environment, while simultaneously positioning the company for long-term growth. Despite operating in an environment characterized by economic volatility, evolving trade relationships, and global instability in certain regions, I'm increasingly confident in our ability to generate value for all of our stakeholders. The fundamental strategies that have powered our success throughout our history continue to demonstrate the relevance and our team's proven adaptability and execution capabilities fuel my optimism about our trajectory. Our direction remains clear and consistent, maintain our dedication to delivering distinctive fashion-forward merchandise through customer connection strategies that have driven our growth while preserving the operational discipline that has strengthened our financial performance. Before turning things over to Chris, I want to express my appreciation to our entire organization for their continued commitment and adaptability. Your dedication to our values and our customers remains the foundation for all of our achievements. With that, let me hand things over to Chris for our financial review.

Christopher 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. Third quarter net sales were $239.1 million, up 7.5% from $222.5 million in the third quarter of 2024. Comparable sales were up 7.6% for the quarter. As Rick mentioned, the primary driver was our North America business, which shows outside strength even as macroeconomic uncertainty spurred by global trade policy continues. For the third quarter, North America net sales were $202.8 million, an increase of 8.6% from 2024. Other international net sales, which consist of Europe and Australia, were $36.3 million, up 1.7% from last year. Excluding the impact of foreign currency translation, North America net sales increased 8.7% and other international net sales increased 3.1% year-over-year. Comparable sales for North America were up 10%, marking the seventh consecutive quarter of comparable sales growth in the region. Other international comparable sales declined 3.9% in the third quarter, but showed sequential improvement from the second quarter. From a category perspective, women's was our largest positive comping category, followed by hard goods, men's, and accessories. Footwear was our only negative comping category. 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, while units per transaction were roughly flat year-over-year. Third quarter gross profit was $89.8 million, up 14.7% compared to $78.3 million in the third quarter of last year. Gross profit as a percentage of sales was 37.6% for the quarter compared to 35.2% in the third quarter of 2024. The 240 basis point increase in gross margin was primarily driven by 110 basis points of leverage in store occupancy costs on higher sales and the closure of underperforming stores, 100 basis points of improvement in product margin and 30 basis points of benefit from lower inventory shrinkage. SG&A expense was $78 million or 32.7% of net sales in the third quarter compared to $75.9 million or 34.1% of net sales a year ago. The 140 basis point decrease in SG&A expense was driven by a 110 basis point decrease in non-wage store operating costs and 80 basis points of leverage of store wages tied to higher sales and the closure of underperforming stores. These benefits were partially offset by a 40 basis point increase related to annual incentive compensation. Operating income in the third quarter of 2025 was $11.8 million or 4.9% of net sales compared with operating income of $2.4 million or 1.1% of net sales last year. Net income for the third quarter was $9.2 million or $0.55 per share. This compares to a net income of $1.2 million or $0.06 per share for the third quarter of 2024. In the third quarter of fiscal 2025, we benefited from a one-time tax item, which increased diluted earnings per share by approximately $0.09. Our effective tax rate for the third quarter of 2025 was 26.1% compared with 63.4% in the year ago period. The year-over-year decrease in the effective tax rate was primarily driven by improved operating results, the allocation of losses across the jurisdictions in which we operate and the previously mentioned one-time tax item. Turning to the balance sheet. The business ended the quarter in a strong financial position. We had cash and current marketable securities of $104.5 million as of November 1, 2025, compared to $99.3 million as of November 2, 2024. The increase in cash and current marketable securities over the trailing 12 periods was driven primarily by $50.5 million in cash provided by operating activities and the release of $3 million in restricted cash. This was partially offset by share repurchases and capital expenditures of $38.3 million and $12.5 million, respectively. As of November 1, 2025, we had no debt on the balance sheet. During the third quarter, we repurchased 300,000 shares at an average cost, including commission of $18.61 per share for a total cost of $5.4 million. Fiscal year-to-date through November 1, 2025, the company has repurchased 2.7 million shares at an average cost, including commission of $14.18 per share and a total cost of $38.3 million. As of November 1, 2025, we had $1.7 million remaining on the $15 million repurchase authorization approved by the Board on June 4 of this year. We ended the quarter with $180.7 million in inventory, down 3.5% compared with $187.2 million last year. On a constant currency basis, our inventory levels were down 5.1% from last year. We feel good about our current inventory position. Now to our fourth quarter-to-date results. Net sales for the 31-day period ended December 2, 2025, increased 7.5% compared to the 31-day period in the prior year ended December 3, 2024. Comparable sales for the 31-day period in December 2, 2025, were up 6.6% from the comparable period in the prior year, and we are seeing changes in foreign exchange positively increase total sales growth by approximately 1.7%. From a regional perspective, net sales for our North America business for the 31-day period ended December 2, 2025, increased 6.7% compared to the 31-day period ended December 3, 2024, while our other international business increased 10.6%. Excluding the impact of foreign currency translation, North America net sales increased 6.7% from the prior year, while international net sales increased 2.5%. Comparable sales for North America increased 7.8% for the 31-day period in December 2, 2025, compared to the same weeks in the prior year, while comparable sales for our other international business increased 2.6%. From a category perspective, hard goods was our strongest comping category followed by women's, accessories, and men's. Footwear was our only negative comping category quarter-to-date. The increase in comparable sales was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transaction were up for the period, driven by an increase in average unit retail and an increase in units per transaction. With respect to our outlook for the fourth quarter of fiscal 2025, I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales, product margin, and earnings growth given the variety of internal and external factors that impact our performance. This is even more pronounced in today's environment with the current tariff situation that adds additional uncertainty and complexity to pricing and the potential to limit the ability of our customers to continue to spend. Our recent trend line in North America has been very encouraging and provides confidence as we head into the heart of the holiday selling season. That said, we think it is prudent to balance our current domestic momentum with some near-term conservatism given the general uncertainty in the macro environment and recent trends where we have seen non-peak consumer traffic soften. We are anticipating total sales will be between $291 million and $296 million for the 13 weeks ended January 31, 2026, representing sales growth of 4% to 6%. Total comparable sales are planned to be in the 2.5% to 4% range. This reflects continued strength in North America and comparable sales planned in the 4.5% to 6.5% range. Comparable sales in our international business are planned to be tougher as we anniversary promotional trends from the fourth quarter of 2024. Internationally, we expect comparable sales to be down in the low single digits, with overall growth in product margin dollars year-over-year as we continue our efforts to drive full-price selling. For the fourth quarter, we are expecting product margin to increase modestly from the fourth quarter of last year. Consolidated operating income in the fourth quarter is expected to be between 8% and 8.5% of sales, and we anticipate earnings per share will be between $0.97 and $1.07 compared to EPS of $0.78 in the prior year. We estimate that our fourth quarter diluted share count will be approximately 16.5 million shares, which excludes any stock repurchases beyond the end of the third quarter. Regarding full year 2025 results, we have performed well in North America during the important back-to-school season and start to the holiday shopping, which is generally a reasonable indicator for overall holiday performance, but continue to experience headwinds with our international business. Overall, barring a significant downturn in the economy for the full year, we believe that we'll see year-over-year total sales growth between 4.5% and 5%, and despite the closure of 33 stores in fiscal 2024 and approximately 21 store closures planned primarily in late 2025, which combined are estimated to have a negative impact on sales of roughly $15 million for the year. We anticipate 40 to 50 basis points of growth in product margin in 2025 on top of 70 basis points of improvement in fiscal 2024. We anticipate driving additional gross margin leverage through other expense categories such as occupancy, distribution, and logistics, and finally, we believe that we can hold our 2025 SG&A costs relatively flat as a percentage of sales with our fiscal 2024 results through a continued focus on expense management while also investing in important long-term strategic initiatives. This is inclusive of the previously mentioned $3.6 million settlement of a wage and hour lawsuit in California as well as meaningful growth in our incentive costs on stronger performance. Combined, these expectations will drive a year-over-year increase in operating margins and net profit for fiscal 2025, with anticipated earnings per share between $0.57 and $0.67 compared to a loss of $0.09 in 2024. Included in these fiscal 2025 expectations are the following: six new store openings during the year, including five in North America and one in Australia. We also plan to close approximately 21 stores in fiscal 2025, including up to 18 in the United States, one in Canada, and two in Europe. We expect our capital expenditures for 2025 to be between $10 million and $12 million compared to $15 million in fiscal 2024 and $20.4 million in fiscal 2023. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $22 million, in line with the prior year. And while the effective tax rates have fluctuated significantly by quarter, we anticipate our full-year effective tax rate will be roughly 51% to 54% in fiscal 2025. We are currently projecting our diluted share count for the full year to be approximately 17.2 million shares, which excludes any stock repurchases beyond the end of the third quarter. And with that, operator, we'd like to open the call up for questions.

Operator, Operator

Our first question will come from the line of Mitch Kummetz from Seaport Research Partners.

Mitchel Kummetz, Analyst

Rick, maybe we can start on hard goods. Could you elaborate on what's driving the strong performance there? I think you said it was double-digit comp in the quarter, and it seems to be your leading category for Q4 to date. I mean, the bulk of your hard goods business, if I recall, is skate. I'm wondering if you're getting any contribution from snow in Europe? Or what kind of trends in skate are you seeing in the U.S. that's driving this?

Richard Brooks, CEO

Thanks, Mitch, for your question. The key factor here is skate. This trend is consistent across our global regions, including North America, Europe, and Australia. What we are finally witnessing is the reversal of a long-term negative trend that has been quite challenging for us in recent years. As you are aware, in 2020, we experienced an all-time high similar to many other outdoor activities like biking and camping due to the pandemic. Our skate hard goods business peaked at that time, but now in '24, it has reached an all-time low. However, we are cautiously optimistic about seeing a turnaround in that business as we typically would in a new skate hard goods cycle over the next few years. We will need to monitor how things progress during the holiday season, which is usually favorable for skate as it is a popular gift category. Overall, I feel positive about our positioning in this area, and after four difficult years of significant declines in skate hard goods, this marks the long-awaited turnaround we have been anticipating.

Mitchel Kummetz, Analyst

That's helpful. And then Chris, on the fourth quarter outlook, you guys were obviously performing well through the first 31 days of the quarter. What are your comp assumptions for the balance of the quarter? I mean, I think you said that you're taking a conservative approach just based on some consumer uncertainty. But can you kind of fill us in on what sort of comp is embedded over the balance of the quarter to get to your guide for Q4?

Christopher Work, CFO

Yes. I think, Mitch, as we think about the guide, we are assuming on the North America side, that it will just be a little bit softer than what we saw here in November. We saw good November, obviously highlighted, as Rick pointed out in his commentary by the Black Friday and Cyber Monday weekend was our strongest point, but we would expect it to slow a little bit here in the interim weeks between Black Friday, Cyber Monday and obviously, the important holiday week right at the end of December. So we are planning just a slight deceleration from November for North America. And on the European side, we're really encouraged by where November came in positive comparable sales and margin growth as well, really magnifying the impact to product margin dollars. But we also know, as we commented in the call that we had some promotional activity in December and January of last year, and that resulted in a benefit to sales, but obviously a detriment to margin. And so as we look to anniversary in 2025, we are looking for that trend line to decelerate and turn negative again after being positive in November. But at the same time, driving product margin dollars. So what you would expect to have product margin increases that would offset that sales decline. And that's what we are planning the business at. So the run rate from here for December and January is a negative comp in Europe that would offset those gains that we had in November.

Mitchel Kummetz, Analyst

Got it. And then on the private label business, just maybe speak to the performance in the quarter, where is the penetration today? And how much contribution are you getting from private label in terms of your product margin?

Christopher Work, CFO

Yes, I will quantify some of this, and then Rick can provide additional insights. We are very encouraged by our private label performance, which we have discussed over several quarters. Our teams have done an excellent job in driving trends. We are noticing an increasing number of customers entering our store, inquiring about our private label brands, as they recognize their value and are willing to pay full price for them. This is exciting for us. As you mentioned, we have experienced continued penetration in private label, which has increased by approximately 200 basis points year-over-year. This translates to a growth of 2 percentage points as part of our overall sales. We are pleased with this progress and how the business is performing. While private label products typically offer a higher product margin, they also contribute to our overall strategy of providing value to customers, illustrated by our promotion of four items for $135, which includes two tops and two bottoms. This promotion resonates well with our consumers, primarily driven by our private label products. Overall, we are very satisfied with the trajectory of our private label business.

Richard Brooks, CEO

I would like to add to Chris' comment, Mitch, that we have been focused on our private label initiatives over the past five years, including reinventing our trend process within the organization. What you are witnessing is a strong collective effort from our entire team towards what we now see as essential for new brands and the rapid pace of product cycles. Most new brands typically do not progress to producing cut and sew products, as they operate more like screenable businesses. We have dedicated ourselves to owning that segment through our own brands. Additionally, I want to highlight, as Chris mentioned, that we operate as a full-price, full-margin business. In the cut and sew categories of our private label offering, we are often positioned as the premium price provider among our competitors, which indicates that we are delivering something special for our customers.

Mitchel Kummetz, Analyst

And are you seeing more strength on the women's side than the men's? And is that contributing to the outperformance of women's right now? Or is that not really the situation?

Richard Brooks, CEO

We have good strength across our private label brands in both men's and women's. The mix is different in terms of penetration, but there's good strength in both sides.

Operator, Operator

And our next question is of the line of Jeff Van Sinderen from B. Riley Securities.

Jeff Van Sinderen, Analyst

Just a follow-up on Mitch's questions on private label. Maybe I missed it. Did you give the penetration of private label roughly what that is now?

Christopher Work, CFO

Yes. Year-to-date, we're running right just under 31% of total product and to Rick's point earlier, five years ago, we were right around 11% or 12%. So we have seen a large run in private label. Jeff, you've been around the story for some time. We've been over 20% in our past. In fact, we were over 20% as recently as 2015. And we saw that decrease that 11% to 12% across the end of the last decade, really on a heavy brand cycle. And now I think we're seeing our private label drive higher numbers than we've seen in the past because I think it's really hitting on trend.

Jeff Van Sinderen, Analyst

I know this is a tough question, but where do you think private label penetration peaks out? Does that go to 40%? Or are we maybe expecting something different, considering you probably didn't anticipate it reaching 31%?

Christopher Work, CFO

I think it's a really good question, Jeff. And one, obviously, as you would expect, we spent a lot of time talking internally. But it will go where the customer wants it to go. I think, is kind of our answer here. I mean, we really appreciate working with our brands and the relationship we have with brands. And as we think about the cycles I laid out on your first question, I mean, when we went from 21% to 11% we weren't trying something different. We just saw brands really accelerate and saw brands become more important to our customers. And that's the direction we went in. I will say we grew product margin during that period too. And of course, in this cycle that we're in, we're seeing our private label brands really take off. And along with some of our brands. I don't want to paint any picture that we are more predominantly private label in our stores or anything like that because I think the branded element of what we sell is so important to what we're doing, and it's important to who our consumer is. I mean you have to remember, this is a consumer that wants to individuate and be unique and different and we've talked over time about 20% to 30% turnover in our top 10 and top 20 because they're on to what's next. And that's an exciting thing about what we sell. It's also a challenging thing about what we sell because you've got to bring in newness. And I I'm just really proud of our buying team that they're able to do that both across our private label to bring in newness and also our brands.

Richard Brooks, CEO

I would like to add to Chris' comments that I agree with everything you've said. To provide some context, we'll have another brand run again. As skate declines, we’re entering a fully branded product cycle in skate hard goods, resulting in further runs. Although penetration might appear to be decreasing, I believe that our dollar volume in private label won’t decline; we will continue to grow our business financially. We will experience brand cycles, but in areas where our owned brands excel, we will still be able to expand our business. This will simply represent a shift in mix relative to how strong the brand cycles are.

Christopher Work, CFO

It's a really good point because footwear is in that same bucket. Where in footwear, we just don't do private label. So we have a large chunk of our business that is going to be branded.

Jeff Van Sinderen, Analyst

But footwear has been kind of negative lately, correct?

Christopher Work, CFO

No doubt. This has been our toughest category. Yes.

Jeff Van Sinderen, Analyst

Okay. Let me ask you this: who do you think you are taking market share from in North America? Is it the independents or someone else? Feel free to answer in any way you prefer. Also, do you believe the demographic you are targeting is changing? Are you gaining new customers, perhaps through more private label, especially on the women's side? I would appreciate any thoughts on these ideas.

Richard Brooks, CEO

Yes, I'll start, and Chris can add on, Jeff. I mean, we are laser-focused on our core customer and that the same core customer we've always been focused on, which is a young person, as Chris said a moment ago that wants to individuate and self-express their identity, they move through adolescence more so than their broader age demographic. So where we're, I think, benefiting is from this, and we may be drawing some people into that because of the faster nature of how I think how forward we are on trend. We may be trying some broader people. But I want to be clear, our focus is on our core consumer. And I think that's always a winning strategy as you think about how you serve your customers. You've got to start with your core consumer and hyper-serve them in this world. And that is our focus. And yes, maybe we are picking up in other areas, but it's because we're winning with, I think, what is one of the most influential consumers in the marketplace today, the person who's willing to lead on trend, that's our core consumer. And they may be bringing others along with them because of our ability to execute on behalf of that core consumer.

Jeff Van Sinderen, Analyst

Okay. And then I'm sorry, on taking market share, any thoughts on who you might be taking some share from?

Richard Brooks, CEO

I don’t have any major insights on that. The majority of our gains, as Chris mentioned, have come from executing on trends and collaborating with our strong brand partners. Most of our growth over the past couple of years has been driven by average unit retail. Recently, we’ve begun to see some growth in transactions as well. I think we are reflecting the market's reality, which we talked about in terms of its volatility. This indicates that our execution levels are high enough to capture a larger share of consumer spending. Average unit retail has been a key factor in driving our gains over the last two years.

Jeff Van Sinderen, Analyst

Now in the November period that you just finished, I think the transactions, I believe you said were down slightly. I'm just curious, what did you see in store traffic during this latest period?

Christopher Work, CFO

Yes, I'd have to break it into two different regions because on a consolidated basis, we were down slightly. We were up in North America, and we were down slightly in Europe. Even though Europe ran a comp, again, more AUR, DPT driven than transactions. So we did see a transaction gain in North America. And I think what we saw traffic-wise was decent comps actually throughout the month with week four being by far our strongest though. We saw, I think, a really good pickup similar to how we saw Q3 where we saw back-to-school be really strong. And then it actually stayed more stable than we anticipated through the back two months of Q3. We saw the same thing in November, where it's stable and good comps, weeks one through three, but week four, definitely more impressive.

Richard Brooks, CEO

And the longer term here, Jeff, what I'd tell you is, as consumers' income levels catch up with the rates of inflation we've experienced, I think we're starting to see the next phase. As we noticed in back-to-school, we ran comparable gains in North America in November. As consumer incomes begin to align with the rate of inflation, I believe we will see an increase in transaction rates. Victor, do we have any more questions from the group?

Unknown Executive, Unknown

I'm not sure if Victor dropped. This is Jill. Jeff, I see you have a follow up?

Operator, Operator

I see Jeff Van Sinderen is still in the stage.

Jeff Van Sinderen, Analyst

My questions were answered.

Operator, Operator

And I'm not showing any further questions in the queue at this moment. I'd like to turn the call back over to Rick for any closing remarks.

Richard Brooks, CEO

All right. Thank you, Victor. I want to express my appreciation to everyone following our efforts here at Zumiez and wish you all a very happy holiday season. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.