Q1 2020 Zumiez Inc Earnings Call
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At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this converts before we begin I'd like to remind everyone that the company 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.
Or.
Risk factors that could cause actual results to differ materially from the information that will be discussed as available in zumiez filing with the FCC.
At this time I'll turn the call over to Rick Brooks Chief Executive Officer. Please go ahead Sir.
Hello, and thank everyone for joining us on the call with me today as Chris work, our Chief Financial Officer.
I'd like to start by sharing my immense gratitude to our employees and partners for their continued dedication during these unprecedented times.
As I several months of they many of its feel anxious scared and uncertain. What lies ahead.
Dependent because clearly had a major impact on our business.
Additionally, in the last week, we once again witness the impact of injustices in our communities.
Jimmy as we strive to hire and support the people that reflect our communities and that live our values.
We invest in our employee try to promote from within and support them as a platform to serve their communities share their opinions salus assumptions and put their energy towards the causes they believe it.
I'm proud to serve as part of the series team are confident that by living some of our core values of of equity and inclusion and driving people to action. We can make a difference we all work together.
Now I'd like to make a few remarks and the current status of the business then I'll share some thoughts on our first quarter performance and the rest of the year before joining the call to Chris who will take you through the numbers after that we'll open the call to your questions.
Fiscal 2020 got off to a strong start with first quarter sales and EPS tracking ahead of expectations through early March. However, our performance soon fell off as many of our markets enacted measures to help slow the spread of cobot 19, including requiring all non essential businesses to close and people to shelter at home.
Following the guys from health officials and local governments, we made decision to close virtually all of our stores as of March 19th the.
In order to protect the health and safety of our customers employees and the communities we operated.
With our brick and mortar locations temporarily closed to the public we immediately shifted our focus to increasing financial flexibility and directing resources towards continuing to engage in service our customers through our digital platforms.
The long track record of effectively managing the capital with organization and quickly adapting to changing environment, we're confident in jimmy's ability to whether this crisis and emerge in a position of strength.
In order to achieve this we've had to make some difficult near term decisions.
First we unfortunately had to eliminate virtually all hours for our part time staff.
We also suspended all hiring eliminates actually all planned fiscal 2020 bonuses and the late the majority of merit raises.
We also took steps to further strengthen our balance sheet by reducing planned inventory receipts extending payment terms delayed or canceled select capital projects, including new store openings and pausing our share repurchase program.
Finally in terms of rent we suspended most payments why we continue discussions with our landlords about potential rent relief. During this period our stores are closed.
We've had to make many changes to our business in response to to the Cobot 19 pandemic one area that remain constant is our commitment and our investment in ARPU.
We've discussed at length over the years, the significance of our culture and brand and how they serve is critical competitive advantages that have helped us win throughout our 40 plus year history.
The most significant quota of our culture and brand has always been and will always be our people.
With this mindset, we made the decision to pay our full time employees throughout the pandemic.
This was a meaningful commitment and one that we believe will benefit all of us in the short and long term.
In fact, we're already starting to see the benefits in our results.
This started preopening as our teams continue to connect with our customer digitally through social engagement and fulfilling in our stores and this is only magnified since starting to reopen process.
Our teams have been able to collaborate and execute quickly and safely reopening our stores as state and local governments begin, allowing certain non essential businesses to resume operations.
We cannot be more proud of the dedication exhibited by our teams during what has been the most difficult operating conditions. The company has ever faced.
We banded together taking care of each other and maintained a strong commitment to our customers.
We learned to work effectively together why physically apart from one another in order to maintain the needs of the business and success at successfully navigate the new challenges created by this unprecedented situation.
The benefits of our one channel operating model weren't fully evident prior to covert 19 I believe they are now as we've been able to optimize our inventory management and fulfill our digital demand using store fulfillment quickly yet in a safe and efficient manner.
We ended the first quarter were 65 stores open for business, representing 9% of our entire store base.
And as the end of May that numbers increased to 493 stores or 69% of our entire store base.
The worked at our field teams and supporting departments have done to open stores in accordance with governmental regulations have been nothing short of amazing.
We've done incredible job balancing the safety of our employees and customers, while still providing a unique and authentic shopping experience.
This collective effort to reopen has gotten us off to a great start with total may sales declining 8.6% compared to the 35% decline in the first quarter.
With comparable sales up 79.6% in may consisting of our open stores in digital activity. We are well ahead of expectations for the month.
Looking ahead, there is still a great deal of uncertainty about the state of retail the global economy due to the impacts from the code 19 box and there's still a lot of work ahead to continue navigate the current environment.
Like Sumita's done throughout its history will listen to our customers and adapt.
Thanks to our dynamic teams and one channel mentality, we are well positioned to pivot to meet the needs of our customers wherever whenever and however, they want to engage with us.
We learned a great deal some recession of 2008 in 2009 about how to serve the customer during challenging times and how market consolidation can be a benefit to our business.
Much like that recessionary period, we lead the current environment will accelerate further consolidation globally and our focus on the customer has uniquely well positioned to gain further wallet in buying share as we emerge from this crisis.
We think about this time period much like ECCMID economic downturns in the past must be smart, how we navigate the business challenges.
We're also looking for long term strategic investments that will set us up for the future.
These include great real estate opportunities, new tools with our omni channel environment and other strategic investments to support the next era of intimacy and now with our customers.
The strength in our financial position can be a significant advantage in these times.
I have great confidence in our teams in the proven ability to navigate through unforeseen challenges.
Our response to the pandemic has highlight the strength of our culture and brand and bolstered my optimism about emerging even stronger from this current crisis.
With that I'll turn the call to Chris to discuss the financials.
Thanks, Rick and good afternoon, everyone going to start with a few high level comments on the financial strength to the business review, our first quarter and then provide an update on may sales before discussing a few updates on the full year.
We entered fiscal 2020 in a strong financial position with cash over $250 million and coming off the highest earnings per share in the history of our company.
This resulted from years of commitment and hard work by our team coupled with strong financial planning.
Now turning to closure and subsequent reopened we have continued to see the strength of our one channel model and our stores working diligently to serve the customer.
The business ended the first quarter in a strong financial position cash and current marketable securities increased 29.3% to $217.2 million as of May 2nd 2020, compared to $168 million has been before 2019.
This increase was driven by cash flow generated through operations offset by capital expenditures and $13.4 million of share repurchases. They were executed during the first quarter prior to our store closings.
As of May 2nd 2020, we have no debt on the balance sheet, but you have approximately $14.4 million in deferred payments associated with deferred lease payment and governmental programs.
We continue to maintain access to our unused credit line of 39 $5 million.
We ended first quarter 2020, with $136.4 million in inventory compared with $136 million in inventory last year inventory grew only 0.3% from the prior year as our merchandising teams work to cancel or push out orders to currency impact of declining sales due to store.
Our closures.
Given our strategy to fulfill orders from stores inventory in a large percentage of our stores continue to move through digital order fulfillment rather than remaining stagnant during the shutdown.
Our overall, aged inventory as a percent of total inventory is up slightly however, overall, we feel well position as we move into the reopened phase.
During the first quarter, we repurchased $13.4 million or 700000 shares of our common stock at an average purchase price of 19 Dollarsthirty one set we paused the repurchases when our stores closed and we currently at $86.6 million remaining in our stock repurchase authorization.
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Turning to the income statement the majority of our commentary here will be focused on total sales as our comparable sales policy removes close stores from the calculation. After they have been closed for seven consecutive days.
Given this we view total net sales is the best indicator of business performance during this challenging time.
First quarter net sales decreased 35.3% to $137.8 million compared to $212.9 million in the first quarter 2019. The decrease in sales were driven by the impact at Cobiz 19, and the closure of our physical retail stores across the world offset by gains.
Our online sales throughout the period.
From a regional perspective, North American net sales decreased $71.4 million or 38% to $116.6 million.
Our international net sales, which consists of Europe, and Australia decreased $3.7 million or 15% to $21.2 million.
Excluding the impact of foreign currency translation, North American net sales decreased 37.9% and other international net sales decreased 11.7% for the quarter.
Now I'd like to provide you a little more color about the keyed into the quarter, including results prior to our store closings and the poster store closing results.
We started to feel the negative sales impacted the cobot 19 situation in the second week of March for the first five weeks in a quarter through March seven total sales were up 7.5% from the same five week period in the prior year for the finally, we to the quarter, which included nearly all of our stores being closed for the majority of that timeframe.
Total sales were down 60.3% despite growth in our online sales of 75.9% as we shifted efforts to serving our customers digitally.
From a category perspective, all categories were down in total sales with hard goods being R&D negative followed by women accessories footwear and men's clothing.
First quarter gross profit was $23.7 million compared to $66.5 million in the first quarter of last year and gross margin was 17.2% compared to 31.2% a year ago.
The decrease was driven primarily by 790 basis point increase in our store occupancy costs due to use a continuation of rent charges without associates sales during a period of closures.
While a significant portion of cash rent payments were deferred the income statement continued to reflect all occupancy charges due during the quarter.
The gross margin decrease was also driven by a 350 basis point increase in order fulfillment and distribution cost due to increased web activity as result of cobot 19 related historically measures as well as de leverage across our distribution center fixed costs, including the continuation of wage payments.
Same store closures.
Also a 140 basis point decrease in product margin and a 90 basis point increase in Kobe 19 related impairment of our right of use assets.
At DNA expenses was $51.6 million in the first quarter compared to $65.5 million a year ago and decrease in 21.2%. The decrease in asked you name was driven by lower store operating costs. While stores were closed combined with the actions we took to lower overall expenses in response.
The impact from Coven 19 at rig covered earlier.
This number also includes the investments that we have made in our people in the store system and home op, Ed where we have maintaining paid all full time staff throughout the closures. These investments have been pivotal and maintains a strong culture here I do need as well as positioning ourselves to get back to business as quickly as possible.
Across the country when it's Dave to do so.
Operating loss in the first quarter 2020 was.
$27.8 million compared with operating income in the prior year $1 million net loss for the first quarter was $21.1 million or 84 cents per share compared to net income of zero point $8 million or three cents per share in the first quarter 2019, our effective tax rate for the first quarter just 90.
I was 20.9% compared with 59.8% year ago period.
Now to our May sales results.
Total may sales were down 8.6% to the four week period ended may 32020, compared with the four week period ended June Onest 2019, as we move through the month, we continue to opening stores following the guidance a state local and international authorities in the month with 409.
83 stores open or 69% of our store base. Overall result, hence we have opened have exceeded our expectations with total sales starting amount and week, one down 35.8%, we to down 12.7% week three up 5.1%.
And we far up 8%.
It's worth noting that our total sales were up from the prior year in the last two weeks in a month. Despite the fact that we're still hundreds of stores closed at the end of May.
Total comparable sales for the period ended May 32020 were up 79.6%.
As a reminder, this includes our open stores on the first day. They are open as well as our ecommerce sales in the period by channel are open store comparable sales increased 38.5% and our E commerce comparable sales increased 181.6% during may.
The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction may dollars per transaction increased due to an increase in units per transaction average unit retail.
For May hard goods was our highest positive copying category followed by men accessories Juniors and footwear there were no negative comping categories in the month.
Due to limited visibility to the business, we will not be providing guidance for the second quarter of 2020 or the fiscal year that said, we do want to give you a few thoughts on how we're looking at 2020.
We continue to manage cost across the business understanding this challenging environment and limited visibility.
This has resulted in significant reductions in certain expenses as we work to align the cost structure to sales loss during our closure and the potential for softer sales results as we move through the year. We're currently planning asking expenses across the business to be down significantly compared to 2019 associated with your removal of.
Travel and training reductions in planned capital removal of incentive other areas of compensation and many other areas due to the variability in performance over the back half of the year. This could increase or decrease as we move through the year and gain more visibility in the sales trends.
We are planning to open approximately nine new stores in 2020, including five stores in North America three stores in Europe, and one store in Australia. This is down from our plan coming into the year of 20 stores.
This number may increase if we see the right opportunities in the marketplace.
We expect capital expenditures for the full 2020 fiscal year to be approximately $11 million compared to $90 million in 2019 in our original plan for 2020 at between $18 million and $20 million. The majority of the capital spend will be dedicated to new store openings and planned remodel and this amount.
I also increase if we're able to secure advantageous locations as we move throughout the year.
We expect that depreciation and amortization, excluding non cash lease expense will be approximately $24 million down slightly from the prior year.
And we are currently projecting our share count for the full year to be approximately 25.3 million shares at this point, we're not expecting any share repurchases until we have further visibility into the business.
With that operator, we'd like to open the call up for your questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please stand by what we compile the Q and a roster.
Our first question comes from Sharon Zackfia with William Blair. Your line is note.
Hi, good afternoon.
That's a pretty impressive recovery you've seen in sales, particularly in the back half of May obviously make you alluded to what you did with your full time partners and how that's helped I guess I'm also curious.
If you're seeing variation with the opened stores across regions.
What what if any kind of pent up demand do you think is embedded in these numbers and if thats or is that have been opened a lot of guys are starting to see tapering off and the trend over time or they're just stayed really really robust.
Well. Thank you for the questions. It's a really two questions always churn out on the money until that Chris we are actually prepared for your question here, particularly relative to what that trend looks like based on the week the stores open so that Chris take it from there sure. So.
Sure and as we said in our prepared remarks, we add 65 stores opened to in the quarter approximately 9% of our store base at the end in May that number it increased to 493 stores are 69% of our store base has it today, we're about 74% opened so as you can see we've kind of.
Continued to move.
Opening stores as we move through the second quarter here the work of our field teams and supporting departments to make this happened safely and in accordance with government regulations is really truly been amazing.
I think we've been quick dope and we've been engaged with the local community prepared to face a variety of scenarios upon opening.
Good point, we still believe our stores, we believe all of our stores are going to be opened by the ended June and we're focused again them open as quickly as possible in regards to Mays results.
Total sales declining only 8.6%.
Down from the 35% decline we saw in the first quarter.
With hundreds of stores closed I mean, we're obviously pretty happy with the results as well.
To understand the results we've looked at this multiple ways we've looked at it.
By markets by trade area understanding what were web sales in the trade area prior to our stores opening that looking at the impact of store openings have had on the trade area and the impact each week. After opening we've also tried to slice and dice is really trying to understand where.
Formats may be performing better another street versus mall international versus domestic tourist college, all the different types, you expect and while we have a lot to learn we're very encouraged with the early results, noting that with some exceptions pretty much all of our stores have opened have coffee.
Extremely well in their first few weeks up until the end of May speaking just domestically, we've seen 87% of our stores that have opened up comp positively with roughly 50% of our stores that have opened comping over 50% positive on a four wall basis.
We see indoor centers perform actually stronger than outdoor centers, but both be very strong we're seeing a strong intend to buy across our stores with meaningful increases these dollars per transaction driven by units per transaction.
The web comps in the markets were stores have opened have decreased moderately but remained extremely high throughout the month currently running over 100% domestically and very high double digits in Europe traffic remains highly driven by organic and director.
Research.
We have seen our store comps by we continued to be strong for the most part.
And we are seeing challenges as expected in our tourist markets as well as some border markets and college towns.
With these results we spent a lot of time thinking about why this is happening and while these are just our initial thoughts I am I tried to outline a few things that we think are driving this today.
First we believe that investment that you mentioned in our people has been instrumental in driving a great customer experience.
Our people have been engaged in connected to their consumer throughout the print pandemic either through fulfillment or socially through different methods to connect with their customer our people are ready to open and when clear by local authority.
And our ability to open quickly provide a great place for our customer as well as non traditional do these customers. When we are sometimes one of the only stores opened in the mall.
Secondly, our merchandising teams continue to be on the front.
End of trend right product choices with skate continued to perform extremely well in may as well as our apparel categories.
We believe our customer and pent up demand from two months of quarantine and is looking for newness and interactions as a brand they trust.
We believe our customers most likely received some level of governmental assistance through this challenge in the form a stimulus or on our other unemployment or both and Tom maybe making more than when they were working.
And we believe there's less competition for discretionary dollars as we look at the landscape mill real most restaurants and bars are closed or take out only travel has been limited and sports movies and other venues have closed as well. So all in all we try to capitalize the best accounted cycle and we couldn't be more proud of our teams.
Now going forward I think the other thing I'd add to your question. Sharon is we do remain cautious we're very pleased with this result, but as we look at the next few months in back half of the year, we're cautious in thinking about the some of the things that are unclear and the damage caused by this pandemic in how can impact that.
This concludes our consumers' ability to spend.
What happens with the stimulus and pent up demand the high rate of unemployment.
What impact of metering at peak will the safety measures needed with the pandemic result in less less severe.
Less ability to serve our customers.
What happens at the virus comes back in the fall and we have a lot to learn as you can imagine our teams are working through all these implications and all of these and try and figure out the best way forward, but we're really happy with where our results are today.
I guess following up on that so you had those on 65 locations that opened by late April when you look at those that I'd just like called on a co art like how is that trend that through may as they've been like a decelerating rate of improvement that you see that kind of big.
Bang when the doors open and then it tapers off or is that kind of holding steady this using that as a base case.
Yes, we're actually tracking this week by week. So every store that opens gets classified in the week of opening and now we're reporting those stores as well as their associated web sales to try to see what's happening and effectively what we've seen is that they have stayed pretty strong we'll see a good part when the open and as a key.
Class or weekly classes of stores. They have continued to remain pretty pretty strong throughout the month of May we did see some awareness.
Slowdown, but like I said in my remarks, they pull restate actually the web state extremely strong so we're pretty pretty happy with how the stores have opened in and I think it's resonating with our consumer.
And then my last question there.
Okay, just curious added that just.
Go ahead.
No that's leased.
Just going to say be clear I mean, we're where we say that we're seeing that their maintained the pace of the comp.
Across that chain or whatever that the company is running across those weeks is basically maintaining pace as we go as of store class of progress.
Got it.
I guess the other question yes.
Thats working remotely escalating and.
The other question that.
And then I Didnt expect to ask today, which is on inventory and about the question I expected, but I mean do you do you feel like you have enough levers to pull if demand.
Genius to strengthen to have enough inventory going into back to school.
If we feel it can as Chris said churn Theres, just so many uncertainties out what what that's going to look like which we will be reduced smaller through Stoke member remember we're doing these results in most cases and a large majority of our locations where traffic has been metered between 25 and 50% of occupancy so.
We're still uncertain, but what all of these how's that translate into a peak season.
We believe.
That we are actively out they're pursuing inventory, particularly in certain categories of business and scale, obviously skate would be one bit apparel. Likewise, we look for said we had good such good results in apparel.
So we believe that we're in a pretty good spot to work with our vendors and bring product in there's definitely some supply chain challenges around this though to be to be clear, but we think by the time to get the back to school will be a pretty good position to react to consumer demand and that's about the best I can say at this point.
Sure in terms of Howard how we think about we're planning the business with just so many uncertainties, but that we think we can plan in a pretty.
Effective way from a product perspective, as well as what tactics and tools our teams throughout the used in a peak that we made ever done before with experiment lots of ideas around that that our teams are working on to capture as I think will be as always a leader in capturing whatever demand is there.
Thank you.
Thank you. Our next question comes from Jeff Van Sinderen with B. Riley. Your line is note.
Terrific just see this strong snap back in your business.
Just wanted to sort of touch on the digital component I know you have one channel model. However, given the strong performance in digital the arguable endurance about despite some of the major unknowns that are kind of hanging in the balance can you speak about the profitability influence of digital as that business.
Skills with which it seems to be doing.
Yes be glad to give it ultimately to the high level at Kris Kris attack. It of course with the real numbers Jeffs joystick you tend to have a separate that sets but.
From my perspective again, we do have a one channel model in our job is to empower customers to make choices about how they engage with us.
And and how win.
What they want experienced with we're building our models around all sorts of different ways to empower consumers and also I would add to empower our people in the same wafer gates and with our customers. So we still don't care, whether it starts digitally or or in the physical world.
We just want to.
To when the customer is where we're at now I will tell you that in.
As always as we've said here during this the closure period. Our teams pivoted. We tried we experimented with all sorts of new things. So there really exciting thing for me coming now. This is I think we have confirmed some of our broad theories and strategies that weve been working on that.
We really could pivot more to that does around let's say, let's go try these things and I think we've seen really good success, there with a lot of experimentation innovation around how we communicated with our customers.
The relevant to you as to how we can improve the relative to the communication with our consumers, but yet all make it a local and transparent to our teams.
So I feel like we have some real lessons, we can take away from this now do I still care, where the sales is a digital sales or physical sale I actually don't and from a large perspective I still think.
When we get back to a more normal cycle was kind of see digital acceptance patterns for our consumer kind of returning to their previous trend line.
But we've learned though I think a lot of valuable lesson step in the process of can help us improve the digital experience for our consumers and give them more options for how they want to interact with us. So I feel really good about that and then I'll, let Chris take your concern, yes, I would just echo what Rick staying about the one channel and how they work together and I think Vince.
Endemic has given us yet another data point of this significant the that as we did years ago as we talked about opening stores across the you add we talked about when we open stores. We saw an increase in web and I think it's no different in this cycle with internationally, obviously with a lot of room for growth during the period of closure we saw.
Stronger web results in those markets, where we have stores and now I want to be clear we had good web results, both where we have stores and where we don't have stores internationally.
But they were stronger where our stores, where as you would expect so I think these two really do work together to get to the hard your question around digital profitability.
This is a this is a challenging in our model as you know because we fulfilled from stores. So they are very integrated together. So we tend to look at the different metrics around this as you know if a customer walks into store that could be our most efficient model, but overall when we think.
About the contribution levels of a four wall store and the contribution of the web including having.
The shipping charges, they actually pare out to be pretty similar now remember, we don't have a way to allocate all the labor back to the west nor am I sure. If we should because a lot of our fulfillment within store is done.
Outside of additional hours. So I think we look at the channel about part as Rick said I think the bigger thing to US is just driving sales and listening to the customer and ultimately pushing towards.
The trade area profitability is how we see stores in web working together to serve a community.
Okay, well, you certainly seem to be doing a an amazing job of driving sales.
Any update you give us on what you're hearing landlords any specifics there may be how that's progressing how you're thinking about opportunities in real estate as we see vacancies kind of spiral.
Sure. Let me, let me just kind of give a quick update on where we're at and then I'll talk a little bit longer term.
Obviously this cycle has put a continued challenge on the retail segment.
Our strategy with physical retail has not changed we continue to want to try to manage to not have one more story than we need to in any given trade area and as it relates to cope at here in the short term.
We continue to work closely with our landlord partners I think is what I would tell you. This is a difficult time for both of US as we previously mentioned we did hold back significant portions of April and May rent and we're making partner, we're making progress working with our landlord partners Weve. This includes abatements differ.
All other rain actions that work to find a compromise in this difficult time at this point in the process, we're well into it we've got a lot of deals done and behind us and we have a lot of work to do as well, it's a lot of time.
On our real estate teams and that.
Supporting teams to help get this into our financials I think longer term, we continue to monitor that bottom, 10% to 20% like we talked to you about before we look at each trade area trying to find you know how the stores in the fulfillment aligned with what we're doing in those market I think.
I think in the next three 510 years.
Really honing in on that is going to help improve our overall profitability linking in things like our stash data to understand how more of our customers in those market and I think all of that is going to play to make us more profitable over the long term.
Currently we really only have about 7% of our stores right now that are not making money on a four wall base. It is up from 4% prior to the first quarter. So the vast majority our stores are profitable, even those that aren't making money many of those.
As our EBITDA positive so.
As I think about like that lowest 20% from a contribution perspective, we have the ability to exit roughly 75% of those in the next three years. So we've taken a very rich based approach to real estate I think it. It's our thought that is the omni model that wins on the long term in stores.
They really own their marketing their trade area, we're going to invest in and and the ones that don't we're going to keep on shorter leases and be able to adapt quickly.
Jeff in terms of future opportunities that are out there I mean, we are definitely going to be this is where the strength of balance it really helps.
I, particularly globally I think this is particularly true because we have a lot of growth left in in front of us in Europe and Australia.
But we're also be clear not her either I think theres going to be tremendous is we're already starting to see consolidation in the retail world I think thats going to take a while to play out so deals could get better I think from real estate front over the next 12 months.
Consolidation becomes even more obvious so.
I will be patient as we as you heard in her comments, we're going to pull back from the store growth. This year, we patient, but we're definitely be opportunistic because we know that some of the 2008 in 2009. Some of those stores. We opened during the recession. We have had a decade of tremendous profitability for us because we are able to strike deals that were really.
We're opportunistic at the time, so we'll definitely be out there looking in the markets where it makes sense in our teams are thinking about that this point, but we're also going to be patient.
Okay.
Thanks, and best of luck.
Thanks.
Thank you. Our next question comes from Janine Stichter with Jefferies. Your line is knows.
Hi, Thank you.
There's just a modeling question then kind one big picture question.
Gross margin I think you said you had at just over 100 basis points, a pipe merchant cash in the first quarter. It seems like inventory now clean right now and just a little bit in each inventory mentioned, so do you expect the product margin passion and less than what you saw among Q and then I wanted to ask about Harden Thats you had really good momentum there three covenant seems like that hasn't changed.
Just catch your thoughts on how especially if anything is impacting the hobbies or interest and their customers that had anything to say time and then your thoughts on the impact having cycle. Thank you.
Sure of all started on product margin here.
From an overall perspective, we did say was down pretty meaningfully in the first quarter.
Not going to give clear guidance on the go forward as we're still trying to navigate through the cycle. We do believe there will be promotional pressure add people get their stores back open obviously with.
Some people needing to clear out old inventory some people are going to clear inventory to generate cash very quickly and others, perhaps in true liquidation form so we.
We are trying to navigate debt and seeing through it.
Our hope is that it is not as significant as what we saw in Q1, we are actually believed that our inventory position to in the first quarter is advantageous to be active here in the second quarter and and in the back half of the year I think our teams have done a really good job keeping inventory clean.
Really investing in those areas that are driving sales and moving to our teams are trying to navigate it is carefully as possible, but we do expect it to be promotional cycle.
And today relative to your question on the impact of kind of consumer trend cycles here again around the hardgoods business. We obviously have spent some time talking about this internally.
We've been ask ourselves a question.
It's clearly skate hardgoods remember was really strong a year ago at this point in time and likewise here. It's continued to strength here in two through Q1 and into Q2 and through the pandemic. So we have been talking about well how much of this are really seen obviously something kids can do and they can go.
Skate by themselves are still be socially distance with their friends outstanding and so the big question for US really has been have we pull demand forward.
And.
We've spent a lot of time talking with internally about this and externally we don't of course, no the answer but our general feel is that the trend is so strong in talked with our scape brand just our partners on the wholesale side. We feel like this is just demand and we're not sure that is pulled forward demand. This just pent up demand.
We're now seeing that the situation is given people a real chance. It goes spend the money. They had on this category that there would have been anyway. So we'll see how it plays out over time.
Not sure about that but it's definitely we think like a lot of sporting goods or fitness categories. Our business is reflective of the impact of the pandemic in but it's a continuing trend for us is as strong as.
Through the pandemic as was previously.
That's helpful. Thank you.
Thank you.
Our next question comes from Mitch Kummetz was pivotal research your line is no.
Yes, thanks for taking my questions.
Chris Let me, let me start on M&A, because I think you made a comment but do you expect your planning it down significantly or that you kind of went through some of the line items.
Were you expect to.
Cutting costs I'm, just trying to understand.
How to think about maybe Q2 versus the balance of Jefferies. Your Q2, I would imagine.
Relative to last year.
Joel you'll save a lot on payroll just as you sort of phase three openings over the balance with the quarter, but then for the back half I think you maybe comment that you expect all your stores to be open by the end of June.
Think about the back half at least from like a store payroll standpoint that should be I guess sort of pretty even year over year or so I'm just trying to understand.
You know how much you can say once the stores are open.
So any color around that might be helpful.
Sure, Matt I'll do my best I'm going to be more directional in nature, just because as you know a lot of this is tied to where the topline debt and other trends of the business. So.
As we think about some of the things that have led to our first quarter SG neviah down 21%.
You're talking about store wages around closures reduced hours reduction in project, our cost reduction in store operation cost.
Some of those things, obviously are going to be more tied to store store openings.
We do have things like our larger national event that at this point in time, we don't we don't believe it's safe to bring these large groups of people together, obviously reduced travel reduced marketing events a lot of our marketing portfolio has been live events in our teams that have to page has had to pivot to more digital event.
Yeah.
And then we have some other areas.
I think we did not do raises this year, we've reduced that 2020 incentive plan.
Those types of things will play out across quarters, but I think generally the way that you're thinking about it.
Right that we would have more significant declines here in the first quarter and then the second quarter and ill sort of taper down as we move through the year I mean, obviously, our real strategy here is trying to strike that delicate balance between pushing the business forward and making the right investment.
While also maintaining capital and preparing for you know if theres a future challenge is well here, so we're going to stay pretty nimble.
We do expect.
Do you expect it to be down as I said on the cost significantly.
But that's kind of how we're thinking about it.
Okay Fair enough and then just give back to school or I'm, just trying to understand how your.
Planning the business for back to school is you're working assumption that schools.
Crossed the country, you're going to reopen for in person instruction is that kind of how you're planning the inventory I know you made some comments about being cautious as you think about the business for the balance was year.
If you are being cautious I'm, just wondering to what extent you can change things.
If the trends can kind of continue along the lines, what you're seeing or if you're kind of constrained by your conservative plants.
Thanks for the question Mitch So first of the headline is does back to school happened I think is the headline of your question then and so we definitely think back to school is going to happen is the question is what form that that the taken and there's going to be no. One answer that because as can be different regionally across the country based upon what different.
Parts of the country view as their perception of what safe and appropriate for their their communities.
So we know that this can be no one answer that in some cases it may be all back to physical schools goals are open kids come back and others and maybe a weekend week out scenario.
Physical versus digital the alternate weaken week out.
In our in some cases might be we might find that it's an all digital format.
All those cases, we think that where we do for young people, which is about provided in a way to excel progress identity is larger picture is up even if it's all all digital we think that we have a fair shot that kids wanting to represent.
Who they are true what they were affected that says maybe be more important for us in terms of thinking about that.
So, we still where our operating assumptions that some way shape or form back to school is going to pick place.
Now we are being cautious because we think we're going to be in a recessionary environment, but we also want to look at where we might have upside. So we are having conversations just like you asked about where can we chase at how fast can we chase what we do to make sure. We can chase and as you know a large percentage of our business and in back to school.
Tools and printable categories T shirts, sweatshirts pass things that we can chase.
A more quick basis than your traditional so kind of fashion.
We're also willing to take risks in some areas, where we think we have evergreen inventory.
So that we can be in a position to capture the demand thats in place without really expose ourselves to significant inventory because we we which is just moving it forward and we would just push out orders later in those categories.
So we're working through all that.
Mitch and trying to think about where we can chase or how we can manage to two key to our upside high but protecting the downside at the same time.
Rick has a real quick follow ups about I know that there are a lot of vendor saw order cancellations over the last two or three months as all of this.
Went down you get the sense, you're dealing talking to your vendors, but theres a fair amount of inventory in kind of some of those basics that you could change if you if you do too that the inventories there on the vendors books.
But you could drop into.
Our buyers who of course look at that.
Mitch will also look at the relative to what we can do and our private label love and might be approved to move up in our private label Silsbee combination of where can we go after that and what the opportunity is now I will tell you that most of the larger vendors for us.
End of traditional industry benefits for us are not a very big part of our business at this point so for US it's really about the small emerging brands, particularly the screen about categories that really drive the business I think drive traffic and those cases.
So theres been some conserve or what the state if those brands are and.
I think as we work with our smaller brand partners were funny. They are pretty good shape, because they're small they don't have lot of overhead there really nimble and quick to respond and they also have the advantage that we are their key partner in most cases, where the majority of their revenue or significant majority of the revenue. So as long as we are financially stable, we can be there tabak them.
And make sure they know that they've got us ready to support them as they need so we're working with those brands to through this cycle to say how can we help you have we make sure we have newer brands properly represented our business during this peak period.
So it's kind of the way we're thinking about it we're really looking at both.
The key.
Different brands, where we have differentiation and then we're looking at the categories where.
It's more of a fashion category were Wayne out what inventories available versus what the what we can do within our private let got it okay. Thanks. Good luck.
Thank you and our last question comes from Jonathan Komp with Baird. Your line is now.
Yeah, Hi, Thank you I'm, just maybe one follow up I'm curious.
If you're willing to share would you look at consumer behavior or either running your business will outline that will media. We're now that its reopened any any kind of broader observation because you would share in terms of changes in behavior across brands or or any other observation David share.
No from a from a brand and trend perspective, John It was let's just say this what was good before as it was good during and is good post.
And so for brand was strong before and its strong it was to maintain the relative strength during the closures and maintained has been strong post so think about generally.
What's good is still good.
Pre and post pandemic.
And so I would say those things out because of consumer behavior.
As Chris said.
What we start with our website was we actually saw organic traffic and direct low trap to be the real areas of growth. So this was super encouraging to us in the cycle as I said, we don't care, whether the consumer business.
We just have to one channel model. However, they want to come shop with us is great.
But when we see that the real dry, but really drove our traffic during the closure period was organic traffic being the with do they might be at a search box, but theyre type in zumiez in that search box or direct load, where they're very time consuming dot com into the rather let it can be directly to us.
That's what grew significantly and with the the.
The Jordi vast majority of our traffic to meet what that tells you is the brand strength in the relationship our employees have with their customers.
And that's really important because that's why you're seeing the great result post two is because now they have another option now post we did see some different reactions were how consumers want to shop in the stores and so our teams are as we've learned a lot already that there's going be different techniques that we're going have to employ.
Like a share all those things of that we're we're seeing out there but these are the things are going to inform us as we think about what happens in the back to school cycle, where we will have even larger volumes of customers, but maybe yet still be metered Tom in terms of how many customers come in the doors. So.
Alright, and would that they also have are all of safety protocols in place.
So we did see some I would call in small changes in consumer behavior. When the people came back to the store, but otherwise it's to tell you. There has been a lot of love for the Zumiez brand and I think particularly in the digital side, that's what drove our business was consumers who come directly to us.
Yeah, that's encouraging and maybe just as a follow up maybe not asking for specifics or you just referred to in terms of operating changes but.
Any early thoughts kind of adapting to the new normal.
Yeah, what that might lead to in terms of initiatives are shifting your focus.
Yes, it's good question and I'll tell you. This discussion we just have with our board a couple of days ago relative to.
Our perspectives I'm sure the same as yours, which is that we think that the trends that were in place pre pandemic are still the trends that are going to move forward in terms of consumer trends or.
'cause trends and the consumer world more broadly, but but clearly I think what the pandemic is going to do as accelerate the change of those.
The speed of those trend cycles. So at the board we talked about this across really five groupings, the retail real estate environment the competitive environment.
The consumer environment, our employee environment, and then the supply chain environment and so we believe that pretend and if we had outlined a lot of really key initiatives for that were right for our business, our consumer Jonathan that where we needed to move really moved down that these clear direction, you've kind of hurt us referred to the intimacy.
Now as a frame line guiding principles and speed is definitely one of those ideas.
Speed always being dominant pride and the need to have.
Scale to function properly today's world. So we had a series of investment plan. So really our discussion with our board. This past week about what do we think is going to change with the pandemic chase depends on a change curve is going to accelerate what those areas that we may have to readjust some of our initiatives.
And so we have weird, we did come out with all the answers, but we clearly are going to do we have time to do the work over the next few months, we're looking evaluating exactly what your question is we have some instincts about what needs to go faster and move up in terms of priority.
And.
But that work is still underway.
Okay look forward to hearing Mark I appreciate the perspective.
Thank you.
Thank you. Our final question comes from build to sell them with Titan capital. Your line is now.
Hi, Thank you would you be able to breakout comps by category for the month of May.
Now Bill that's not something we've done historically I think in what we try to do as you try to lay them out.
Really in the order of magnitude kind of the largest the smallest or in a period of loss obviously the opposite way. So at this point in time, we had no no categories to Comped negatively in May we talked about skate being the leader and laid those out right.
Hey, the rest amount in our prepared remarks.
Great. Thank you.
Thanks.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Rick Brooks for any closing remarks.
Thank you Daniel again, I, just want to wish everyone safety and health here as we work through this towns of the pandemic were clearly not to it we have a ways to go but I wish everyone. The best and again as always we greatly appreciate interest in Zumiez and we'll look forward to talk here at our next quarterly call. Thank everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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