Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. third quarter fiscal 2019 earnings conference call.
So I'm 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. business outlook and contains forward looking statements. These forward looking statements and all others.
And then some maybe made on this call they're 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 and then these filings with the FCC at this time.
I will now turn the call over to Rick Brooks Chief Executive Officer. Please go ahead.
Hello, and thank everyone for joining us on the call.
With me today as Chris work, our Chief Financial Officer.
I'll begin today's call. It a few brief remarks regarding our third quarter at holiday performance to date, then I'll share some thoughts about the future before handing the call to Chris will take you through the numbers after that we'll open up call to your question.
The third quarter represent our fourth consecutive strong back to school season, and the 13th quarter, a positive comparable sales gains.
We drove solid full price selling in each of our geographies, resulting in a comparable sales increase of 5.5% versus our guidance of 2% to 4%.
This comes on top of a 4.8% gain a year ago and 7.9% gain year before that.
We're very pleased with our performance and our teams meticulous focus on providing high quality service to the customer to every touch point.
Does this focus that allowed us to convert mid single digit topline growth into a significant improvement in profitability.
The sales gains coupled with growth Mark gross margin expansion and the benefits from numerous expense saving initiatives, we implemented throughout our organization drove a 37.1% increasing earnings per share to 75 cents, which is 14 cents above the high end of our guidance range.
Our relentless attention to serving our customers combined with a powerful operating model, we build around a single cost structure has fueled our strong track record of performance. It has to me is well positioned for continued success.
This includes a fourth quarter, which has started well with quarter today comparable sales measured through Tuesday December Threerd 2019, increasing 3.3% compared to the same period last year, ending Tuesday December for 2018.
As we reflect upon the strongly ball results from the first nine months and full year outlook, we reminded that our short term results or directly attribute to the execution of our long term strategies.
For Zumiez, our long term focus remains squarely on continue to execute the customer centric growth strategy that the company has been building and evolving over its 40 year history.
Many of the key elements of our strategy haven't changed over the decades, where others have been refined to reflect the impact of technology on consumer purchasing behavior.
Before I hand, the call to Chris for review of the numbers, let me expand on the key elements of our long term strategy.
It starts with have the right product the brands with our customers are looking for within engaging customer experience.
Our product selection made about the distinct mix of leading an emerging brands that are not broadly distributed.
Older years, we've been able to consistently achieved this balance grew strongly should see forward with our brand partners and more recently, our global reach the allowed to serve both our customers and brand partners at heightened levels.
This includes clearly articulating our culture, driven lifestyle brand position and showcasing our ability to connect with a target target audience in authentic gauging environment that is uniquely curated by our people all the way down to the local level.
Over the years, we spent significant time and resources, improving our localized merchandise assortment through investments in our people and technology that enhanced customer experience at each touch point.
Our teams across organization put a significant amount of effort into understanding our customers not only today, but how the continue evolved and what will be important to future generations.
Thinking is embedded in our culture and as reflected in who we hire and how we operate.
These teams are in tune with the local and national trends are important to our customers and can speak to them across all of our channels. This approach allows us to serve the customer and authentic way bring it all the touch points together through the customer journey.
The next factor critical to our success is speed.
With the proliferation of digital capabilities the speed of Commerce has changed dramatically in recent years.
We're already faster than most of our competitors as we have the ability to deliver all digital orders out of our stores.
This concept allows us to get product into the customers hands faster, but cutting down the shipping distance and also providing a stronger and more relevant product offerings in stores.
Looking ahead, we're going to get faster in every aspect of serving and meeting customers needs and we are today to enhancing localized assortments and our ability to get to know the customer more intimately through improved digital interactions and enhanced in store experiences.
Finally, growing internationally has allowed us to identify consumer trends that emerge locally and grow globally.
And to achieve the scale necessary to work together with our brand partners in serving our customers around the world.
Our expansion has established a strategic physical presence in eight countries across three continents with a digital platform that allows us to reach even further.
We are applying learnings and best practices from each of our markets to ensure that we're on top of the latest fashion trends and brands cycles, which can now launch from anywhere in the world and could quickly spread globally due the proliferation of smart devices and social media.
Our international business or primed for future growth.
And through exporting our operating model.
We are taking our processes and tools from the more mature U.S. operations as seen good results internationally.
The third quarter, our businesses in Europe , and Australia again performed ahead of the consolidated comparable sales growth.
With the strong comparable sales margin growth and overall store growth year to date, we've seen improved operating performance as well.
Excited about the progress being made by the Blue tomato and fast times teams continue to build upon the benefits of a globally integrated business.
We are the only retailer in our lifestyle needs second offer our brand partners global reach in major markets that meets consumer demand.
With regard to our financial model. We believe two key factors have contributed and we'll continue to contribute to our ability to drive improved results over the long term.
First as a lifestyle retailer, we have built our business to be exceptionally nibble continuously evolving with customer trends and preferences.
The capabilities, we have built continue to provide us with a defensible strategy and maintaining and growing share with our segment of the lifestyle market that seeks to be unique and different.
The first nine months of 2019 is a great example of this as we saw a category shifted our business globally with footwear and hard goods, leading the comparable sales trends, while men's and women's apparel have posted softer results.
This is a meaningful change from one year ago, when we saw the apparel categories driving our positive comparable sales.
Overall, the goal continues to be selling a full price at full margin by listening to the customer with regards to the categories and brands they want to see Zumiez.
This focus has resulted in growth of comparable sales and 34 of our 40 years is something that we believe we'll continue to be an advantage into the future.
Secondly, as we transitioned into the digital age we have done a tremendous amount of work treatment operating model that positions it needs to win with today's empowered consumer.
Combining our digital and physical sales channels to work seamlessly in service of the customer.
With one inventory as accessible from all customer touch points localized fulfillment integrated sales teams aligned goals and our strong cultural values were well positioned to scale the business in todays integrated world.
This strategy directly contributed to our 2018 results as we increased operating profit by 25.3% on a 5.5% growth in revenue for the year.
We have continued that trend into 2019, delivering operating profit growth of 58% through the first nine months of 2019 on sales growth of 4.6%.
I'll leave you with this by staying true to our customer culture and brand.
With an intense focus on long term results, we've consistently outperformed the competition and strengthened our market position.
As these thoughts that drive our long term planning and feed the blueprint for our current year success. We've established a platform for growth based upon a strong culture and brand that we are confident will support continued growth and increase shareholder value well into the future.
That will end the call the Chris for his review of our financials, Chris Thanks, Rick and good afternoon, everyone I'm going to start with a review of our third quarter 2019 results. I'll then provide a brief update on the quarter, Andy sales trends before discussing our fourth quarter guidance and our updated perspective on the full year.
Third quarter, net sales increased $15.2 million or 6.1% to $264 million from $248.8 million in the third quarter of 2018 contributed this increase were positive comparable sales growth of 5.5% and the net addition at 15 stores since the end of last year's third quarter, partially offset by.
The decrease at 1.4 million due to changes in foreign currency rates.
During the 2019 third quarter, our comparable sales were driven by an increase in transaction volume as well as the increase in dollars per transaction. The increase in dollars per transaction resulted from higher units per transaction, partially offset by decreased average unit retail.
During the quarter the hard goods category was our largest positive comping category, followed by accessories footwear and men.
Women's was our only negative comping category.
From a regional perspective, North American net sales increased $11.9 million or 5.3% to $238.5 million. Other international net sales, which consists of Europe , and Australia increased $3.3 million or 14.8% to $25.6 million, excluding the impact of foreign currency translation North American.
Net sales grew 5.4% and other international net sales grew 19.8% for the quarter.
Third quarter gross profit was $94.6 million, an increase of $7.7 million or 8.9% compared to the third quarter 2018 gross margin was 35.8% in the quarter, an increase of 90 basis points compared to 34.9% a year ago. The increase was primarily driven by 40 basis points or less.
Average our store occupancy costs 30 basis points improvement web fulfillment distribution and shipping costs and 20 basis point improvement in the write off of excess are slow moving inventory.
Product margins were flat during the quarter, despite unfavorable mix shifts across categories and geographies.
Yes, you in a expense was $70.3 million in the third quarter compared to $68.5 million a year ago as soon as a percentage sales was 26.6% compared to 27.5% in the prior year. The decrease was primarily driven by 100 basis points, a leveraging our store costs, including 30 basis points of depreciation.
Operating income in the third quarter, 2019 increased 32.2% to $24.3 million or 9.2% of net sales compared with the prior year third quarter operating income of $18.4 million or 7.4% net sales.
Net income for the third quarter was up 38.7% to $19.2 million or 75 cents per share compared to net income of $13.8 million or 55 cents per share for the third quarter 2018.
Our effective tax rate for the third quarter, 2019 was 25% compared with 26.5% a year ago period. The decrease was primarily due to a reduction in net losses in certain jurisdictions, which are excluded from our estimated annual effective tax rate due to the uncertainty the realization of deferred tax assets and.
The proportion of earnings or loss before income taxes across each of our jurisdictions.
Turning to the balance sheet cash and current marketable securities increased 39.7% to $178.6 million as of November 2nd 2019.
From a $127.9 million as of November Threerd 2018.
This increase was primarily driven by $77.6 million and cash flow from operation, partially offset by $19.2 million of capital expenditures, primarily related to new store growth and remodels.
We ended third quarter 2019, with $183.4 million in inventory down 1.9% from last year, excluding the year over year impact of foreign currency translation inventory declined 1.4% from the prior year.
Now to our recent sales results are comparable sales increased 3.3% quarter to date through December Threerd 2019, compared with the prior year quarter day sales results through December for 2018, we have provided this comparison for 2019 due the timing of the Thanksgiving holiday shift.
Comparable sales increase was driven by an increase in transactions and increase in dollars per transaction quarter at $8 per transaction increase due an increase in units per transaction and an increase in average unit retail.
Quarter to date, the hard goods category is our highest positive comping category, followed by accessories and men's.
Women's is our largest negative comping category followed by footwear.
Looking at the guidance for the fourth quarter of 2019.
Once again I'll start off by reminding everyone that formulating our guidance involve some inherent uncertainty and complexity and estimate sales product margin and earnings growth given the variety of internal and external factors that impact our performance with that in mind. We currently expect the comparable sales will increase between 2% and 4%.
For the fourth quarter of 2019 would total sales in the range of $314 million to $320 million consolidated operating margins are expected to be between 12.5% and 13% and we anticipate earnings per share will be between a $1.26 cents and $1.32 cents compared with last.
Two years earnings of one dollar an 18 cents.
Now I want to give you a few updated thoughts around 2019, given our performance year to date.
We are now building on 13 consecutive quarters of positive comparable sales.
As we look to the fourth quarter 2019, and beyond we continue to believe that we've made him.
With the investments we've made our infrastructure, creating a seamless sales experience for our customers are unique approach to merchandising as well as those investments. We continue to make an zumiez team will drive long term top and bottom line growth.
With that mind, we're updating our annual expectation for consolidated comparable sales growth to be approximately 4% compared to our previous guidance for comparable sales growth to be between two and 4% for fiscal 2019.
In fiscal 2018, we achieved peak product margins improving from the previous high point in 2017, despite a heavily branded cycle, resulting in reduction in private label share of 370 basis points in fiscal 2019 to date. We've also experienced mix shifts that have impacted margin. These mix shifts include our category sales.
Sales trending towards hard goods in footwear, which have lower product margins in the apparel categories as well as higher topline growth in our international businesses, while international product margins continue to grow and have additional opportunity. There currently lower than our us operations based upon where those businesses are in their lifecycle.
For 2019, we expect product margin to be down between 10, and 20 basis points from the prior year consistent with our Q2 earnings call update.
We continue to manage costs across the business with the more mature concepts in North America focused on leveraging at a low single digit comparable sales growth internationally, we're focused on managing cost well within the current sales and unit growth rates and driving our content is closer to breakeven reducing the impact of the losses on the overall business. We currently.
We anticipate year over year operating profit growth of approximately 25% to 30% for fiscal 2019.
We are currently planning our business, assuming an annual effective tax rate of approximately 26% compared to our prior year rate of 27.5% and.
Diluted earnings per share for the full year are now expected to be between $2.38 and $2.46 up from our previous guidance of $2.10 to $2.20 representing year over year growth between 33% and 37%.
We have opened 15, new stores in 2019, including five stores in North America seven stores in Europe , and three stores in Australia. There are no further store openings planned during fiscal 2019.
We expect capital expenditures for the full 2019 fiscal year to be between $19 million in $21 million compared to $21 million in 2018. The majority of the capital spend is dedicated to new store openings and planned remodels.
We expect that depreciation amortization, excluding noncash lease expense will be approximately $25 million for the year down approximately $1.6 million from the prior year.
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 lastly on December four 2019, the Zumiez board of directors approved the repurchase of up to $100 million of our common stock. This repurchase authorization replaces the previously approved $75 million repurchase program.
As expected to continue through January Thirtyth, 2000, 2021, and less this time period is extended or shortened by our board of directors.
And with that operator, we'd like to open up the call for questions.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby well, we compile the culinary roster.
Our first question is from Sharon Zackfia from William Blair. Your line is now open.
Hi, good afternoon.
A couple of questions on I guess, most obviously on the rate of SNA growth, which has been really really low in terms of dollar growth through the first three quarters that you're driving it kind of that mid single digit sales gains and I know Rick you alluded to this some in the prepared comments commentary.
But how do we think about SGN a going forward I mean is this kind of the new normal where you can grow question at a low.
Single digit percentage rate or is there something unusual this year that you really harvesting and it'll tick up.
Get in future years.
Sure sure and I'll go ahead and take that so.
Thank you for your comments on our M&A growth, we're pretty happy about it as well.
This is this is been a big effort of ours as we've been thinking about the business over the last couple of years in setting goals.
Really by entity in how we're planning the business in.
As we think about 2019 and how we've exited the last couple of years I think that the one benefit we've had in growth rate last year, we perform pretty well.
Before that in 2017, we did as well throughout that time, we were growing the incentive pool, and we've got that kind of to that targeted level and and beyond in so there is a benefit.
In incentives to a modest amount in how we're planning 2019 right now.
So thats one area, but beyond that it's really strong expense management across all of our entities.
This is something again, we kind of talked about in our long term planning to how do we think about SG, ne and really all costs.
We really try to optimize the.
The business and it starts with some of the things Rick talked about.
We've talked about localization and how we're thinking about one sales channel and we've really tried to break the business apart in say the.
The customer only sees us as one sales channel, we don't need to see our cost structure is too and so.
Fulfilling from stores and the way, we've been able to ship closer to the consumer all of those things had been benefits to our site to our to our overall business.
That being said we've had many other areas within SGN a.
Just in our management of store wages, how we've looked at store operations and the management of a store costs, we've really kind of gone back and looked at our web businesses across all all of our STS to say where can we optimize some of the cost there and of course attacks and some of the areas a corporate SGN as well so all.
Those are country contributing to what we're seeing on the store growth from a store growth rate I think armed sorry from SGN a growth rate I think would you. She expects from US going forward is we're going to really work.
Diligently to planted at a rate below sales and domestically here, we're looking at low single digit.
Plans in trying to plan as DNA to grow below that and internationally, obviously the growth rate from stores and topline is going to be higher based on the opportunities there, but again, we're trying to manage SGN a very very tightly.
To keep that actually in a rate pretty meaningfully below the sales rate of growth.
Really drop through that profit to the bottom line. So.
Really happy with where the rates stand for 2019, I don't think it's a direct straight line into 2020 and growing forward, we'll probably see a little higher rate of growth, but plan that rate below sales and share and I'd just add to that that I don't want you to.
To think that this is a cost saving push that we're making investments in our business to about.
Things that we think you're going to drive long term results simultaneously as Chris is laid out our ability to think about this concept the trade area Optum nation optimization of trade areas. The importance of refined localized assortments as we mentioned in the comments and how we are able to lever labor in new ways.
In a single cost structure world there are lot of initiatives.
How can interact with our consumer over the next few years in all sorts of different ways being high more highly relevant to them I think that will continue to drive. This I don't want you to think that.
This is really about cost savings.
One side. This is really about optimization of the business why we're investing for the future at the same time.
Okay. That's helpful and then on merchandise margin or product margin I know, you've kind of had that slightly negative guidance all here, but it's been kind of slightly positive through the first three quarters.
So I guess I mean, we're going to have all of that happen and the current quarter is that is that really more geographic because of the kick up and international and the fourth quarter or is it more or the category mix.
Yes, hi, it's definitely as it relates to the fourth quarter and we have been up and down we are a little bit up and product margin in Q1 down in Q2 and relatively flat in Q3 here. So.
As we think about Q4 international is just a larger portion of the business. So that explains the mix shift international is going to have a bigger impact into the fourth quarter.
But the growth is as we've really reported all year and in skate hardgoods predominantly but also footwear has been pretty phenomenal and so that mix. It within categories is impactful as well, but to your question International will have a larger impact in the fourth quarter.
In the category mix, but both will have an impact in the fourth quarter and what our plans are today.
Okay. Thank you very much.
Thanks Sharon.
Thank you. Our next question comes from the line of Jeff Van Sinderen from B. Riley FBR. Your line is now open.
Hello, Richard Magnuson for Jeff Van Sinderen.
Historically during a.
Song Skate Hardgoods cycle, what did you experience in the snow hardgoods related apparel business with the store conditions being equal were just wondering if there is a correlation you can point to.
No. There's no correlation is the simple answer Richard.
Snow is is as a function of weather to a large degree.
When you're talking about snow hardgoods, and outerwear that goes with it. So it's really a function of where does the snow and how much does it snow and does this no at our larger markets, where we do business versus our the smaller.
Markets, where.
Where we might operate around the country around the world. So it's a function of snow I don't view it is and I don't see any correlation relative to the trend skate cycle.
Okay.
And then regarding the various brands that you carry im just learning as a leadership of the brands is constantly evolving can you speak to any emerging trends that you're seeing develop and what is your latest thinking where you are in their branded cycle in the apparel business and then maybe you can touch on the trends in your footwear business as well and the outlook there.
Although I'll, let Chris you talked a little bit more deeply about the trends relative to mix of our business and things like that but.
Let me, let me start up Richard your by just saying that.
I think that where we feel good about pipeline for new brands I believe we're on target for hitting our launch this year of how many new brands, we're target to launch on annual basis. So we're not seeing any lack.
New brands coming forward into the marketplace.
From that perspective, now it doesn't mean that they become an all store by right. These many from work as local brands is where you start working with them and beginning to help them build their business.
So I I'll, just remind you that from my perspective, you have to think about our business as a portfolio of brands a portfolio of departments and categories and that at different times different things will drive the business.
And again as we've talked on our comments that can change rapidly as you've seen from last year with apparel being the driver this year with skate hardgoods and accessories being the driver.
So our our view of this both from a brand perspective emerging brands is always going to see something happened. If this is a wallet share dried and we believe we were pretty good at capturing our share of wallet.
So just committed it keep that in mind, our models about this portfolio approach to brands and and the lifestyle represent entire lifestyle through departments and category combination. So the other than that because that Chris has some comments, yes, I'd just say from a trends perspective, as we've talked about it over our history, we really try to look at kind of our top.
20 brands and.
And how they represent and we've said in the past, 20% to 30% turnover over an annual period is pretty calm and we are actually just trending slightly ahead of that through the third quarter year to date. So we'll we'll come back and report that after a full year, which is probably the best read to kind of give an idea of what's happening.
To Rick's point I think we continue to see the pipeline.
Look good a couple of the brands it moved into our top 20 worn even in our ecosystem a year ago, which is which is kind of I think are really cool sign and again highlights what we talked about over the years. It just the speed of trends and how fast things move.
So.
Overall, the top 20 brands in regards to kind of where we are in this brand cycle, our top 20 brands.
Actually through the first nine months.
A little higher.
Total penetration than they were a year ago, which.
It's historically been indication for us its can still the strength of the cycle and where our top 20 consolidating taking more of a share so.
Again overall feeling good about the make up in regards to footwear footwear has been a driver all year long we talked about that we did call out that it was just down I was down through quarter to date, but I will reiterate it was down very very slightly so.
Almost to the flat level. So we are feeling fine about where footwear stands in.
And the footwear trends have been good we still have.
One vendor that's been a bigger driver there, but we are seeing growth in other areas of footwear too. So it's.
Not just all growth in one areas and that's that's the diversity there Rick talks about both across departments as well as within department. So.
See it we obviously feel.
Very pleased with the trends of the business and where brands situations. It.
Thank you.
Thank you.
Thank you. Our next question comes from Janine picture from Jefferies. Your line is now open.
Hi, Thanks for taking the question and congrats on the great results.
Wanted to ask about the on women's apparel business I guess, that's the one piece you could maybe stays a little bit weaker right now everything else can still working really well so what's going on there can you give us some context. The just the fact that we've been stronger branded cycle and I think that the limits of house, you little bit more toward private label or how should we think about and is there. Some outlook, we can give us that.
In line for that piece the businesses from positive. Thank you.
Sure glad to help out a little bit their jeanine in terms of thinking about the women's business I think the women's is.
Tends to be a bit faster from a trend perspective than our men inside the business.
So some of that I think we tend to see more volatility around women's both on the upside in the downside traditionally I'd also remind you that I think that.
Our women's consumer.
In many respects buys men's product to a large degree and so some of the new and emerging brands. We have our brands that I think where we're not offering women's products. So that were we'll probably see some about women's from just a trend perspective bind to the smallest mens for example.
T shirts and things like that so.
What we talk about women's to be clear we were talking about is the number we're talking about there is women's apparel doesn't include accessories are women's footwear. So it's a broader mix when we look at overall women's and then again I think there is this push to for our business that.
Women don't see gender lines is clearly there just as happy to buy men's sizes in men's brands and in certain.
Subsets within like the fit better frankly.
Ben side the business. So it's not as clear as just women's apparel is been a negative but I do add that that it tends to be more volatile than the men's site tradition, because trend cycles will even faster other with inside the business and I'd just add a one thing with women's just to remember we have been down for the first three quarters of this.
Year, but we are up 10 quarters prior to that and and up pretty strong so even when I look at like the two year stack through the year.
It's still positive. So we ran some really strong results in womens and yes, we have been running down but still pretty good results overall, specifically in light of where the overall business that.
Great. That's helpful perspective, and then just anything you can give on tariffs what you're hearing from your branded partners any update there.
Okay.
Yes, absolutely.
From a tariff perspective, obviously were just like all other retailers year monitoring this very closely.
One of things we've talked about over the last few quarters, just where our exposure lands and we still are probably just over since nine one which is the last time. The last update we've had of kind of the rates going into effect, we're still probably just over 40% 40, 142% of product coming from China.
You know that I try to remind people we talk about this because that number can see bigger, but such a large portion of our business is screening balls and much of that is blanks.
That come from China, and so as we start to break that down the imported value of a blank is obviously much less than the completed values. So.
But yes, we continue to work with our vendors here.
To date, what you see through the third quarter and what's planned in the fourth quarter. There are no. There's not a material impact there are areas, where we have seen the increase tariff and a few areas, where we've seen some passthrough from our brands in but at the end of the day, it's not material to this year its.
Can you to monitor and manage as we move into 2020.
We're going to we're going to really try to take a balanced approach here of working with our vendors continuing to try and move production where possible.
Finding other potential offsets on price here and then you know in the last case scenario potentially having to raise our prices to customers. So.
It's an.
The ongoing situation, we're monitoring and.
We will kind of keep tabs on a here.
Great. Thank you.
Thank you. Our next question comes from Mitch comments from pivotal research. Your line is now open.
Yeah. Thanks for taking my questions are congrats on the quarter.
Few questions I, just want to circle back on footwear, which was.
Sounds like fairly negative.
Quarter to date, I know thats, a very small sample size. It doesn't sound like if anything you guys are concerned one so I just wanted to drill down to that I mean is there.
I know that these categories sort of flow and it doesn't sound like you feel like footwear is now something that it's going to hit a downward trajectory likely to be apparel has for the last few quarters.
And I'm just kind of wondering why why you think that is if this is just a blip or two small sample or.
I think Mitch the way I think about it and obviously we've looked at this different ways.
It's been trending really well for us all year long we've looked at this over the last two.
Q4 s and have actually seen November softer than December . So December typically has gotten stronger in footwear sales, which I think makes sense in regards to the gift giving and.
The need around Christmas time for people wanting footwear so.
So we don't have any indications at this point I would kind of class by more to your question at the smaller sample size in November obviously, the good portion of our volume here is still to come and.
We expect footwear is still being a strong part of our Q4 sales.
Got it from my perspective, historically, if it's I'd just add that again, I think footwear really booms in the post holiday period, when when our consumer our young consumers back in the sport in the store as opposed to the gift giver. So that's what we're really seen historically footwear do even better.
Okay, and then on on EBIT margin.
Guys, you're closing in on a percent it looks like based on what the Q3 guidance, you're sort of inching towards that Chris I know that.
Past when people have asked you about EBIT margin targets in sort of talked about I think 80%.
Something lower than prior period I'm, just wondering now that we're kind of getting close to that number.
Where do you think you just go from here were what's the low hanging fruit at this point on the margin side did it above 80% level does that you've kind of referred to over the past.
Yes. Thanks, Thanks mentioned I'll kind of tie this end with even Sharon's question earlier on SGN acreage. We're we're super happy with where the results are are coming in for this year, obviously on top of very strong results in 2018.
To your point the top end of our Q4 guidance would indicate operating profit or EBIT.
Close to 8% there, it's about 7.7% in operating profit compared to 6.2% a year ago. So.
Very very happy with the with the growth there.
I think where we've pushed in the past is to say high single digits and so.
With that to US means we can cut probably get closer to 10, and it's going to take some work to do that were.
Working on ways always to kind of optimize in and maximize the potential of our North America business. This year. That's very immature. Obviously you guys know we have a good opportunity to grow internationally and turn that profitably, which will which will help us a lot but.
In addition to the comments I made around Sharon's question earlier, you know there's other areas that have contributed to this operating profit or EBIT margin, depending on how you want to look at it in regards to we continue to make some traction on shrink now our CNR shrink rate come down we've we called out to the amount of excess.
In obsolete inventory management that we've been able to benefit from which is really our teams coming together and maximizing.
Some of our clearance and damage product to bring more value to that.
We've talked about occupancy leverage in and.
Opportunity, there and working on that line item and Theres, a lot of kind of DC optimization and shipping optimization projects that weve reached some benefits from and have benefits to come in the future. So.
For Us I think it's really trying to push it to.
To get back to you know that around 10% and.
We kind of but thats where were pushing toward.
Over the last question, just you kind of touched upon it briefly.
In response to that question, but profitability update on Europe .
Especially given what you've seen on international business last couple quarters, I would imagine that thats been pretty impactful on the profitability.
National business, but it's still losing money if I'm not if I'm not mistaken I think you kind of talked about getting closer to breakeven this year.
When can you get breaking even just kind of based on what you've seen over the last couple of quarters in particular.
Thanks Mitch.
It definitely is part of the mix right. When we're growing here operating profit between 25% to 30%.
Big portion of that is North America, just because it's the lions share of our business, but theres a great contribution from our international teams here as well.
We've talked about losing millions of dollars.
Over the last couple of years, we are getting.
That down quite a bit will make substantial our forecast we're going to make substantial improvement here in 2019, we'll try to give a little more color on that in Q4 I think it is important just based on the seasonality that business that we see how the Q4 comes in but our current estimates would mean, we would show we're going to making major traction there.
There in 2019, as we look to charge 2020, our current focus based on how we're planning the rest of this year and into 2020 is that we will continue to make substantial progress and this would be a business that within the next year or two.
We would be looking on the profitability side of it. So I think that we're getting very close we're really excited about our current results as Rick talked about on the call. We continue to see Europe perform very strong specifically in some of those.
Important markets outside of the Austria, which was the on the home country for the business, we've seen Germany be really strong we opened.
Finland here in the last quarter, which would be our fifth market here in in Europe , which would be starting in Austria, We added Germany Swiss the Netherlands, and now Finland, and we've seen some really good early indications from that market. So.
So really happy with that and as Rick pointed out in his comments you know international is super important to our global footprint and really meeting the expectations of the customer right. These you know and how trends emerge around the world and then obviously, serving our brand partners as well so.
Happy with how that's moving forward and.
Well, we'll look forward to given you guys more of an update here in our Q4 call and Mitch I'd just add this effort for flavor to this comment about international is when we talk about needing to invest in the current business thinking about the long term nature of driving profitability.
All these international markets take invested because for us to roll out then our omni tools practice processes and tools themselves requires scale in the marketplace. So while we were we launched in Canada or first international market, we had to make those investments they lost money in our initial years in Canada, and then as we are able to gain the scale.
We havent candidate today, we are able turnover omni tools served the customers are all new levels and actually we have a pretty strong business in Canada. These days and that's what you're seeing us do globally as we think about the business here Europe is a really big market. So requires that we make those investments are you, making as much as as we go on why delivery and good long term results.
Executing develop new tools, the new ways to serve customers that are most mature markets.
While investing in growth in those markets to gain scale, then, allowing us to implement our omni tools, which are now being able to do in parts of Europe . We're building out models and seeing the benefits of the Ami tools play out. So again this year I want for all of US to think about this at the continuum of with making investments today theyre going to pay off in the future.
Great all right. Thanks, guys good luck with solid.
Thanks management.
Thank you. Our next question comes from the line of Jonathan Komp from Baird. Your line is now Ben.
Yes, hi, Thank you I just wanted to follow up on some of the category performance and I guess just wondering when you look at the current mix.
Hardgoods accessories footwear to a lesser extent can you maybe just comment more on maybe the duration of that mix of drivers and.
Reported in the future, where you think you need to get apparel back working better to sustain the comps performance or how are you thinking about that.
Sure John I again.
As we think about this is portfolio approach, we've always been we've got to own the wallet share for our consumers and there's not many years that we do not affect not me or is that we not only don't own our share, but I think we're gaining more share.
Of their wallet as we move forward so.
I I would I would tell you that npks, we've seen better performance of the men's apparel already and as Chris said, I think where we've had some new brands going into the play Thats been very impactful in on the men's apparel line and probably again indirectly out when this too because I believe it to some extent that's women buying.
While the size of the some of these new men's brands.
But that being said you know again, we listen to the consumer we follow the consumer says I think some trend cycles move at different speeds the fastest trend cycles have to do which is.
Fashion trend versus a brand cycle, which tends to be longer in duration and I would tell you that I think a skate cycle like we're in here had those historically for us had been long cycles, both on the upside and the downside as you Recollect I think our last peak in skate was in 2000.
15, approximately had a tough 16, and then we had tough years since gate in fact, we write downs get a year ago breakeven. So they tend to be a multi year cycle is what we've seen intended to see what it's a department driven cycle like that now that doesn't mean, we're interrupted run up in skate as big as we are this year next year to be.
Clear, but I think if you thought about in terms of recapturing percentage mix of the business and skate that you could expect over a period of time over a period of years, we would we would achieve that penetration again that we've historically achieved in skate hardgoods. So each of the each of the different kinds of trend cycles move at different speeds.
And I would expect because the the fashion Transacts move faster, we'll see some things trend down well. The next 18 months and we'll see all new things being introduced.
Brad cycles, I think as we said earlier, we feel good about the pipeline where rat.
We've had some good success with new brands. This year in the business. So I think I don't have any major negative for you there and then on the on the category type of Department category kind of kind of combinations will tend to be longer lasting has been our history multiyear cycles and again. So I think we've got some some room with skate to go and I think the right way to think about it is.
Do we get back to the peak penetration we put in prior cycles.
And that's that's where I wanted to follow up actually I'm scale I guess two questions.
Escaped our first escape item, that's gifted for holiday or is that our business that kicks back in next spring and then.
Just any color commentary or what you observe in terms of the competitive set following the last down cycle.
That the case, where you could maybe go deeper capture more of the share and an up cycle. That's the competitive set has changed.
Yes, good questions and I would tell you that I think that.
Skate cycle, there are fewer competitors today in the skate Hardgoods World then there were in the last cycle and so I think that we've talked about whether or not we achieved a greater deeper penetration I think the evidence we're gonna have to wait to see that play out and to see if that is going to be true, but I think.
That does the rate that skaters growing for us is pretty phenomenal and it would tend to indicate to me that we own a bigger share I think this is a good example that Jonathan where we do I believe own a bigger share than I believe our skate business is growing faster than most of the rest of the marketplace and I think we just on scale I don't know.
Cool when you come to actual lifestyle skateboard retailing, where your assembly components of boards I don't know if anyone bigger than us in the world doing it today.
So this isn't there the strip definitely strength of ours will see we've had some competition Trillium, who I will we might reach a new peak here I think we just have talked evidenced play that out.
Okay and just on the holiday is that something that's gifted or that sure.
No. It is definitely gift item. So I think now also T shirts put run bigger in the holiday season. It's a good obviously a gift item out you accessory groupings, but no I had skate Scott has always been a gift items that may not run up as high as it does in the spring just relative to mix because other categories like T shirts, and accessories run higher.
But it is it good gifting item.
Okay, Great. That's all really helpful. Thank you.
You bet.
Thank you. Our next question is from John Morris from D.A. Davidson. Your line is now open.
Hi, Thanks, Hey.
Hey, Chris Rick So really nice work here and I'm thinking.
The inventory levels, it's really great you guys were able to put up these kinds of numbers with lower inventory actually at the end of the quarter. So.
Anymore added color there is that where you're getting a lot of efficiency that we're talking about.
And where what should we be thinking about how inventories look at the end of the year.
And.
You know the just kind of turning it around do you feel like you could drive more sales.
You decide to release more inventory into the pipeline I'm I'm thinking from a perspective.
Not so much Q4, now, but how you might manage the business differently into next year, so sort of all of that inventory discussion nice nice works.
Sure I appreciate it John and I'll jump in here and then let Rick add anything at the end if you'd like.
I think from let's say, if we just step back and kind of talk long term obviously.
Going to localized fulfillment was a big benefit in inventory to us overall now that's not that's not going to directly attribute to the year over year here, but I do want just focused on the only when we closed our fulfillment center and we pushed.
Portion of that inventory out to stores, it's really allowed us to optimize and think about inventory differently over the last couple of years and Rick even talked about it in his prepared comments.
The the its benefited the experience of the physical stores because your your online demand is effectively.
Carried in the local stores, which makes it as you match those together from a planning and fulfill anup planning and allocation perspective. It just brings a better cost in store experience. Overall, so we're really happy with the inventory management I think our buying teams in our store teams in our web teams and everybody working together has.
Really really optimized inventory and and we have ways to go we have a ton of opportunities as well. So we're very pleased with the inventory management I think as you look at growth rates I would just say, let's look at it over a multiyear period last year at this point.
We saw inventory increased 19.1% at the same quarter. So.
Over a couple of year period, our two year stack. This is still a pretty good increase for us, but really that's just a factor of doing I think what you're asking in the latter part of your question of if you had more inventory could you do more and and where we got to last year was that by increasing more inventory, bringing in more Q3 receipt and getting that inventory.
In a better balance position heading into holiday.
We did think we can do more and I think it. It showed good results last year and as we manage to this year. We we thought we could take it down a little bit and and we did that but overall, we feel like inventories in a really good spot. We're about we're more current than we were a year ago across all of our entities. So the health of the.
Great and a good spot and.
We're excited to see how this fourth quarter plays out and the only thing I'd add John to Chris' comments is again I just want to reemphasize that the quality of inventories really strong again were more current as Chris said across all of our entities. So we really feel good about that the teams have worked harder, but again about keeping pace keeping things and good current position.
Funds, which of course is going to be helps us offset some of the market challenges relative to mix and shipped in the business. Yes, I think I would tell you that is a positive for us in the cycle like this and although it's a small still overall small percentage our business relative to mens or womens apparel for example, skate hardgoods skate hardgoods as a quick turning business. So if you actually looked at our inventory.
There were running down actually significantly there and inventory relative to this.
A significant gain it just we're able to program that worked closely with our brand partners. We are very important retailer for our brand partners and so we're able to turn thats up actually a faster turn category for us because we land we can land decks every week and.
We're literally build plans with our partners as or what we're going to need of when we're going to need it and so we work really well together partners and that tends to be faster turning business was a small part of overall inventory position. We are I can tell you have larger.
We are down more in skate inventory why running up a huge amount. So it's just a quick turn the fact is that's a trendy business for us helps us a little bit just because as a quick turn business.
Yes, and we can see that better inventory in the stores. They look great, but one other quick question, Chris on the tax rate for the fourth quarter.
Can you just true it up for us for Q4, because it looks like the full year. I think you said would be 25%. So that would imply Q4 would be down quite a bit too and I'm. Just I just wanted to check that number with you.
That's correct, yes, we would we would expect.
Q4 to be.
Down even significantly to our Q3 rate, which was 25 and I think the the big challenge here and actually the benefit we've had throughout the year is.
It's really most closely tied to our international business as you guys know, we do have evaluation allowance on the.
On the losses that we sustained in Europe , which means we cannot recognize the any tax benefit in the losses to operating profit flow straight to the bottom line.
So that has the inverse impact in the fourth quarter, where this is the quarter that our operations there make money, it's their largest corridor and so we're going to see a positive benefit to the bottom line of.
The see operating profit drop straight down to net income and offset some of the net operating losses, we have in the entity. So.
So you'll see that benefit which is obviously driving the lower tax rate in the fourth quarter and then to our annual guide as.
That we gave in our in our script.
Should we be thinking about next year around 25%.
We are working taxes, I think I think where we land here for 2000.
19 will be a good draft for where it will be long term, obviously more profitable that we can make our international operations. The more benefit we should have there.
And so yes, I think that this is probably a good benchmark to start with for 2020, and we'll try to provide some more color as we get to our Q4 call.
Got it thanks, and good luck for holiday guys. Thanks appreciate it.
Thank you as a reminder, ladies and gentlemen, if you have a question. Please press the star and the number one key on your Touchtone telephone.
At this time I'm showing no further questions I would like to turn the call back over to Rick Brooks for closing remarks.
Alright, Thank you very much and we appreciate everyone's interest in Zumiez and thanks for all your questions today and of course, we wish you all the best in the holiday season, and we'll look forward to talking to you again with our fourth quarter results in March thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.