Q3 2020 Zumiez Inc Earnings Call
And welcome to the Zumiez Inc. third quarter fiscal 2020 earnings conference call at this.
All participants I know listen only mode.
Well conduct a question and answer session towards the end of this conference.
Before we begin I'd like to remind everyone of the company's safe Harbor language.
Today's conference call includes comments concerning Zumiez Inc. business outlook and contains forward looking statements.
These forward looking statements and all other statements that may be made on this call.
Net or not based on historical facts are subject to risks and uncertainties at.
Actual results may differ materially additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in zumiez filings with the FCC at this time I would kind of call over to Rick Brooks Chief Executive Officer. Please go ahead Sir.
Hello, and thank you everyone for joining us on the call.
With me today is Chris work of our Chief Financial Officer.
I'll begin today's call with a few remarks about the third quarter then.
Then I'll share some thoughts on sales for the fourth quarter to date before handing the call over to Chris who will take you through the numbers after.
After that we'll open up the call to your questions.
Our teams continue to do an incredible job navigating ball apparel market conditions.
After successfully executing on the reopening of the vast majority of our stores during the second quarter, we faced at back to school season that was very different from prior years.
As many states end districts around the country delayed the start of the new school year for decided to begin with the virtual instructions due to the pandemic.
We did not see this is David lifted the ban we typically do starting in late July at running through at least September.
As a result for.
The second most important selling period of the year got off to a very challenging start at sales were down in the last week of July at every week in August.
Negative for the trends improved week over week throughout August period positive at the first week of September I remain very strong through the end of the quarter.
This supported our hypothesis that we would have a prolonged back to school season with some demand shifting out later in the third quarter.
These trends it exceeded our expectations at we're able to show sales growth during the quarter.
Our ability to capture as much of late season demand as we did.
And more of that make up for the loss for extra and historical peak weeks at August underscores the strength of our brand and culture and speaks to the ability of our business model to adapt to change.
For the third quarter revenue increased 2.6 per cent. Despite the slow start a difficult selling environment reduced hours in stores being opened roughly five per cent fewer days than a year ago.
Strong digital activity and robust full price selling across all geographies highlighted our topline performance as we continued to experience solid demand for our distinct and differentiated merchandise assortments.
Our total comparable opened store sales increased 8.1 per cent led by 39.6% growth in web sales at 2.2 per cent comparable sales growth in our stores.
Our teams for relentless in their commitment to serving our customers, which contributed to stronger results than we anticipated and positive comparable sales of across all geography.
Our performance was once again highlighted by strong product margin gains fueled by full price selling.
The same time, we experienced meaningful leverage as a result of the average we've made to refine our model over the last few years as for all the adjustments we made to our expense structure in response to pandemic.
Looking beyond the pandemic, we expect many of these costs will come back into the income statement along with lost revenue.
As we return to more normal operating environment likely sometime next year the.
The combination of all of these factors contribute to earnings per share increasing 54% in the third quarter two at dollar 16.
And favorable cash generation.
With well over 300 million in cash on our balance sheet and no debt, we are well positioned on how to get what is likely to be on follow <unk> operating environment over the next few quarters, while investing strategically in the business.
Our recent performance has been years in the making we've spoken before about the significance of our culture brand at how they sort of its critical of competitive advantages of helped us win throughout our 40 plus year history.
This has never been more true then at 2020 assets.
And it starts with our people.
Yeah, that's a free made on our people coming into this year and three depend on that have allowed us to maintain our high level of service at Tommy fulfillment. Despite the disruptions for operations caused by the virus.
As it has in the past.
Cost at that our unwavering commitment to our people will continue to further said zumiez apart from the competition and meaningfully benefit our long term performance.
Looking ahead of where there's been positive news recently about the effectiveness of certain vaccines, there's still a great deal of uncertainty about the state of retail and the global economy due to the impacts from COVID-19.
We're currently expecting that given the demographics of our customers at employee base generally speaking there will most likely be at the latter end of the vaccination process.
We're current experiencing the effects of the health crisis that the health price is having on our holiday season around the world has many local state and federal governments of forced non essential stores for either we close or operate under other restrictions on our.
On European market.
In our European market quarter to date through Tuesday, we have had roughly 17% fewer opened store days than one year ago.
Stores operating at reduced hours during the holiday season government to encourage customers to stay at home at a slow start to important winter sports season.
Meanwhile, at quarter to date through Tuesday at North America, We had roughly 2% fewer opened store days on last year reduced operating hours during the important keep black Friday weekend and significant metering of traffic tied to both government orders as well as potential safety concerns.
We expect at the store closures and various other operating surface will fluctuate as we move through the quarter.
Through the store shutdowns and industry headwinds fourth quarter day sales through Tuesday December Onest decreased roughly 3.9% from the comparable period end the prior year.
North America sales were strong through the first three weeks of rubber.
The Black Friday week of was significantly impacted by traffic declines closures and track of metering of crossing meaningful number of our locations.
But at the same as the back to school season, we're seeing better performance versus last year in the off peak weeks at more challenge results. During the time traditionally relied on more on heavy store traffic.
Internationally Europe is experienced meaningful sales declines of fourth quarter to date at as previously mentioned well Australia stays sales growth has been the strongest in the company.
It's unclear at this point, how the remainder of the year will play out.
Regardless of what on fault Zumiez as it has been is well positioned to pivot to the needs of our customers wherever whenever and however, they want to engage with us. Thanks for our dynamic teams are one shot of mentality and advance fulfillment capabilities, including Zumiez delivery, which we expanded.
The fourth quarter to take our best in class sales team directly to our customer's door in select markets around the United States.
Period of significant change create opportunities come.
Copies of the right people strategies and resources in place can take advantage at times like this to advance their brand and business well.
While some of these isn't immune to the disruption created by the pandemic. We do believe the current environment will accelerate further consolidation globally and that our focus on our customer will lead to further wallet and mind share gains as we emerge from the crisis.
Must be smart on how we navigate the business challenges. We're also looking for long term strategic investments that will set us up for the future. These.
These include great real estate opportunities new tools within our one channel strategy.
Another strategic investments at support the next era of intimacy and now with our customers the strength in our for Nash vision position can be a significant advantage for these times.
I have great confidence in our teams and the proven ability to navigate through unforeseen changes on.
Our response to pandemic has highlighted at the strength of our culture of brand and bolstered my optimism about the future for zoom ish.
I will turn the call to Chris discuss the financials Chris.
Thanks, Rick and good afternoon, everyone I'm going to start with of few high level of comments on the financial strength of the business review, our third quarter and then provide an update on our core of day sales through the past Tuesday before discussing a few updates on the full year.
We entered fiscal 2020 at a strong financial position with cash over $250 million and coming out of the highest earnings per share in the history of our company. This.
This resulted from years of commitment and hard work by our teams coupled with strong financial planning now for the initial store closures at March and continued challenges to date, we've seen the strength of our one channel model with our teams are working diligently to serve the customer.
The business ended the third quarter on a strong financial position cash on current marketable securities increased 77% to $316.2 million as of October 31st 2020, compared to $178.6 million as of November seven 2019.
The increase in cash and current marketable securities is driven by cash generated through operations, including deferment of $53 million and payment composed of lower inventory levels landlord obligations extended vendor terms and deferred payroll tax payments as well as net income improvements related to the abatements credit and expense reductions.
This increase was partially offset by $30.4 million of share repurchases through the company stock buyback program prior to our stores closing at March due to cope at 19 and other planned capital expenditures as of October 31st 2020, we have no debt on the balance sheet and continue to maintain our fall unused credit line.
At $35 million.
We ended third quarter of 2020 with $161 million in inventory compared to $183.4 million last year, a decrease of $22.4 million or 12.2% after delaying or canceling orders during the first quarter. We have continued to work with our brand partners at demand has exceeded our expectations in the second and third quarter. Okay.
For all the inventory on hand is healthy and selling at a favorable margin and entering the fourth quarter and we continue to increase our levels in key category.
Turning to the income statement third quarter, net sales increased 2.6% to $271 million compared to $264 million for the third quarter of 2019, the increase in sales of driven by an 8.1% increase in comparable sales, which includes re opened stores and our digital activity, partially offset by store closures during the per.
Period, breaking down on a comparable sales further we saw a meaningful digital strength with comparable web sales growing 39.6% for the quarter, while comparable sales for physical stores grew 2.2% year over year. Our stores were opened for roughly 95% of the potential operating days during the third quarter of 2020.
From a regional perspective, North America, net sales increased $1.9 million or <unk>, 0.8% to $240.3 million on or other international net sales, which consist of Europe, and Australia increased $5.1 million or 19.8% to $30.6 million, excluding the impact of foreign currency translation.
In North America, net sales increased 0.8% and other international net sales increased 12.5% for the quarter day.
During the quarter of the hard goods category was our largest positive comping category, followed by mens accessories and women's for.
Footwear was our only negative comping category.
Third quarter gross profit was $105.8 million compared to $94.6 million in the third quarter of last year and gross margin was 39% compared to 35.8% a year ago at.
320 basis point increase in gross margin was primarily driven by a 170 basis point increase in product margin of 150 basis point improvement on inventory shrinkage and a 30 basis point decrease in store Oxy costs. This was partially offset by 40 basis point increase in web shipping costs due to higher web penetration, however, shipping cost leverage.
The prior year when compared to total ship sales.
Thanks, Jeff <unk> expense was $67.9 million for 25% net sales from the third quarter compared to $70.3 million or 26% of net sales a year ago. The 160 basis point decrease net net expense as a percentage of net sales was primarily driven by 90 basis point decrease in our store wages of 40 basis points of low.
Leverage and other store costs 40 basis point decrease in corporate costs.
30 basis point decrease due to governmental payroll credit and 30 basis point decrease in Nash on training and recognition of bank costs. These improvements were partially offset by a 40 basis point increase in annual on discretionary incentive compensation and a 30 basis point increase in impairment on fixed assets.
Operating income in the third quarter of 2020 was $37.9 million or 14% of net sales compared with operating income in the prior year of $24.3 million or 9.2% of net sales.
During the quarter, we recognize flow through on incremental sales of almost 200% based on the factors outlined above and our ability to adjust quickly in this challenging time net.
Net income for the third quarter was $29.1 million or $1.16 per share compared to net income of $19.2 million or 75 cents per share for the third quarter of 2019, our effective tax rate for the third quarter of 2020 with 24.7% compared to 25% in the year ago period.
Looking at year to day results from a sales and earnings perspective. This year has been incredibly volatile from quarter to quarter year to day sales through the third quarter on currently down 6.6% or just over $46 million, while earnings per share of growing at 15.8% to $1.32. We continue to benefit from both our optimization.
Current efforts within the model as well as from onetime adjustments. We have made in response at pandemic around managing our apparel cost reducing events travel on training managing marketing efforts working with our landlords and receiving governmental subsidies tied to continue to pay our people as moving to 2021, we expect.
We're at a quarter volatility to continue as we transition back to a normalized sales net expense environment.
Now to our fiscal fourth quarter to day sales results total fourth quarter day sales through December 1st were down roughly 3.9% compared with the same time period in the prior year ended December 32019.
Our stores were closed for roughly 3% of the potential operating days during this timeframe due to the ongoing mandated store closures, both domestically and internationally.
We also experienced significant traffic metering and reduced operating hours.
Total comparable sales for the quarter day period, ending December 1st we're down roughly 1.7% by channel our quarter day comparable store sales decreased 7.8% and our ecommerce sales increased 16.7%.
Our sales were stronger in the first few weeks of the fourth quarter as we saw customers look to purchase one store traffic was lighter sales.
Sales were challenging during the important black Friday weekend as noted by Rick earlier from a regional perspective, our North America business has experienced a 0.6% increase in the fourth quarter through Tuesday, while our European business has seen an over 30% decline with store closures and reduced traffic across.
Cost of the business as well as a slow start to the impact of important snow season.
The quarter day 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, partially offset by a decline in average unit retail.
Quarter to date footwear was our largest negative comping category, followed by mens and womens the hard goods category with our largest positive comps on category followed by accessories.
Due to limited visibility on the business, we will not be providing guidance for the fourth quarter of 2020 or of the fiscal year.
That said, we do want to give a few thoughts on how we're looking at 2020 wrapping up.
We believe sales during the fourth quarter will continue to be impacted by closures traffic metering and sales trends that are hard to predict to prepare for this our teams of bill multiple scenarios to navigate the range of possibilities and we are continuing to monitor our results against those scenarios.
We are expecting that our total sales for the full quarter will be better than our core to day results of down roughly 3.9%. This includes our north American sales trending flat to up low single digits for the quarter end, our European business be significantly impacted by store closures as well as reduced winter sports.
Activities.
We drove a product margin increase of 170 basis points in the third quarter and of had a positive start for the fourth quarter, we are managing inventory tightly and working with our brand partners to navigate this environment in the fourth quarter, we expect to see a benefit in product margin for the prior year, but do not anticipate that it will be as significant as the year over year.
Your growth experienced on our third quarter.
We continue to manage costs across the business understanding of this challenging environment and limited visibility.
Through the first nine months, we have seen significant reductions in certain expenses as we work to align the cost structure to the sales loss during our closures. We're currently planning EPS unique expenses across the business to be down approximately 9% compared to 2019 associated with reduced hours on stores the reduction of travel on training reductions in <unk>.
On on capital spending reductions of incentives and many other benefits with.
With the potential variability on performance over the important holiday quarter. This estimate could increase or decrease as we gain more visibility to the sales trends our ability to further adjusted expenses and the potential for non cash impairment.
We now expect to opened approximately 12, new stores in 2020, including three stores in North America seven stores in Europe, and two stores in Australia. This is down from our plan coming end of the year of 20 new stores.
We expect capital expenditures for the for 2020 fiscal year to be approximately $11 million compared to $19 million in 2019 in our original plan for 2020 of between $18 million at $20 million. The majority of our capital spend will be dedicated to new store openings and planned remodels.
We expect at depreciation and amortization, excluding non cash lease expense will be approximately $24 million down from $25.1 million from the prior year.
Yesterday, our board of directors approved the repurchase of up to $100 million of our common stock. This repurchase authorization of replaces the previously approved $100 million repurchase program and is expected to continue through January 29 to 2022 and less the time period is extended or shortened by the board address.
Actors Lang.
Lastly, we are currently projecting our share count for the full year to be approximately 25.3 million shares excluding the impact of potential future stock repurchases with that operator, we'd like to open the call for questions.
Thank you Ashley of mandates to ask a question you'll need to press star one on your telephone share.
Let's try a question press the pound key please stand by low we capacity coming on day roster.
Our first question comes from Janine Stichter with Jefferies. Your line is now open.
Hi, Thanks for all the color on the gross margin on tumor.
Questions about the drivers there I think first you called out on some pretty nice shipping leverage in the third quarter I was wondering if something that's on the thing can continue into the fourth quarter on maybe talk a little bit more about what's driving now and then at shrink the benefit you saw in the third quarter at their opportunity in the fourth quarter as well and maybe on how those compare them.
Thank you.
Sure let me tackle each one of those in order here so from a from a shipping perspective and leverage this.
This is something we we've worked on for a long time in how we manage our shipping profile as you know we're we're one of the few retailers, it's exclusively shipping 100% of our.
Digital orders from stores and this is part of our model on we think it's a really competitive part of our model from a standpoint of thinking about a one channel cost structure to serve the customer and as we have continued to refine that really over the last five years, we've been operating like that we continue to get better at what we are doing for.
From a shipping perspective, and obviously with increased demand here at during the cold at time period, we've been able to continue.
Continue to make strides and what we're doing here from getting inventory at the right place to begin with and minimizing split to to see higher DPT ease in the current that's driving a better shipping volume to continue to work with our carriers on how we're managing costs. So all of these things.
Really play into the model and how we are trying to push it going forward is we want to be fast to our customers, we want to get them, what they want and we want to try to optimize on the back end from a shrink perspective.
I think it's been of.
Pretty significant benefit to us as we move for the year as we laid out in our prepared remarks clearly.
Clearly the at the store closure period a.
Coupled with reduced traffic and metering has been a benefit to this but we've also been working behind the scenes for the last couple of years as you may recall, a couple of years ago, we were talking about this trend going the other way.
But our store teams done a really phenomenal job putting practices and procedures in place working as a team to bring this line item Downs I think you kind of take those efforts that we had throughout 2019 and coming into 2020, coupled with the operating environment. We've had here in the first nine months of the.
Year, and how we would see it playing out into the fourth quarter, we would expect to see some benefit in shrink just based on how store volumes are being measured.
Great and then just on one more on the delivery I think you mentioned zumiez delivery on the sales team going directly to the customer store can you elaborate a little bit more about what that is on how big it is at maybe what the potential at there.
Sure John ill start on the Chris follow up with some comments too. So I mean, just of a really excited about.
That we're able to roll out our zumiez delivery effort and then for this fourth quarter and we're really excited because if you could give us an advantage this year, particularly.
Particularly on shipping company at the restricting shipments due to capacity constraints in the system because of so much digital shipping demand.
Now that said we are really prepared for this opportunity in Q4, because we are working on our ability to do delivery for the last two years.
And.
This is I would like to I guess, everyone to think about this on our kind of innovate.
Innovation spectrum for us our innovation roadmap and we've been on this March for many years of how we think about involving our touch points at every day for to meet consumer need at every consumer touch points on.
Our team did a really great job of rolling out the program quickly with great training materials based on our learning we had through all the test phase of the last couple of years and I can tell you that the rollout has gone really well.
Yes for me more broadly I like to think this is again. Another example of Zumiez as a leading innovator in specialty retail.
How we evolve to meet the needs of this really modern empowered consumer.
Our goal is to really again as I said of every consumer touch point and challenger sales of how we can improve the experience for our customers. So I guess I'd ask you all to think about putting zoom zumiez delivering the context of the old other programs we discussed.
Including fully localized fulfillment that Chris just mentioned, which you've been doing for about five years now and is clearly proven to be at winning strategy to put zumiez delivery in context of the trade area assortment planning initiatives, you've heard us talking about we're striving to be total customer may on both physical and digital always transparently available in each trade area, we do business.
To put the zumiez delivery effort in context of the broader idea of trade area of profitability, which you heard us talk a lot about that we're striving to optimize experience again as you've just for Chris mentioned for our customer at our business and put all these efforts in the context of meeting customers expectations in any way they want to get their product at the strive for next day or same.
At capabilities over the long term, so I guess from each of the injury to the some of the ideas at your I was hoping for Alison investing to see us execute that we believe are driving our results and creating new ways to bring our brand experience right to our customers store.
And we have a lot more ideas about how we can innovate and how we can be of continue our lead and innovating, especially retail.
We're focused on meeting what we think are really rapidly evolving consumer needs. So the wrap my part of this up I just while you know we have a really clear vision of where we're going and what we need to do at how we need to innovate for this consumer over the next few years, we have really clear roadmaps at a lot of initiatives in front of us all.
A lot more interest of things besides assuming his delivery to rollout and a clear vision to go achieve these objectives. So can I hope everyone to think of what were are announced period as you means our delivery capabilities in the context of being innovative in how we take steps to serve our customers and then connect our customers. It's really what's the strength of our business are made.
And salespeople, so now, let Chris talk little bit more about of delivery process, Chris Yes, Thanks, Rick and let me just echo my excitement for the program to this is really cool that that our teams are even in a spot to be able to execute on this obviously is as we started to opened stores in and started to operate at.
Full capacity here in the second quarter.
We very quickly realized that we could have for carrier constraints as we moved into the important holiday peak.
And we started brainstorming around those challenges so.
As we went well we certainly do not have full clarity end at what's going to happen over the next month. We built we believe we've built a model that we can continue to prioritize our customers. This includes really working with our incumbent carrier to prepare for the increased low to and wed penetration discussing modeling and.
Total capacity limits that we've really been working with them on on a daily basis for now months Weve.
We brought on additional carriers to diversify end help with some of the constraints that are out there and the potential risks.
We saw around holiday and we've launched on these delivery that we're talking about right now and 20 for trade areas. This accounts to as much of 5% to 10% of our daily deliveries right now on this accounts for roughly a 150 of our stores.
And at program as Rick mentioned, we piloted now for for over a year the concepts free simple, we hire our employees and we bring that great customer experience.
Right to the higher the great employee experience right to our customer's door and.
We're really excited about what this operating the opportunity is.
We are on the early stages of this large rollout we actually launched at the.
At 23 markets beyond our initial test market in late October. So we have a lot to learn here, but we have proven through our testing.
We think we can be efficient in this type of environment and we've really proven in our testing that we can exceed the customer's expectation with speed and Sim.
Similar to our fulfillment five years at our in store fulfillment five years ago.
We had concerns back then about some of the financial implications.
Implications of fulfilling from store, but we knew we had great teams and we knew we had smart people and if we put effort to at it.
Was the best thing for the customer and I think over the last five years, you've seen us really refine our model and thats become a accretive.
Service that we've been able to do and and we feel comfortable with where we are here on the delivery side to that we can continue to it as well so.
More to come on eye on where this goes for us, but this is a great new capability that adds to our suite of capabilities at Rick touched on earlier.
Great. Thanks for all of the color on best of luck for holiday.
Thank you.
Thank you for our next question comes from share Index Yell at William Blair. Your line is now open.
Hi, good afternoon, I actually find that I have a lot of questions ill try to narrow it down I guess, Rick you talked about.
The strategic opportunities and I know you talked about real estate within that so I guess the question there if you're.
Prepared at or willing to take advantage of a more favorable real estate market. Currently I know at some of the companies I follow at other sectors are doing so, but I haven't seen anybody yet do that.
And your neck of the wed so just curious on your thoughts there and then on the one channel dining.
Dynamic are there any M&A.
Opportunities there that would help you accelerate some of what you're doing I mean, its tremendous what you're doing but obviously developing your own capabilities could take longer than buying them. So just curious about that and then lastly on the on the delivery is that actually.
Cost effective relative to traditional like easing EPS or what have you or as at more because you know we're end this high volume season, and it's important to have.
That optionality for the consumer and what's a really constrained channel right now.
Okay. Those are all of.
All right really great question share. So let me let me start the for the first couple of from ill, let Chris take on the Zumiez delivery of the cost structure as we're thinking about it.
So yes, we are willing to take advantage on the real estate and will it and obviously we of the capital to do so.
So share and I would tell you that we're already doing so in our international markets, where I think at the opportunities are really great.
So we're already leaning in in those markets, where we're really seeing significant drops in rent.
We have why here in North America, where our business is a much more mature business, but still has room for growth. We do have a list of targets of centers that we'd like to be end at.
And we're always engaging with our landlords on those targets.
At least typically our higher end centers, where either we have not been able to negotiate the right rent structure economically to match, what we believe our business our sales forecast for those markets.
For we have on the right locations in the centers, where we feel strongly about of our willingness to take a location of the center. So we are clearly here in the in the us and North American Marc is still looking at opportunities there too and in some cases it might be a relocation or reposition repositioning of an existing location that there may be some of that.
On there, but we'd be moving into higher volume centers in doing that it would still be of net plus for the business from a revenue point of view. So we're still looking at those share in and again, then I step back and put.
The concept of what we're doing particularly here in North America I'd put the real estate concepts back on the real estate.
Potential for opportunities back in the context of the concept of trade area.
And thinking about how do we optimize to serve customers in these trade areas and we define at trade as a group of stores that work together in a geographic region to meet all of the needs of the customers in that region.
And so these are definitely factors that come into our thinking about the evolution of our store portfolio over a period of time. So we can find those opportunities which on our real estate team is always working on here, we will take those advantage here in North America, as well, but I would tell you right now I think the big opportunities, where we still have a ton of growth in front of us are.
Looking at at our international markets, particularly Europe on Australia.
On the second for your second question again, which is an excellent question about our one channel approach of both the one gentleman, Saudi as it relates of serving customers, but those the one cost structure for that that underlies that which as Chris mentioned, we are working hard to optimize experience and I think these two things on our go hand in hand, when we can work.
At the faster response of always have whatever the customer wants complete transparency at those traders available anytime they want it that really gives us the.
The option then it gives us the ability to really optimized of business in the one cost structure mentality. So it's not just I think at the one show mentalities be about our customer focus that we're going to power of the customers choose and then the cost structure at about optimizing around that customer experience.
So it's a really great question, you are asking about the buy versus build around capabilities and as I have said in the comments regarding zumiez delivery, we have a long list of initiatives here of how we think we an innovator on this consumer experience.
And we do in some cases share on where we don't have the internal capabilities of some of these issues. We go outside of the business, whether it's development partners, we have really experts special expertise in a particular area.
And we've looked at other parts of our business, where we think we could potentially add strength and capabilities and talent by hiring the skills that we need to do it.
Two of great extent, though so.
So we're not opposed is the headline share in looking outside to acquire the skills that we need but I would tell you that in most cases, it's not so much.
M&A in terms of business its really about talent that we need to acquire the skillsets in most cases, where we need to supplement our own zumiez talent pool to achieve some of the plans we have in place.
And we have been doing that around some of these initiatives were going on outside of the company located in what we think's really outstanding talent to help us drive out some of these new goals and ideas we have of that we're working on.
So we're not at all opposed to at though again, whether it's through consultants and developers for talent acquisition, we're doing those things and if we found something big enough share in where we thought it would add we would definitely take a look at at Theres no doubt about that and because again, we have the capital resources and I think the skill sets and the dominance.
On our market to bid on lever of those opportunities. So if they come up we're certainly taking a look at them. If we identify most of that we need we are certainly something we'll consider but we are constantly looking to add more capabilities and I just want limit to M&A I think again, it's about talent acquisition or the use of outside experts in certain areas, where we might have may not have the expertise internally.
And the last thing I guess I'd say about that is one thing that is a challenge for share and on these topics is fine cultural alignment.
We just can't high at believing that we just can't hire any outside consultant or developer to help us they actually have to be willing to think creatively and culturally of the way we do at.
And so we have to find those culturally aligned partners from about his perspective on really to get the.
To get the buy into what we're trying to do so that's and that that's not a restricting factor dose those matters are out there for us. We just made in some cases at the look a little harder to find them. So we're open to finalize that thought churn were opened all sorts of angles not just on potential look at M&A activity, but also at talent and looking at broadening our talent acquisition work.
Two outside of our historic strengths internally.
And then looking for outside consultants and experts who can help us of specialized areas of Chris talked about the zumiez till the cost structure, yes, absolutely and I think it's important to note as we as we delve deeper into this at this is not a one store to one customer relationship. This does tied directly into what Rick talked about from a trade area of perspective. This is a a GAAP.
Group of stores, serving the customers in that market, which allows you to increase the inventory basin and manage volumes now share and Jay you've followed us for a long time for you know that we are always mindful of costs as we navigate through things, but we're also mindful of what's right for the customer and I think one of the beauties of below that.
Yes. This program now for over a year is we've been able to see how the volume to react and trade area as we seasonally moved through the year, we mailed to see the peaks and see the valleys and video to adjust and tweak the program.
To try to drive effectiveness.
As you do mass rollout. So at this point in time, we have certainly seen that we can do that.
For sustained period at or near a what the cost of the carriers are obviously, we've had time periods, where we've been above and time periods, where we've been at at I think the best part about it is again ties back to what I mentioned earlier is the experience at the customers had so we feel pretty confident in moving out into the cash.
Cash group that our teams will be able to manage this and over time, we'll be able to optimize it we still have a lot to do.
We obviously accelerated this rollout based on the current environment, where end. So we have more technology more process improvement teams will put in place, but in rolling it out it was a pretty calculated effort on where we thought costs will go and obviously as we move through.
The fourth quarter Monteiro will get a much better read on it maybe Chris you could get a little bit color on how much the delivery, we're doing ourselves within the trade areas for using the program. Yeah. At this point in time, we as I mentioned at from a total company, we're at that 5% to 10% and within an individual of trade area, we've gone to 25% to 30%. So we.
We are we are able to get more capacity and I think thats a number that we can also see increase as we continue to move along and as we are able to increased at overall capacity, obviously, the economics of the program.
Become better and this is where it actually all feeds on itself and you know Weve worked on this for a while as weve localized fulfillment of getting the right product and the right trade areas and it's a total company effort because it starts with our buyers really thinking about the product, they're going to buy up front and on the allocation process and obviously this delay.
Livery drive through to those initiatives to make sure we have the right product in the right places.
It's a classic old retail Maxim of right product right place right time, we're just taking it to all new level, I guess share and in terms of.
Of what that means from the concept of trade area of total demand within the trade areas for you when we talk about demand at trader, we mean, both physical and digital demand and then how we serve customers and plan on product for that and then getting on what we're looking to do is really really to connect to put to create amazing brand experiences at every touch point and if so while we don't always share.
At our Roadmaps are if you just take that idea flow and think about what it means in this empowered consumer world and and then we're thinking about how we can do that and put make it as human to human connections as possible across this and then we of evolution plan for why we're in the process now of just making sure that in was going to be a very constrained delivery time period of holiday.
And maybe where it may will deliver product close of the holiday season, we've ever been able to deliver it up in those final days, we have some more work to do to make that transparency available for customers to do at I hope, we're going to get there, but could give us a tremendous leg up in the days in advance of Christmas. So we have more work to do to get there to be clear in this price.
Process, but it's this I mean these are one of the cool things I think share in that again I I'm. Just so proud of all of our teams to be able execute we are able to pull lever that no. One else really can Paul and I think eventually we're going to find our teams can really to end. This to it we are going to know whats a profitable order for us to deliver at what's not in our algorithms will take care of.
Following those orders if its right into our own delivery capabilities into our own system for delivery capabilities.
And then as we think of the evolution of this.
Think about the point in time than where we're going to get to the customer's store and we're going to add onto the sale and this gets back to our way of thinking about our our point of sales of how we conduct digitally into the customer experience, what how do we get out of one or 2% more to sales across for delivery process. What happens we can correct sizing and we're we're out there able to.
Deliver customers on all new ways, what happens at where the out there with the customers for skateboards, showing the young young young girl how to do our first kicked flip in the driveway. This.
This is what we talked about on the power of the Zumiez brand experience of power of our amazing people were buried altogether and then optimize experience around the customer.
I think thats, just going to be period again, all of these ideas of multiple multiple levels to what we are trying to do so it's really I think is going to be one to fund parts about how we think about our future of where we're going to go.
Thank you.
Thank you for our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.
Hi, Yes, hi, everyone.
Just a follow up on the delivery did you say if the plan instead zumiez delivery to all trade areas of all stores and also will that run all year or is that just during peak periods and I guess, how much of your E. Com delivery do you expect to be Zumiez deliberate.
Yes, Jeff Thanks.
Obviously as I mentioned this is very early on and right now we're at 24 trade areas. We definitely think there is the potential to expand from 20 for trade areas.
As you can imagine there are certain stores that represent their own trade area because of their remote net that day in connection to other stores. So we haven't really gone down the path of what it might look like and those types of stores. So this isn't something that we're thinking would be rolled out to all of our stores across the country, but certain.
We all of our stores in metropolitan areas that have work with each other to serve the customer. We think we can operate in all trade areas.
At like that and I think you know as Rick talked about at this kind of innovation lab of the different ways to serve the customer. This is a key part of our strategy the innovate and export and we have done it with Europe and Australia already in many different examples and Canada as well everyone's at different Pat points on the.
Path here, obviously in many of the markets. We're operating at internationally, we just need to get the scale of stores and digital to serve the customer, but as we continue to push we're already seeing that today, including being able to fulfill from store in Europe, which is obviously a challenge market with some of our store close.
Is there so as we as we push long term, we do think at the program that can roll out internationally has the potential to roll out internationally I should say, we think at the program that we can roll out further domestically I don't think were prepared at this time to say what percent of our digital of share of that's going to be but.
But we do think its of program that could work at all metropolitan markets.
Okay Fair enough and then can you speak a little bit more about how you're thinking about.
On managing inventory in Q4, I guess, maybe where you feel like you.
Like the of running light or if there are areas, where you feel like you may need to lean into a little more just wondering if theres anything around that.
Sure and then let me just kind of start with some of the numbers and at brick would like add anything in.
We can go from there.
At Tory, obviously has been a roller coaster and our buying teams across all of our NCS of just on a phenomenal job navigating through it from.
What seemed like a very difficult situation in Q1, and cancelling orders and trying to get things right and as you know we ended the first quarter roughly flat in inventory year over year to then seeing our stores reopened to end the incredible demand at.
That we saw as stores were reopened in the online demand.
We finished Q2 with inventory being down about 16%.
To get to down 12% continues to be that effort of chasing and.
And really working with our brands to get product in overall, we feel really good about where the inventories at as we move through Q4, we're being really opportunistic about where we're going to increase penetration. Our goal is not to be down 12%. We certainly would like to have some more inventory in certain key categories.
But we've been chasing that and growing our inventory levels to meet the queue for demand and where we think we need to be within our ecosystem end.
You know as we as we moved through the quarter, we expect to continue to make headway and end the year, where we where we'd like to be.
Do you feel like you have enough hard goods inventory, given the supply chain constraints or a lot.
It's it's clear of and it's a challenge and a lot of not just hard to build across a lot of categories of business over the last few months and I would tell you that it didnt pretty much as Chris said, Jeff we are getting sequentially better.
So I feel like were definitely better position at hard goods than we have been throughout the earlier parts of this year, we're better positioned now than we have been the most target categories now the only work earlier in this year. So I think our teams have done a really good job were I think for prepared to meet the consumer demand.
And but it's been a challenge at a lot of areas footwear has been a major challenge in terms of supply chain for us and that's you actually were down the most and inventory is in our footwear business. So.
I feel pretty good about where we're at I think as Chris at our teams have done a really good job across the country at across our entities to really manage inventory and focus on the things that are most as you might guess most important in terms of where we're trending at this point, but in most cases ours are skate hardgoods.
Department at categories on a better position here at holiday than they've been earlier in the year.
Okay, Thanks, and best of luck for Alan.
Thank you Jeff.
Thank you for our next question comes from Jonathan Komp with Baird. Your line is now open.
Yes, hi, Thank you just one quick follow up on the delivery units should end if I see on line.
Yes. It was quoted at for five to seven day window of fast.
I'm wondering how that compared to your interest being option than just getting more perspective around at speed for about a mistake.
Yes.
We are pretty darn fast is the headline on zumiez delivery.
So I think that just our team give a little bit of room maneuver, because we're usually in a day or two.
And John we totally encourage you to test this out of order a few things or a lot of things for that matter John.
Let's see we end the get it to you really quickly in your markets. So that's probably just our team did a little bit cautious in their early rollout.
And the markets were end, but again remember we're not doing the system wide at this point, we're only doing this and the 20 for metropolitan markets that we're at today. So.
With room, if we need to over the next few weeks to pull more triggers spending on how we're doing in the marketplace. We can activate more markets are ready to activate for markets. If we need to but we're pretty darn fast on is the headline.
Yes.
I would say this were faster than any of the other options.
In our in our GAAP in our delivery venue.
On pulled at here I don't know on Metro of Yours on the top 20 required by GAAP.
I'll take your word for free.
Maybe maybe one other quick follow up Chris just the thought on North America, improving during the balance of the quarter any more color there on what you expect.
Yeah sure I can talk a little bit about Q4.
How were thinking about it I mean, obviously, we in our prepared remarks, we talked a little bit about what the cadence has looked like North America included positive weak line, followed by a really solid at least two and three and actually really good lead up to the Black Friday weekend like.
Like I think many retailers will have reported or will report, obviously Thursday Friday was definitely challenged by store closures reduced hours on.
Metered traffic as we would expect in end and then since then at things.
Things have been better and so I think you know we are looking at Q4 very similarly to how we looked at Q3.
The peaks are just more challenged in this type of operating environment, we will not see that.
At the levels of mall traffic, we've had and actually traffic overall, but yet you're going to see that spread out much more so our anticipation that built into the general comments we gave.
Around getting better than our current run rate and where we think North America will be is really built on the concept of will be stronger here as we move through these weeks, which actually for the last better part of last five to 10 years of declined at the peaks of gotten more important but.
But we would expect that to be spread out a little bit here at these lower volume period between the two peaks and then it will be more challenging the.
The week of Christmas as volumes of historically picked up and that may be spread out a little lighter and then we could see after Christmas I still be stronger even into mid late January. So that's what's built into our thought process for North America and and.
And how we're thinking about the remainder of Q for I think that so I think thats exactly just echo chriss comments on John I think thats exactly where things about it's going to be very similar to Q3.
I think has been driven by how consumers are thinking about the current environment and safety in this current environment and and spreading out their spending probably for conservative reasons on their part to but I agree with Chris I think we may think about as we said at improved improving trend line to where we're at today for the whole quarter for as Chris said that may take through the end of January to play out because of.
There's no way that we can have at we can achieve our store volumes of the 26 with particularly this year falls on a Saturday 26, 27 20 for store monstrous days for us in stores when the kids always come in end user gift cards. So I think that volume of spreads out as Chris has said that volume also spreads out potentially spreads of all the way through the month of January.
And I'd just add to your question John I know you Didnt ask about international but I do think it's important to talk a little bit of just about where Europe is.
Obviously, the business has performed extremely well through the first nine months of the year with coming into the year with.
Digital being about 50% of our sales.
Even when the stores closed it performed much better than the consolidated run rate. The second quarter end third quarter were really great results for the team there and we're really proud of the progress that we've made entering the fourth quarter. Obviously, we have been more impacted by some of the governmental.
Restraints over there with from a pretty significant closures share we talked about 70% of our our store days being closed through December onest.
Pretty significant reduced hours.
And maybe even more challenging is extended stay at home orders, so even where we're able to keep retail opened there is the encouragement that you should be home and so it's really created a challenge on a slow start as I mentioned in my comments were down 30% in.
In November and.
Q4 is always been very important for blue tomato and a higher penetration than our domestic business.
And where we are definitely feeling for the team working through these challenging times that being said there they're doing awesome, they're doing everything they can to gain share again sales and we do anticipate that we're we're hoping based on what we know today there will be opening stores here as we move into December into next week actually.
Early and we're hoping that we see some of the pent up demand, we see when Weve had opened and closed stores across the year and other markets. So.
Definitely factored that into our guidance thoughts as well and we're hoping we're able to exceed that we'll see where where the customers at as we move through the quarter.
Yes, that's really helpful and maybe just last one Chris you brought up a more normal cost environment.
Looking into next year any more color on that I mean, the fact that day.
Gross operating margin like you have for year to date on a kind of down sales number of should we be.
Speaking of anchor in more towards 2019 operating margin as a starting point.
Just trying to.
Yes, I read what you're signaling there.
Yes, Todd totally a fair question, Jonathan and and something Weve.
Definitely been thinking a lot of out as we've been building budgets and moving into 2021.
And obviously, let me just start by Dan we are extremely happy with where we stand from an income statement perspective and balance sheet perspective through the first nine months of the year. There. Our teams have reacted in a way that I don't think we ever could of anticipated.
And so we're really proud of where we stand as we as we look to 2021.
Surely there is a lot of uncertainty and what that environment may look like.
We're certainly not prepared to give guidance at this point, but we do think it's important to kind of lay out a few things were contemplating and hopefully that helps answer your question.
Overall, we do expect sales to come back assuming a more normalized operating environment, our ability for the customer to really come into stores and shop, how they want when they want and the physical environment, while still utilizing the digital platform.
We are expecting quarter to quarter volatility in the financial results to be pretty significant with the first quarter performing much stronger than what we saw here in 2020, the second quarter is going to be more challenged and the third and fourth quarter were hoping to see more normalized results compared to where we've been.
Hi, we're expecting product margin to be a pretty significant challenge given the growth we've had this year.
However were building plans to really maximize our result, there and our teams are really thinking about this in a new way.
Were expecting more meaningful occupancy growth and step ups in certain areas of the business as we are knocking on doors, we're not planning on receiving rent abatements or governmental credits around payroll at.
And we're planning to reinstate some of these important cultural events Youve heard us talk about over the years and training and travel as we continue investing our people I mean, we think this is a really big differentiator of ours.
As we move through 2020 at something that's important for us to go back to as we as we look to a more normal operating environment. Obviously, we expect hours to go back to normal driving additional payroll expense and operating cost and all.
All of that it makes it hard for hard for you guys at hard for us to add to predict what it looks like that on 2019, we grew sq in a 4.7% on sales of 8.8%. We we've we've done a good job I think managing SGN a this year weve for in my prepared remarks.
X. I talked about a decline of approximately 9% is currently where we're planning based on a expense cuts and credit that we've we've discussed so as we think at 2021 on at this point and obviously, we'll update you more March we look at total last June $8 growing I think looking at it in relay.
Well into 2019 is probably right, we actually would expect Sq day to grow even on 2019 levels in total dollars.
Well, we certainly believe we can manage it lined as a percentage of sales as we think about where SG day was as a percentage of total sales in 2019 might be a better starting point as we looked at at 2021. So I think it will be a difficult operating environment that.
I tell you 2020 is giving us even more confidence in our team's ability to navigate through it.
Understood that gives us.
Are you guys contemplating thank you.
Okay.
Thank you.
Our next question comes from Mitch Kummetz with pivotal research. Your line is now open.
Yes, Thanks for taking my questions I got a couple of let me, let me start with Europe and.
On the snow business can you say how much exposure you have to so.
On the fourth quarter and as the issue or part of the issue with some of these resorts might open or if they are opened or closed I know that at some headlines around that and I've got.
From a follow up on that of that another question.
Yes and.
Much of that is exactly the issue we on the snow business, which is theres always this year when it snows, but it always knows at some point right.
So you should we time has told us at that usually low for the volume will follow the dash of weather conditions at the bigger challenge in Europe relative of snow business at this point in time is related to pandemic.
And right now a lot of the resorts just simply can't opened.
And that is true in Austria, our home market at Blue tomato theres going to be some restrictions of place for quite a while there yet.
There's tourists restrictions for cross border.
Tourists coming into Austria, the use of store resorts. There. So there is a lot of complication of around this issue of just weather and how much the resorts can be able to be opened for business during the season.
And here that's been answered of it differently I'd say right with the the season passes and.
On the reservations to use the mountain right. There they have approached a deferral of here, but we're not at the same challenges here in the us in a different way and thats still not going be a lot of tourism for traveler as usually pick up here in the northwest of lot of trips to Whistler or up at the central for is funded Thats just can't happen now.
So we'll see some of the same effects here, but differently and that but Europe, it's definitely.
More constrained environment in the store business now all of that being said niche at the other the other thing I'd want to point about our store business Europe is that we've been for administrating snow as percent of our total mix over the last number of years, because we've been growing our store base and as you are aware of the digital world attracts particularly larger per se.
On of the snow business of our store base, which.
And digital snow business. It does at lower margins on our apparel business. So on doing this is one of the things that as we grow our store base on Europe will will decrease our dependence upon the snow business why improving margins as we do that is kind of the magic of.
Building scale in the marketplace. So that has been happening over the last few years and as we continue our growth in the marketplace will continue to see snow will still be important for us there to be clear, but it will be declining portion of our business as we grow our store base over the next five years got it at.
Just a follow up on Europe, and then again one other question. So I guess im a little surprised to hear that Europe because.
Was down 30% of quarter to day, despite all of the issues over there partly because I know you guys have.
Very robust digital business in Europe more robust than you do at North America. So of stores closed on the towers come down I would have thought a lot of the volume trends for transfer on line is that not happening what was total good.
Speaking of in Europe, or people, just not shopping in general or kind of some of this and go back starts at they're just not of stopping for shopping for snow in general so.
Yes, it's two things I think Mitch the first is as as we just comment.
Commented on is that the digital business has a disproportion amount of snow business.
So that is one aspect of it for sure.
Because of you're not going to spend a lot of gear for you not to be able to go to the mountains price I think thats the simple simple calculus, there and the second I think.
Issued at the factor in Europe is there is no additional stimulus work.
At the shutdowns.
And across virtually all the countries and is kind of of worst world for retailers in that sense is because they haven't shut retail down but yet our our operating hours are constrained theres curfews in place in the case of all of your stores auction at closed at.
But there isn't as much stimulus in the economy to drive demand. So I think thats. The other aspect of at that is.
He has been more difficult for the digital business in Europe.
And then the last question was on on footwear, which was your worst topic segment on the quarter I think it's been your most challenged segment for a few quarters now Rick you made the comment that it's the most challenged business from a supply chain standpoint. So.
Does the cash performance gross for the supply chain situation or is there something else operating here I know that.
You guys long enough to know that in response from his question, Jonathan often talked about how the sort of cycle out cycle down on another footwear as lapping a couple of years of really strong performance, but I'm also wondering Jeff.
As maybe some of the issues on footwear that was total but there are these trends for sort of fitness sort of comfort and that's not necessarily.
Your sweet spot on footwear.
I am not prepared at this point to be able to answer that question, Mitch and because partly because of the constraint in the retail in the supply chain is so when you lack of lot of inventory, it's hard to know what the issue is.
So I'm not prepared to I don't think we know the answer to that question that you you just asked at this point because of mix of.
It's hard to know until we have the product to do it.
And to really see where the demand is in the marketplace and again this isn't a just at U.S. issue. This is a global issue for us.
Footwear and so this has been one of the tougher.
Performing businesses again supply chain wise across our global platform now.
Now we do have some things that are working in footwear, but again I would tell you. The same thing, though things are work. If you don't have enough inventory of so I know our partner's share work in their hardest to get product in place for for not only us but for all of their partners, so it and probably for their own dime.
Direct businesses so I.
I think that what transpired at footwear is that it's such a size intensive business that when the pedantic hit.
People took some pretty dramatic actions relative to manage of their own inventories and supply chain structure and that's been it takes to then a lot longer to get at fired back up again, particularly with the the size complexity at you have in footwear.
So I can ask the question because I simply don't know hard to make that read with no inventory got it. Okay. Thanks, guys and good luck for holiday.
Thanks very much.
Thank you im not showing any further questions at this time I would now like to turn the call back over to direct Brooks for closing remarks.
Again, thank you everyone for your interest in Zumiez, we always appreciate it and I just want to close by wishing everyone a sound safe and healthy holiday season, and we're going to look forward to talking with you again in 2021, when we get the chance to report our Q4 results. So thank you everybody really appreciate it toxin.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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