Q2 2020 Zumiez Inc Earnings Call

At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference.

Before we begin I'd like to remind everyone at the company's safe Harbor language.

Today's conference call one quick comments concerning <unk> business outlook and contains forward looking statements.

Forward looking statements and all other statements that may be made on this call, but are not based on historical facts are subject to risks and uncertainties.

Actual results may differ materially.

No information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in zumiez filings with the FCC.

At this time I will turn the call over to make books Chief Executive Officer. Please go ahead Sir.

Hello, and thanks, everyone for joining us on the call.

With me today, it's Chris work, our Chief Financial Officer.

I'll begin today's call with a few remarks about the second quarter.

I will share some thoughts on back to school and the rest of the year before handing the call over to Chris will take you through the numbers.

After that well open up the call to your question.

[music] amidst the most difficult operating conditions. The company has ever faced we delivered better than anticipated results.

Put some context around our recent performance when the second quarter started in May we had only 65 stores open what's it just 9% of our entire store base.

But by the end of May that number it increased to 492 stores or 68% of our store base by the end of June we hit our peak was 691 stores or 96% of our store base open.

Then in July as result of governmental orders, we closed a total of 69 stores in California in Australia and ended the second quarter with 645 stores for 90% open.

For the quarter, our stores were opened for 73% potential operating days.

Despite stores being opened 27% fewer days than a year ago second quarter 2020 revenue increased 9.6%. That's stores that were open combined with digital activity Comped up 37.3%.

Our topline performance was highlighted by robust full price selling across all geographies.

Demand for a distinct and differentiated merchandise assortments and the continued efforts of our teams go much stronger results than we'd anticipated.

By geography, we Expensed, we experienced stronger growth in our international markets with Canada, Europe, and Australia, all showing significant comparable sales gains and double digit total sales growth despite closures in the period.

As we discussed on our Q1 call in June.

Onset of the pandemic, we made some difficult near term decisions around our expense structure in order to weathered this crisis and emerge in a position of strength.

This included lane opportunity all of our part time stop spending all hiring.

Eliminates substantially all plan fiscal 2020 bonuses and eliminating the majority of merit raises.

Other operational changes, we've made during Q1 and across Q2.

Include reducing store labor to reflect restricted operating hours when they travel across all areas of the business cancelling Nashville training and certain marketing events and looking for the other costs that could be eliminated or delayed as result of the current environment.

These combined actions coupled with the increased sales activity allowed us to significantly leveraged the business contributed second quarter earnings per share of a dollar or one and favorable cash generation.

With close to $300 million in cash and marketable securities on our balance sheet and no debt. We believe are well positioned to now to get what is likely to be a volatile operating environment over the next few quarters, while investing strategically in the business.

These results in this environment underscore the strength of our brand and culture and speaks to the believe our business model to adapt to change.

We have discussed at length over the years, the significance of our culture and brand and how they serve as a critical competitive advantages center helped us win throughout our 40 plus year history.

The most significant component of our culture and brand has always been there will always be our people.

Definitely made and supporting our full time employees throughout the pandemic pay dividends in the second quarter as they're able to quickly and successfully execute the reopening of nearly our entire store base, while continuing to service and engage with our customers physically and digitally.

As it has in the past I'm confident that our unwavering commitment to our people will continue to further set jimmy's apart from the competition and meaningfully benefit our long term performance.

Looking ahead, there's still a great deal of uncertainty about the state a retail and the global economy due to the impacts from Kobin 19.

We are currently experiencing the effects the health crisis, having on back to school as many states and districts around the country have delayed the start of the new school year Waterside decided to begin with virtual instruction.

As a result, we did not see the sustained lift in demand. We typically do starting in late July and running through early September.

To date, the third quarter has been meaningfully impacted by the timing it back to school and the impact of virtual learning.

But as generally got stronger each week as we move through the quarter.

At this point, we believe we're likely to see a more prolonged back to school season with some demand shifting out the later in the third quarter.

However, we are currently planning the entire season demean meaningfully below the prior year.

With regard to the upcoming holiday season.

We're also a number of unknown size is unclear what happens with the virus is gets into winter how governments in individuals will respond what impacts of pending election could have on our results as well as the uncertainty around the financial condition of the consumer.

What I do know is as Jimmy this is well positioned pivot to meet the needs of our customers wherever whenever and however, they want to engage with US. Thanks, Troy dynamic teams and our one channel mentality.

Periods of significant change create opportunities companies have the right people strategies and resources in place can take advantage of times like this to advance their brand and business.

Well I assume it isn't fully immune to disruption created by the pandemic. We do believe the current environment will accelerate further consolidation globally and that our focus on the consumer will lead to further wallet in mind share gains as we emerge from the crisis.

We must be smart and how we navigate the business challenges. We're also looking for a long term strategic investments that will set us up for the future.

These include great real estate opportunities new tools within our Omnichannel formats, and other strategic investments to support the next era of intimacy and now with our customers.

Strengthen our financial position can be a significant advantage in these times.

I have great confidence in our teams and their proven ability that get through unforeseen challenges.

Our response to pandemic has highlighted 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 discussed the financials.

Thanks, Rick and good afternoon, everyone, but do you start with a few high level comments on the financial strength and the business review, our second quarter and then provide an update on the quarter day sales through labor day before discussing if you updates on the full year.

We entered fiscal 2020, and a strong financial position with cash and marketable securities 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 teams coupled with strong financial planning.

Now through the closure and subsequent reopened we have continued to see the strength of our one channel model with our teams working diligently to serve the customer.

The business ended the second quarter, and a strong financial position cash and current marketable securities increased 58.6% to $299.1 million as of August 1st 2020, compared to $188.6 million as of August Threerd 2019, the increasing cash incur marketable securities was.

Driven by cash generated through operations.

Alluding deferment and reductions of $41.5 million composed of landlord payments.

Lower inventory levels extended vendor terms and deferred payroll tax payments.

In addition to net income improvements related to abatements credit and expense reductions.

This increase was partially offset by $13.4 million of share repurchases through the company stock buyback program prior to our stores closing due to covert 19 and other planned capital expenditures.

As of August 1st 2020, we have no doubt on the balance sheet and continued to maintain our full unused credit line of $35 million.

We ended the second quarter of 2020 with $126.7 million in inventory compared with $151.1 million of inventory last year, a decrease the $24.4 million or 16.1%.

During the first quarter, our merchandising teams cancelled or pushed out orders in Q1 to curb the impact of declining sales due to store closures with demand in reopen stores exceeding our expectations in the second quarter, we increased our plan receipts meaningfully and still ended the quarter light on inventory across most categories with.

Certain areas of our business significantly impacted by a delayed supply chain.

Overall, the inventory on hand is well positioned and selling at a favorable margin <unk> entering the third quarter.

Turning to the income statement.

Second quarter, net sales increased 9.6% to $250.4 million compared to $228.4 million for the second quarter of 2019.

The increase in sales was driven by 37.3% increasing comparable sales, which includes reopen stores and on digital and our digital activity, partially offset by store closures during the period.

Breaking down the comparable sales further we saw meaningful strength, both digitally and as our stores reopened with comparable sales in stores over 20% and digital comparable sales for the quarter over 122%.

As Rick mentioned, our stores were opened for roughly 73% of potential operating days during the second quarter 2020.

And with the highest concentration is stores opened in June we saw Aastra, our strongest results in that month.

From a regional perspective, North American net sales increased $16.5 million or 8% to $223.5 million.

Other international net sales, which consists of Europe, and Australia increased $5.5 million or 25.4% to $26.9 million.

Excluding the impact of foreign currency translation, North American net sales increased 8.2%.

And other international net sales increased 25.8% for the quarter.

From a category perspective, all categories were up in total sales with the exception of footwear with hard goods being our most positive followed by men's clothing women's clothing and accessories.

Second quarter gross profit was $90.9 million compared to $77.2 million in the second quarter last year, and gross margin was 36.3% compared to 33.8% a year ago.

The 250 basis point, increasing gross margin was primarily driven by 170 basis point increase in product margin 160 basis point decrease in store occupancy costs.

50 basis point decrease in distribution costs, and 20 basis point decrease in inventory shrinkage.

This was partially offset by 160 basis point increase in web shipping cost due to increased web activity as a result of Kobe 19 related to store closures, however, shipping cost leverage to the prior year were compared to total web sales.

S.G.A. expense was $57.7 million in the second quarter compared to $65.5 million a year ago, a decrease of $7.8 million or 11.9% Sta expense as a percent of net sales decreased 560 basis points for the quarter to 23.1% of total sales the decrease.

This was primarily driven by a 240 basis point decrease in our store wages 100 basis point leverage another store cost a 70 basis point decrease due to governmental payroll credits, a 70 basis point decrease in corporate costs.

40 basis point decrease in corporate wages, the 30 basis point decrease in the accrual of annual incentive compensation and 20 basis point decrease in national training and recognition events.

Operating income in the second quarter of 2020 was $33.1 million or 13.2% of net sales compared with operating income in the prior year of $11.7 million or 5.1% net sales.

During the quarter, we recognize flow through on incremental sales of almost 100% based on the factors outlined above and our ability to adjust quickly in this challenging time.

Net income for the second quarter was $25.4 million or dollar and one cents per share compared to net income of $9 million or 36 cents per share for the second quarter of 2019.

Our effective tax rate for the second quarter of 2020 was 26% compared with 30.7% in a year ago period.

Now to our fiscal third quarter to date sales result.

We are providing coordinator today sales through Labor day Monday September seven at this time period is more comparable to the prior year given the shift in the labor day holiday.

Total third quarter to date sales for the 37 days ending September seven 2020 were down approximately 14% compare with the same 37 day time period in the prior year ended September nine 2019.

For this same time period, our stores were opened for 91% the potential operating days due to ongoing mandated store closures, primarily in California, Hawaii and Australia.

Total comparable sales for the 37 day period in September 720, 20 were down 5.1% by channel are open store comparable sales decreased 10.7% and our ecommerce sales increased 27.4%.

The quarter to date comparable sales decreased discussed above was driven by a decrease in transactions, partially offset by an increase in dollars per transaction dollars per transaction increased due to an increase in units per transaction offset by a decline in average unit retail.

Quarter to date total sales increased in our hard goods category. All other categories were down in total sales quarter to date with footwear being the most negative followed by mens womens and accessories.

Our overall quarter day performance reflects the delayed start to back to school with many states and districts pushing back there start date, the impact to schools going back virtually and continued store closures looking at the weekly cadence of our results in August they generally improved each week and we continue.

To believe that there may be opportunity for a prolonged back to school season into September and October.

Due to limited visibility to the business, we will not be providing guidance for the third quarter of 2020 or the fiscal year.

That said, we do want to give a few thoughts on how we're looking at 2020.

We are expecting sales for the third quarter to be down to the prior year. However, we believe our results will be better than the previously disclosed third quarter to date sales decline of approximately 14%.

We experienced a product margin increase of 170 basis points in the second quarter and a positive start to third quarter, we're managing inventory tightly and working with our brand partners to navigate this environment in the third quarter, we expect to see a benefit in product margin to the prior year, but do not anticipate that it will be.

It is significant as the year over year growth experienced in our second quarter.

We continue to manage cost across the business understanding this challenging environment and limited visibility through the first six months, we've seen significant reductions in certain expenses as we work to align the cost structure to sales loss during our closure and potential for greater economic losses, as we move through the year. We're currently.

Planning SGN expenses across the business to be down 12.5% compared with 2019 associated with reductions in store operating hours travel and training planned capital incentive compensation and many other benefits with the potential by variability in performance over the.

Back half of the year this estimate could increase or decrease as we gain more visibility to the sales trends our ability to adjust expenses and the potential for noncash impairment.

We now expect to open approximately 10, new stores in 2020, including two stores in North America seven stores in Europe, and one store in Australia. This is down from our plan coming into the year of 20 new stores.

We expect capital expenditures for the fall 2020 fiscal year to be approximately $11 million compared to $19 million in 2019 in our original plan for 2020 of between $18 million and $20 million.

The majority of our capital spend will be dedicated to new store openings in plan Remodels.

We expect that depreciation and amortization, excluding noncash lead to expense will be approximately $24 million down slightly from the prior year and we're currently expecting harsh projecting our share count for the full year to be approximately 25.3 million shares at this point, we're not expecting any fee.

Further share repurchases until we have better visibility into the business.

With that operator, we'd like to open the call up for your questions.

Ladies and gentlemen, if you'd like to ask a question at this time. Please press the star and the number one key on your Touchtone telephone.

To withdraw your question press the pound key.

Please standby, we compile the Q and a roster.

Our first question comes from Sharon Zackfia with William Blair. Your line is now open.

Hey, good afternoon congratulations.

I guess a question on the inventory position I know I think illustrates that you said you thought you are in a good position, but it looks it looks pretty down I'm, even relative to the sales you indicated for back to school. So are there are pockets of scarcity in your Mitra at this point.

How well positioned our you to chase sales of its a prolonged.

Back to school and then just curious on your thoughts on a store development beyond 2020, considering your your rebounding and doing much much better than most others.

Sure Sharon a happy and happy to start with the inventory and then we'll tackle the store question.

From an inventory perspective, as I mentioned in the prepared remarks, it's been obviously a rollercoaster every year as the is the first quarter here that and the store closures. We are buying teams worked very diligently to work with our vendors to push out product canceling over $100 million that purchase orders and.

Then once we opened.

In the latter part of April into May we started to really see elevated results from where expectations were and that put them in the opposite situation of really chasing and then I think you couple that with where we have been from us getting the supply chain up and running created quite a few challenges as we.

Moved through the period, so I really great Testament to our buying teams of reacting in bringing product again, and our distribution and operations teams in moving through the channel and ultimately our store teams in executing on how they did with our customers both physically and store and digitally.

But it was not without challenges and so I think as we look at inventory and we look at how we ended the quarter. We would definitely say we are lighter than we wanted to be I would tell you inventories very clean so I'd say, we executed inventory in a good position we feel very good about the makeup of our inventory, but we certainly would have liked to have.

Had more of it specifically in categories like hard goods in footwear, which were probably two of our more challenging areas. I think this also gets into kind of the supply chain and how we're working through that and I I know there's been a lot of retailers, who have talked about the varying degrees of challenges in the first six.

I want to the year and.

Well as we look at that the challenge is sort of start it would just getting back up and running a after the closure period.

And then kind of moved to a getting product getting all the product we want getting at the timing of our deliveries a and then the increased demands on the overall ecosystem, including a gay things from our distribution center to our stores as well as our stores to customers just based on the.

Elevated volume levels, and then I think as we look forward. We also are thinking about the potential for some peak surcharges.

That are out there and what other operating challenges we might have so as you can imagine we continue to to try to plan for this and we believe that are one channel philosophy is actually puts us in a pretty good position and how to work through this because we're shipping generally much closer to the customer.

We have a distributed network of stores doing the shipping which has been pretty helpful. And work continue to work with our shipping partners as well as execute our own mitigate.

Mitigation techniques to the risks that are in front of us so.

I think overall as we continue to manage through this as we've moved through August we started to see the inventories rightsize a little bit more again, we continue to feel good about our inventories, but as you pointed out there were some probably opportunities that we had and some sales potential sales misses a where we just weren't able to get inventory and to satisfy.

The consumers demand.

And churn the second part of your question relative to our store footprint and thinking about store developer beyond 2020, I think to to really address that question I want to break into two parts and so let's talk about the U.S. market and then we'll talk about our international markets I think I will help us understand a little bit about differences between both markets in the Chad.

Changes in opportunities in each market.

So in the U.S. you know that we we I think it's pretty clear to most people today that we probably have too many retailers in the market too much retail space and we also probably up too many malls. So we as you know we believe for long time, that's really been this is being driven by the empowered consumer that power that did not have through to complete transparency of inventory availability.

The digital first strategy right that consumers haven't searching of finding product.

So we expect to see that this consumer driven cycles for me, what really drives the consolidation of retailers, we simply most retailers simply don't need as many locations and it's also a struggling it's was causing bought malls to struggle and certainly some mall survival.

Now we also think demick has really accelerated both of these cycles I think there's plenty of evidenced looking at the current marketplace. So thats probably true.

But we believe in a long run that the rationalization around retail and malls is going to be good for us.

And we'll drive or be what will drive really help us drive share consolidation for us as we are positioned I really believe to win our segment of this consumer world. So as Chris to share a few more thoughts around the U.S. market and then I'll talk about international market share. It I think what I'll try to do is just kind of talked about.

The strategies, a real estate and how we think about store units in you. We've said for quite some time, we really don't want to have one more unit than we need to in any given geographic area and so we're definitely moving towards the trade area concept looking at stores and web to serve.

Our customer and believe that they definitely work together and so from a strategy perspective, I mean, there's definitely the short term here in regards to where we stand.

With coded and working with our landlord partners in.

I can tell you we worked really closely add to manage through what the difficult time for both of US and you know as we mentioned on our Q1 call we did hold back.

On significant portions of our April or May rent and even in some cases, our June rent as we work through this process, we're not going to give a lot of detailed color on where we stand with each landlords in the amount of abatements or deferrals.

Other than some of the high level commentary, we gave as part of our prepared remarks around how much deferral is on of all of our deferrals leases.

The inventory balance the payroll.

And our APC.

As well as we gave some color around occupancy and how attaining our PNM now from a leverage perspective.

But what I can't say as we worked very hard with our landlord partners to find compromises.

I think are working for both sides.

And we have quite a few of.

The process, Don and behind US, but we also have a quite a few agreement that we got to get documented and still complete in front of us. So we continue to work through it and longer term you know our strategy is to really manage risk when it comes to the number of stores and as Rick talked about.

In the you at most likely being over mall and so we look at it with the bottom 10, 20% of our stores, obviously trying to keep them on very short deals to allow us flexibility in how we navigate in those markets.

Definitely looking at each unit or each store as what its role in the trade area is and how we think about stores. Both in terms of their four wall sales as well as.

The filling and trying to align it to optimize our store count with any to trade area.

And doing this over a multiyear view to really kind of say, okay. How profitable can we be and coupling that with data that we're learning constantly from our stash data and then just kind of looking at how did this all play together to serve the customer knowing that certain centers a high volume centers are still.

We're going to have long term demand and other may be lower volume centers have a peak seasonal needs, but can also support the high volume centers from a fulfillment perspective over the long term. So we look at that bottom, 20% we've talked about this over the years we have.

Roughly 75%, we can get out of in the next three years over 80% in the next five years and that gives us is kind of comfort level around how we can maneuver and this cycle. So that's kind of strategy component I'll kick it back to Rick just to talk about the international side, great. Thanks, Chris So and just summarizing all that trend.

Relative to us as it relates to again your question around store development, we really see the us more as the as reflecting a fellow market is going to be rationalized. Both in terms of a number of balls that will be in the marketplace as well as retail store footprint and then how we're going to optimize our business to capture share.

In the U.S. marketplace and to grow earnings through the concept of trade area and trade or execution.

Now the international marketplace, I think it's a bit different.

On the international real estate side Theres no doubt that the empowered consumer is that is a universal trend today, driven by smart technology, that's still driving on global marketplaces, and our international marketplaces, that's still deriving retailer consolidation.

Now the ball side, they're generally pretty rational rationalized in terms of all world in our international marketplaces. Today. So we don't expect and look at the mall world outside of the U.S. and say there needs to be a great great amount of rationalization.

In fact, I think there's certain extent, we believe that the malls in international markets reflect and represent the future. How maybe U.S. malls are going to look right relative that only rationalizing the square footage, but relative to what the different kinds of tenant mix might look like in us malls as they as it goes through the rationalization process.

For us, though because we are seeing.

Consolidation of retailers in.

International markets, we think that creates an opportunity for us. So there is going to be space opportunities created in good quality centers.

So fresher and we think this is a growth opportunity for us in our international markets.

For future expansion, because they're just going to be those opportunities. We think there could be some really high quality low cost potential opportunities for us to grow our presence in these markets and of course growing our presence isn't just about the physical world. It's about the concept to how we execute omni to serve customers in these marketplaces. So that's where it gets to the right scale in each mark.

But the tip over so we can execute the omni platforms, which gives a whole additional boost to operating performance. Both on the sales line and on the profit line as we do this so I really think we have a big opportunity for.

Profitable growth in our international markets over the next few years churn and of course, we will as always make sure we manage that growth in our culture and brand positioning right at the forefront of our thinking but were certainly well positioned I think better position any of our competitors to execute on those opportunities over the next few years.

Thank you so much.

Our next question comes from Janine Stichter with Jefferies. Your line is now open.

Hi, Thanks for taking my question.

Take a little bit more in cash back to school sounds like you expect the sales tend to pick up entering Q a bit from where it is currently we can you provide some regional color on what Youve seen in reagent region District, I have already gone back to score or those that have gone back in person.

Helpful color. Thank you.

Sure Yeah, I I'm happy to provide some color and you know I think this is this is where really understanding back to school has become increasingly challenging. This year, obviously, just with the delayed labor day delayed back to school the impact of digital versus in person schooling and just trying.

To understand where the health of our consumer as a from a or the financial health of our consumer I should say so we did profire some thoughts on this and kind of what we're seeing in and what all what I'll try to do is laid that out I will disclose most of this is just domestic as this is really where the bigger part of our businesses and back to.

School, so as we look through that I would tell you don't like we said in our prepared remarks, our result that generally gotten better each week.

With last week, our the fifth week of the period being positive overall by channel, we talked about comparable sales and where they're at in our prepared remarks, and we've seen a all while we see all categories Downscaled hard goods is still been up which is a good thing.

We did see some softness on the labor day weekend as compared to last year, but again this is incredibly challenged analyzed.

Because of the move out so let me kind of trying to freeze up from a what we're seeing from the type of go up go back. So we've done some survey work across our all of our stores and based on that survey work. What we're seeing is about 50% of our schools are going back with some sort of hybrid.

Now 40% of our schools are going back a 100% remote at about 8% of our schools are going back in person with just a couple percent that didnt come back so.

As we look at this and then we start to apply sales to it because almost all of our our regions in stores have gone back at this point, what we're seeing generally is that where we've gone back in person.

Those regions are performing the strongest with kind of a positive low single digit comp, where we've gone back and hybrid with some in person and some remote learning.

We're seeing kind of a down low single digit and and where we're going back.

Purely just remote.

It has been down over 10%. So we're definitely seeing the bigger challenges there. The other piece for US is just the belief that this will continue on to September in August and I'm, sorry in September and October.

As we continue to expect to see some demand here into the next couple of months.

I think it what it means to the future is we just have to continue to be super nimble.

Theres definitely a potential upside and downside given a variety of scenarios that could play out here and we look at those as you know our consumers the ability to spend going forward can we see this prolong back to school that we and others are expecting.

Or could there be a future back to school days if.

We are able to manage through the pandemic in more and more districts in stage decide they want schools to go back and person will we see another back to school days potentially later in the fourth quarter or even in January of next year.

What happens if more stimulus is gone into the economy, where do unemployment levels go how do we think about metering at peak, if we're not able to.

<unk> increased the capacity in our stores how to safety measures for our employees and our customers play into this and what happens if we start to see more and more resurgence around the country and I I quite frankly could probably go on we have other things that we thought about as well. So I think we just have a lot to learn we're going to remain really.

A cautious and as I said nimble as kind of a key where were you seeing I think it's really helped us in the first six months of the year and really how we have to look at the back six months.

And our teams are good today, I think thats a piece that we are the we're on top of and we feel like regardless of how that played out into Q3 and Q4.

Our teams are good and weekend, we can beyond the top side of the retail marketplace for the back half of the year.

Great. That's incredibly helpful detail and then just a follow up on footwear can you elaborate a little bit more on the weakness is that just inventory challenges you reference or is it more of it back to school business typically or is there some change in trend just any color there would be helpful. Thank you.

Yes, Janine I'll start by Chris add any comments you might have I mean.

Some of this is going to be trend related you remember we are on a multi year run on footwear prior to his to couple of years ago, We had a long buildup in our footwear cycle.

And some of this is clearly a result of pandemic and supply chain discussions at Chris talked about so it's always is usually the cases multiple factors I think that drive where we're at now for had been more difficult than some categories prior to the pandemic.

But we clearly have seen the supply chain impacts of again I think you just how difficult the footwear industry is to manage because of this ever an uptick more risk in footwear because of the the the sizing that takes place in the footwear market. So.

But for US I guess the key thing in my mind is I'll remind you what I always say about where route how our business model works. Despite the challenges in footwear, we ran well I think are pretty remarkably good results and has Chris has no matter, how third or fourth quarter turned out this year. The one thing I'm totally confident on is that I think we're going to outperform all of our competitors.

On a relative basis, and most especially retail for that matter. So the reason that is because arpus small sore dynamic with the the number brands. We carry of emerging brands are carrying that become growth brands in our world. The number of department to categories that we exposed our consumers a lifestyles, we represent across the marketplace. So wondering I'm confident.

No matter, what the challenges our with footwear I, just where other remind everyone that our business about managing the diversity of what we offer to deliver it to our really self expressive consumer and our goal is always matter what the transact Liz whether it's a booming skate market a tough footwear market, we always realize that we have categories in apartments or that are increasing.

Others that are decreasing we have brands that are growing brands that are shrinking the whole goal at our business is to build a diverse portfolio departments categories lifestyles in brands the yield a positive comp across sites. So.

Thats kind of the headlines there are some of it in footwear specific jeanine is related to probably reasonable trend as well as more importantly in 2020 is definitely related to supply chain and the challenge of the footwear industry in terms of the sites citrate. The debts here I think thats out there the risk that we off the ticket inventory.

But beyond that just I just reminded about what our model. It's about we're were built to withstand downtrend in departments like that and how about the capture share in other ways through other brands, it's rather departments to run gains that's what we try to do.

Okay. Thank you very much.

Our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.

Hello, everyone.

Terrific work in Q2 can you speak more about what you're seeing in the California market with closures did you see business there shift to digital and then what are you seeing end markets in California that of reopened.

Yes, sure, Jeff Hi, quite as we pointed out in our prepared remarks, we reopened the vast majority of our California stores and the second quarter only disclose them again in the beginning a second week of June July.

And ended July with those.

Those stores closed and then on into August is well.

Well, we can tell you is it California was a big piece of our drop in sales.

Both in July and August and really back to school to date and the numbers and we talked about who is one of the key drivers representing probably about a third of our decline overall on a consolidated level. So we definitely saw some pain there even once we allocated the web sales there now we did see.

Sales go up and it pretty much seen that everywhere, where we have closed just like we did when we did the math closures in Q1.

In stores close we start to see spikes in those regions in volume and then more recently, we've opened a fair amount of those California stores with the exception of La County in a few others.

So we have seen a good rebound there.

As expected with the with the reopening sell we'll see how that plays out as we move through.

Q3, but it was definitely a big impact on our the end of Q2 and our back to school to date and I'd just add to Chris' comments, Jeff that of course as I'm sure you're where most of California is going to be a virtual back to school. So again as we think about the impact to California, we're thinking that how schools go back is going to be.

It can be reflective of how we capture what ever back to school turns out to be surface length is out and as prolonged we think those are probably.

More likely the markets, where we'll see that that back to school stretched out a train.

Okay.

Could you touch on the rent withheld question, how you're thinking about that and maybe speak more about what level or magnitude of rent reductions. We should think about as renewals come up given kind of the top spot the landlords around.

Sure well, let me let me talk about.

Just to cash position overall, and what we tried to lay out in this call I mean, we are.

Incredibly happy with where we've let where we're at from a financial strength position obviously the.

We entered the year in a good spot.

Really good good planning and hard work to get there and Weve teams have just managed incredibly well here through the first six months of the year to get us to where we are which is at $299 million in cash with with no debt that being said, we did want to disclose that we have just over $40 million in.

Deferments and.

Other cost there that are there on the balance sheet that that we think our real so as we think about the cash balance we try to rationalize. It you know, it's probably somewhat something closer to $260 million in a more rationalized environment and that's made up of.

Not just deferrals, but the inventory position, which as we mentioned we are lighter on inventory than we'd like to.

We would maybe not by all of that inventory back, but we certainly would like to get a good portion of it.

Deferrals that we laid out as well as some payroll deferrals that we're taking advantage of so as we plan to move through the year, we do expect.

A lot of that you have been paid out.

Regardless of the rent situation, we're not going to get into a lot of detail.

Other than to say that we're working with our landlords really closely and this is a tough situation.

For them and for Us and we're trying to work with it in the best divest scenario for both of Us and so in some cases.

That is led to deferment in some cases theres abatement.

And in some cases.

These will be things that we continued to work with as we evaluate centers into the future and I don't think thats different than what we've seen over the last five to 10 years in that portfolio that some malt are definitely winners and marketplaces and some malls.

Our more challenged and we have to work together to to optimize them and get into the right cost structure to make them work. So I.

I think we'll keep seeing that play out in this market and and we'll see in I think over the long term.

This is an area that we think we can benefit from our ability to maximize our store related real estate with our one one channel philosophy.

Okay, Thanks, and best of luck.

Our next question comes from Mitch Kummetz with pivotal research. Your line is now open.

Yes, thanks for taking my questions I guess I got a few of them. So.

It would go through this pretty quickly so so Chris on.

The Requeue did you guys are down 14% can you say what percent of three Q is normally a book softer 37 days with a quarter or is it.

50, 560% given the reports about school.

Yes, given given the delay of where we are now it's in that range that closer to that 60%.

We are through the better Labor day weekend that we reported got it and then on on a gross margin I think in your prepared remarks, you mentioned that product margin should be up year over year or maybe not as strong as it was in Q.

Could you maybe speak more broadly about gross margin to expect that to be up or down I would imagine that if the sales are down in through Q2.

To put some pressure and occupancy.

You know digital continues to.

Before I remember that puts a little pressure on shipping so could you kind of end work through those components.

Yeah, absolutely and I think this is.

Hello really interesting how this has worked out because obviously, we would that 9% sales gain in the second quarter, we saw pretty.

Pretty strong gross margin benefit to up 250 basis points.

You're right, we talked about product margin being 170 basis points, which was a benefit.

We also at that level of see pretty good leverage.

Across occupancy and some of our distribution costs.

South and benefits on shrinkage and then we talked about a web shipping being an offset to that up 160 basis point, although and leveraged as a percent of digital sales, which is an important call out because while we are seeing some elevation in gross margin because the mix.

To web.

On the flip side, it's leveraging across digital sales, which is important with how we measure.

Measure the business. So I think as we move into Q3, we are expecting product margins to be up I'll be although not quite.

What we saw on Q2 as you indicated how we see gross margin is going to be more tied to the mix of the business in where sales overall go and I think thats, where add to your part of your question are you are what you commented and when you ask question is if sales are down that will provide some challenge on the gross margin side, we do.

We expect web two.

To be have a higher penetration or total sales in the third quarter, we have seen that through the back to school period, we reported and so that will also puts some pressure on gross margin, but at the end of the day. If we can continue to leverage that expands we do take it could still be a benefit to our overall bottom line. So.

So we're trying to really managed through this it's pretty variable as you pointed out to the sales number but if we can grow sales.

We definitely think we still have opportunity to grow gross margin got it and then lastly on a hard good hard goods I know those your strongest performing category in the quarter. That's for the case for a few quarters now at least is there any way you can say how strong I mean was the growth you know you're over your growth there on multiple of the next best category, where there's been a lot of shot.

Her about sort of equipment to general whether spikes or is your name, but particularly strong.

This summer so I guess, maybe a two part two parter administrators could you speak a little bit more to the growth of Hardgoods and then secondly, sort of how do you think that business.

Into the back half as weather changes to street, typically fall off or just kind of student morphing into maybe a strong snow hardgoods business just to do a little more color on that.

Let me start mentioned then allows Chris to follow with some of the.

Well, maybe it's a more detailed your question, but we tend to look at these department driven cycles as tend to be multiyear cycle. So we had a multiyear SEC around footwear starting for five years go around for a few years. So we're currently in your two of this skate hardgoods cycle and now the question would be does do you think that the impact of.

Penntex accelerated in the cycle, which as I think kind of embedded in your question there relative to what we've seen and other outdoor activities right that are taking place and I'm not sure that we actually no the answer to that question.

I think we think there are really multiple drivers was going on the skate cycle. Today first starts with the fact that we had four or five years of down trending in skate hardgoods. So we're we're kind of Levelized you now would be what it first thing I tell you relative to consumer demand.

The second thing, we see and we believe is true is that there are.

A significant number women more women buying skate hardgoods and skate products than ever before and that's that's clearly what we hear from all of our teams across the country that is clearly been a difference in this cycle that theyre just more women out there, which is a pretty pretty awesome thing to see.

And and we also believe that part of what we experience now in the up trend of the scale lifestyle. In this case targets business is that as more deeply embedded generationally now than it's ever been so this is a case where the.

Young woman or young man, maybe buying their first skateboarding dads bind the his his again go skate with them and I think that's this generational aspect that we're seeing that is a pretty also pretty cool thing within this market I think that what I'm basis, and I think it makes the potential market.

Essential addressable market skate hardgoods bigger in through the cycle.

And then lastly, what I would say about.

Our unique position relative to the skate hardgoods business is that the consolidation in the marketplace or will that over the last five to 10 years, they're just simply fewer retailers selling skate hardgoods and so we have been positioned and we are a significant.

Player in the skate hardgoods business around the globe, where we do business. We I believe just are gaining a larger market share relative to the consolidation of taking place which is one of the things we've talked about relative to what retail consolidation mused arpus, how we think there's more opportunity for us out there in the next five years so.

Thats kind of again, how we're thinking about image from from kind of a trend perspective, I don't know it depends materially accelerate or not what typically I do know as each of tend to be multiyear cycles that play out and again I think there as I described many trends that are kind of driving this multiyear cycle fellow Chris maybe address the magnitude yep, So I am going I must.

Stay away from.

Talking about just comp numbers, just because what we like to do we talk about categories is to get to the total year I think what's the what's important to point out we have disclosed as if we think about hard goods in general in 2018. It was 10% of the business and 2019. It was 13% of the business. So you can see the impact you had in year.

One and while we need to see how Q3 Q4 plays out the impact them pretty substantial for this year as well as really are only a positive comping category. There is some significant there. So again I'll stay away from totally quantifying other than to say that kind of growth and see from 18.

19.

Looks possible and 20 as well I guess I'd just add in Chris you can just confirm this for me, but Mitch I think the size of our comps as good hard because were significant I don't think there's a big difference between their magnitude relative to other there obviously larger but after the magnitude of the cops I'm not sure as it redeploying 19, and 20 really now yes, that's right.

Got it alright, thanks for the color and good luck.

Thank you.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that Star then one.

Our next question comes from Jonathan Komp with Baird. Your line is now open.

Hi, This is Steve Miller Carsky on for John Thanks for taking my questions.

I guess my first one is just.

Looking out how are you thinking about the shape of holiday this year I know.

Some retailers have talked about maybe having a more extended season, having orders pulled forward and especially as it pertains to maybe concerns about capacity with shipping and everything so just any thoughts around the shape of holiday this year.

Yeah, I mean, I think it kind of ties in with how we're thinking about the rest of Q3 and and Q4, we just have to stay Super nimble.

So we are we're very kind of focused on all the different trends you've laid out as far as volume spreading out and what that might mean around the peak up like a black Friday weekend.

We're focused on what the in store experience is going to be from a fact of like will we have metering or will you have challenges getting people in our doors, how we'll communicate to them and we're obviously focused on things even like if let's say that schools go back to school more uniformly in January well within.

Let me into our business so.

We have a lot a different scenarios were playing through its kind of comes back to what we've talked about earlier, just being nimble and so I.

I think theres a lot of unknowns I tried to some earlier I think the other piece that.

Obviously, we have a pending election as well and we'll see what that means to the fourth quarter.

So we see a lot of.

Potential for upside, we see simply said potential challenges and we're just going to do our best to navigate through that and see where we can drive that while also really taking advantage of opportunities that are out there for me I think thats something else that Rick talked about in his prepared remarks that super important where we're at.

We've set ourselves up pretty well from a balance sheet perspective, and while we are very cognizant of whatever challenges can be ahead, and ensuring that we can emerge from that in a position of financial strength.

We also want to be smart about where potential investments could help us accelerate in this cycle and we know that from the away no nine recession, we learned a lot and some of our best investments we made over the last decade emerged from that cycle not just add Steve we do have a number of tactical things that we're trying to address that.

It will.

We hope will help us get as Chris said build flexibility around the challenges. We think we're going to we're going to see in the holiday cycle again around does it get stretched out what happens to peaks in the marketplace what happens to digital web penetration does it go how much greater will it be and what does that mean to the b to b to C should.

Being.

Issues and all the challenge that come around that so we have some tactical things. We're working around that we think can help and all those things are not going to share all those.

This level, but we hope that we can we can do things tactically that will help us bridge that give us ability to meet the meet consumer expectations in consumer demand.

Yeah, great. Thanks.

And maybe one more just.

Obviously, it's been really impressive your ability to manage costs. This year, I guess looking out maybe higher level.

Next year and beyond are you thinking about.

The cost cuts in terms of kind of the permanent structural changes versus a more onetime items. This year I'm at a higher level.

Yeah. Thanks.

I think this is one of the challenges we're going to have heading into 2021, and probably most retailers will as they think about their business I mean.

We are very proud of how we mailed to manage through this I think our teams have done a phenomenal job of you know we've built to 2020 budget than we rebuilt it we've done tons of different scenario planning, we have kind of written the highs and lows and and tried to navigate through this but as we think about moving back into.

Q2 thousand 21, there are the period the stores were closed and we think there'll be some sales we can recapture but theres a significant amount of caught that we've had to manage out and there are things.

There are really important to us in our overall philosophy. So as we think about moving into 2021, where we expect to have happened is though will be a step up in our cost structure and specifically within SSG and may.

As a result of kind of driving the business back and not having some of the savings of.

What are their rent abatements or.

Saving credits payroll credits or reduced operating hours in malls or reduction of travel or some of our national event, and then starting to layer those back in where they make sense and I think one of the things were figuring out here over the back six months of this year is I have as what that looks like and some.

Thing, we'll definitely be coming back to you guys with most likely during our Q4 call, but maybe even a little bit in our Q3 call of trying to outline some of that guide is going to be.

Important to make sure we're aligned in our modeling because we do believe it's important to reinstate our national event.

They're incredibly focused on training, our store managers and moving them along to make them great sales.

Salespeople and to develop new salespeople.

That being said, we're not totally clear what the first three to six months of 2021 is going to look like and will we be able to bring all of our managers together and we'll be able to bring our district managers together. So those are things were looking at we're modeling and working with landlords on what do operating hours look like as we move.

Into holiday and then outside of holiday and how that might look as well as many other kind of operating procedures and management of marketing events and things like that here that we've done on the corporate side. So over the long term what I can tell you is they'll be a.

Probably some sort of rationalization into 2021, and maybe even into 2022, but beyond that we continue to believe in the philosophy. We've executed on over the last couple of years, which is as we look at our more mature markets here in North America in the us in Canada, It's how do we manage those markets on a on a low.

No.

A lower single digit comp over the long term to really manage cost and make sure that we're making the right investments in the business, but also showing some leverage in the business and then on a international side to Rick's comments earlier today, we still believe there's a lot of room for growth and those market.

Our are actually doing quite well despite the pandemic than we have going on here and we have an international market in Canada that we have driven to profitability and strong cash flow. We think we can do the same thing in Europe, and Australia with scale and how we manage those businesses and we think they're continuing to make.

Strides to that and so.

We will manage their cost structure, a little differently because they have elevated sales gains with the addition of units as well as strong comps in newer market. So they will probably be.

More expense growth, there, but still significantly less than the sales growth. So that we show that leverage and drive them to where we want them to be from a profitability perspective. So a lot to do here very complicated situation, but I think that we're well positioned to navigate through it.

Great. Thanks for all the health and for answering a question.

Im showing no further questions in queue at this time I'd like to turn the call back to Mr. books for closing remarks.

Alright, Thank you and I just want to close today's calls with the big Thank you to all of our teams around the world and our brand partners to for all their hard work through 2020 is really appreciate an amazing ever bad when to really help us serve our mutual customers everywhere. We do business. So thank you everybody and we'll look forward again the talking.

Through all of you.

When we would do released their third quarter earnings in December Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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