Q4 2020 Zumiez Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc. Fourth quarter fiscal 2020 earnings conference call. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference before we begin I'd like to remind everyone of the company's Safe Harbor language Today's conference call includes common.
And concerning Zumiez, Inc. Business outlook and contains forward looking statements. These forward looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties.
Actual results may differ materially additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available and the zumiez filings with the SEC at this time I'll turn the call over to Rick Brooks, Chief Executive Officer, Mr. Brooks.
Hello, and thank everyone for joining us on the call with me today is Chris work, our Chief Financial Officer.
I'll begin today's call with a few remarks about the fourth quarter, and then I'll share some thoughts on the past year and what it means for Zumiez going forward beforehand, and the called the Chris who will take you through the financials and some thoughts on the coming year. After that we'll open up the call to your questions.
We're very pleased with their overall of holiday performance given the challenging operating environment for the fourth quarter. We delivered a total sales increase of <unk>, 8% and comparable sales growth of four 7%.
The significant efforts of our teams helped to offset meaningful government governmental temporary store closures in Canada and Europe and.
So all of this reduced operating hours and store capacity restrictions across much of our business.
Our fourth quarter was no different to how we performed throughout the rest of the year delivering results. Despite the headwinds, we face and driving full price selling while efficiently operating with a lean cost structure to deliver a record diluted earnings per share of $1 68 for the quarter.
Our results demonstrate once again, the power of our brand and culture the propelled us throughout this unusual year.
For 2020, we delivered comparable sales growth of 13, 6% and despite total sales being down four 2% for the year, we achieved record diluted earnings per share of $3 for the year as we leveraged the tremendous work of our teams and the strong foundation, we built over the past 40 plus.
Yes.
One of our Q4 earnings call at year ago, I talked about how zumiez than recent results were directly attributable to the execution of the long term consumer centric growth strategy that the company had been building and evolving since our inception.
I highlighted at how this strategy requires significant agility and navigating the trend cycles and speed desired by our customer.
I close with comments about my confidence in our organization the ability to adapt to industry change over the next decade, and how the company was well positioned to continue winning with the consumer over the next five and 10 years is buying behaviors further evolve.
And that call took place a day before the U S. President declared a state of emergency and response to the COVID-19 outbreak.
The number of daily New cases were escalating quickly I don't think anywhere and anticipate the full impact of pandemic would have globally over the next 12 months.
With respect to the retail industry, what we expect it to happen over several years in terms of consolidations of winners and losers and retail has significantly accelerated.
Our ability to respond to this dramatic changes at quickly unfolded and successfully navigate back to school and holiday seasons of that where unlike anything we've ever experienced and demonstrate the competitive advantages of our model and underscores the strength of our people and culture.
Thanks to these cornerstones of our foundation, we enter fiscal 2021 with confidence and our ability to continue to gain share and drive results.
Key to our success has been and will continue to be our dynamic teams or one channel mentality and our advanced in store fulfillment capabilities, including Zumiez delivery, which we expanded and the fourth quarter to take our best in class sales team directly to our customers' door.
Well the elements of our model has and will continue to evolve in the years ahead of.
Our overarching consumer centric strategy rooted and strong brand and culture will remain constant.
We built a business and which we partner with great brands to bring diversity and uniqueness to work to our customers that allows them to individually.
We built the infrastructure and which the customer can shop with us to get what they want when they want and how they want as fast as they want.
We marked our business into a channel lists organization with inventory visibility for all touch points and back end capabilities that allow us to effectively leverage expenses, regardless of the channel and which the sale originates.
The work to get here has been significant but the path ahead will require further focus to move even faster to serve our customer.
While much remains uncertain and the macro environment as the balance sheet ongoing pandemic with the rollout of vaccinations across the globe.
We remain steadfast and our commitment to continuing to invest and our future.
We know that times such as these create opportunities.
And the right people strategies and resources in place, we are well positioned to emerge from this crisis, a stronger brand than ever before.
Before I close.
I would like to thank all of our teams and our brand partners for their dedication and commitment to zumiez over the last year.
I'm immensely proud of our achievements to date, and even more confident and our ability to drive future success.
With that I'll turn the call over to Chris to discuss the financials.
Thanks, Rick and good afternoon, everyone I'm going to start with a review of our fourth quarter and full year 2000, and 'twenty results. I'll, then provide an update on our first quarter day sales trends be part before providing some perspective on how we're thinking about the full year.
Fourth quarter net sales were $331 $5 million up 0.8% from junior and $28 $8 million and the fourth quarter of 2019 the.
The increase in sales was driven by a four 7% increase and comparable sales and the net addition of three new stores during the year, partially offset by temporary store closures due to the pandemic during the quarter.
Breaking down the comparable sales further we saw meaningful digital strength with comparable web sales growing 31, 8% per the quarter, while comparable sales were physical stores were down three 1% year over year. Our stores were opened for approximately 94% of the potential operating days during the fourth quarter of 2020.
From a regional perspective, North America, net sales increased $4 $3 million of one, 5% detour and $85 $2 million of.
Other international net sales, which consists of Europe, and Australia decreased $1 $6 million or three 2% to $46 $3 million excluding.
And the impact of foreign currency translation, and North America net sales increased one 4% and other international net sales decreased 11, 3% for the quarter.
Both of our European and Canadian operations had impactful temporary COVID-19 related store closures and the fourth quarter at.
And we're only open and for approximately 53% and 73% of the available operating days respectively.
During the quarter of the Hardgoods category was our largest positive comping category, followed by accessories and mens footwear was our largest negative comping category followed by women's.
Fourth quarter gross profit was $129 $7 million compared to a $128 $3 million and the fourth quarter last year and gross margin was 39, 1% compared to 39% of year ago. The 10 basis point increase in gross margin was primarily driven by 80 basis point improvement and inventory shrinkage and obsolescence 40 basis points of law.
Average occupancy costs, and 20 basis points improvement and product margin. These improvements were partially offset by an 80 basis point increase and web shipping costs due to increased web activity associated with the pandemic of 30 basis point increase and distribution and fulfillment costs and 30 basis point negative impact related to the stash loyalty program deferred revenue adjustment.
Made and the prior year.
SG&A expense was $75 $9 million or 22, 9% of net sales and the fourth quarter compared to $79 $5 million or 24, 1% of say at net sales a year ago. The.
120 basis point decrease and SG&A expenses at percent of net sales was primarily driven by 50 basis points of leverage and our store wages 50 basis point decrease in national and training and recognition events.
40 basis point decrease and corporate costs, primarily related to governmental payroll credits and decreases in professional fees and other administration and administrative expenses.
These improvements were partially offset by a 30 basis point increase and web related expenses, such as advertising costs due to increased web activity.
Operating income and the fourth quarter of 2020 was $53 $8 million or 16, 2% of net sales compared with the operating income and the prior year of $48 $9 million of 14, 9% of net sales during.
During the quarter, we recognized flow through on incremental sales of almost 180% based on the factors outlined above and our ability to adjust quickly and this challenging time.
Net income for the fourth quarter was $42 $8 million or of $1 68 per share compared to net income of $37 $9 million of $1 48 per share for the fourth quarter of 2019, our effective tax rate for the fourth quarter of 2020 was 23, 7% compared with 24, 8% in the year ago period.
Looking at our full year results from our sales and earnings perspective, 2020 was incredibly volatile quarter to quarter and across months within each quarter.
For the year sales declined four 2% or $43 $5 million, while diluted earnings per share increased 14, 6% to $3.
Our bottom line performance benefited from both our optimization efforts within the model as well as from the onetime adjustments. We have made in response to pandemic around managing our payroll costs, reducing events travel and training managing marketing efforts working with our landlords receiving governmental subsidies tied to continue.
And to pay our people and reducing projects and other expenses is feasible given the uncertain nature of the environment.
And 2021, we expect quarter to quarter volatility to continue as we transition back towards a more normalized sales and expense environment, which we will discuss shortly.
Turning to the balance sheet the business ended the year and a very strong financial position cash and current marketable securities increased 49, 5% to $375 $5 million as of January 30th 'twenty, and 'twenty, one compared to $251 $2 million as of February one 2020.
The increase in cash and current marketable securities was driven by cash generated through operations, including the deferment of $30 $1 million and payments composed of lower inventory levels extended vendor terms landlord obligations and deferred payroll tax payments as well as net income improvements related to abatements credits and expense reductions.
We expect that this will be a reduction to our positive cash flow in 2020, one and the increase was partially offset by $13 $4 million of share repurchases through the company's stock buyback program prior to our stores closing in March 2020, due to COVID-19, and other planned capital expenditures.
As of January 30 of 2021, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million.
We ended the year with $134 $4 million of inventory compared with the $135 $1 million last year, a decrease of zero point $8 million or 0.5% on a constant currency our inventory levels were down 3% overall of the inventory on hand at healthy and selling at a favorable margin entering.
2021.
Now to our fiscal first quarter to date sales results total.
The first quarter of day sales through March six decreased three 8% compared with the same time period and the prior year ended March seven 2020.
Our stores were opened for roughly 93% of the potential operating days during this timeframe compared with no closures last year due primarily to ongoing governmental mandated store closures, both domestically and internationally as well as specific significantly lower levels of foot traffic metering and reduced hours.
Total comparable sales for the quarter day period into the March six decreased 0.4% by channel are core to day comparable sales decreased six 9%.
And our E Commerce sales increased 29, 5%.
From a regional perspective, our North America business has experienced the six 1% decline and total sales and the first quarter and through Saturday March six while our other international business has seen an increase of 11, 4%. There are several factors that have impacted the north America business, including the delay of U S tax returns store.
<unk> for the winter storms, and the south as well as short term store closures in Canada the.
The quarter at a comparable sales decrease was driven by a decrease and transactions, partially offset by an increase and dollars per transactions and dollars per transaction increased due to an increase and average unit retail as well as an increase and units per transaction.
Quarter to date, the Hardgoods category was our largest positive comping category, followed by accessories and footwear was our largest negative comping category, followed by women's and men's.
Due to limited visibility and the business, we will not be providing guidance for the first quarter of 2021 or the fiscal year.
That said, we do want to give you a few directional thoughts on how we are currently expecting the full year to play out.
Starting with revenue for the full year fiscal 2021, we anticipate that we will recapture and lost sales from 2020 and drive total sales ahead of the levels that we experienced in 2019 absent of deterioration and the macroeconomic environment.
On a quarterly basis year over year comparisons between fiscal 2000, and 'twenty 'twenty fiscal 2020 and fiscal 2021 will be challenged due to the seasonality shift caused by the pandemic throughout the year, we'll be comparing our results not only the 2020, but also to 2019 anticipating and return to more normalized seasonality.
Making the 2019 comparability more appropriate and some circumstances.
Examining the high level impacts by quarter from 2021 to 2020 and 2019, we note the following.
And the first quarter of 2021, we've gotten off to a slow start but there are significant contributing factors and offsets at lead us to believe there will be a positive correction within the quarter, specifically the delay of tax returns and significant closures due to snowstorms across the south COVID-19 related store closures purses.
Sting early in the quarter and and the 2021 domestic stimulus package signed today and.
The stores opened at scheduled without meaningful further closures due to COVID-19 or otherwise we believe our results and the first quarter will be ahead of our results for the same quarter in 2019 and that our results will be meaningfully ahead of our results for the same quarter in 2021 of our stores were only open for approximately 50% of the days available during the quarter.
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And the second quarter of 2020 as restrictions begin to lift our stores were opened for approximately 73 per cent of the potential operating days during the quarter and.
In addition, we experienced a surge and demand recapturing some of the lost sales from the first quarter of 2020 and producing a record second quarter 2020 per the company in both total sales and earnings.
We believe the seasonality normalizes in 2021 net sales and the second quarter will be down from fiscal 2020, and total despite a more normalized operating environment, but will grow modestly from the second quarter of fiscal 2019.
As we looked at the back half of the year, we grew sales year over year and both the third quarter and fourth quarter of fiscal 2020 compared with fiscal 2019. Despite the continued challenges of the pandemic and both the back to school and holiday seasons. Our current projection would show total sales growth and the third and fourth quarter.
For fiscal 'twenty, and 'twenty, one compared with fiscal 2020.
Moving to gross margin fiscal 2020 gross margin was down modestly, finishing 10 basis points below the 2019 levels. The primary cause of the increase in shipping and fulfillment costs related to the related to the increase and web revenue penetration driven by store closures and the deleverage of store occupancy costs. These call.
Costs were mostly offset by improvements in inventory shrinkage and product margin at.
As we looked at 2020. One we are currently planning year over year growth and gross margin driven by a reduction of shipping costs as web revenue normalizes with stores being opened at.
And the leverage of our occupancy costs on increased sales.
Product margin improved by 70 basis points, and 2020 versus 2019 and grew for the fifth year and a row, we're planning product margin in 2021 to be flat to down slightly year over year.
Fiscal 2021, SG&A costs are expected to increase in excess of the sales growth for 2020 for several reasons related to the pandemic. The drivers of this include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021.
The governmental subsidies received in 2020, not anticipated to repeat in fiscal 2021, an increase and costs related to training and recognition events that were significantly reduced in 2020 due to the pandemic and the increase in marketing events and spending that were not possible with the restrictions and 2020.
And and increase in travel costs and the back half of 2021 with very little travel included in our fiscal 2020 and results.
In summary, we expect to see expansion and gross margin while SG&A expenses grow ahead of sales for the reasons just outlined.
On a net basis. However, we anticipate the operating margins will be down slightly in fiscal 2021 as the percent of sales compared with fiscal 2020, while we expect operating margin dollars will grow year over year.
We are currently planning our business, assuming an annual effective tax rate of approximately 26, 7% and fiscal 2021 compared with 25, 6% in 2020.
And our planning earnings per share to increase in fiscal 2020, one compared to fiscal 2020 with the significant variability quarter to quarter and comparison to 2020 and more normalized and comparison to 2019.
We are planning to open 22, new stores in fiscal 2020, one, including approximately five stores in North America 12 stores in Europe, and five stores in Australia.
We are planning to close approximately 5% to six stores during the year.
Capital expenditures are planned to be between $20 million and $22 million and fiscal 2021 compared to $9 $1 million and fiscal 2020. The majority of the capital spending will be dedicated of new store openings and planned remodels we.
We expect the depreciation and amortization, including noncash lease expense will be approximately $23 million and fiscal 2021, compared with $23 $5 million and fiscal 2020.
We are currently projecting our share count for the full year to be approximately $25 5 million shares any share repurchases during the year and we will reduce our share count from this estimate.
And with that operator, and we like to open the call up for your questions.
Thank you.
Reminder, to ask the question, you'll need the press star 100, and telephone to inspire and.
Question press the pound.
Please standby and compile the Q&A roster.
Our first question comes from Janine Stichter with Jefferies. You May proceed with your question.
Hi, and good afternoon, and thanks for taking my question and wanted to ask a little bit more.
And more about the quarter to date and maybe you could help us just parse out what you've seen over the last week or so as the fair to see some of the tax refunds pull through and then also curious what youre seeing and Australia. We're hearing really positive things about the trends there and curious if you're seeing that and your business as well and maybe how you think about that the proxy for work.
But the U S. Hopefully it looks like when we start to reopen and thank you.
Yeah. Thanks Jeanine.
So as we talk about the first quarter I guess.
And we gave results kind of here through the first five weeks and I think generally they were below where we thought they would be coming into the year, but I think there are some good reasons for that so just to reiterate what we said on the call overall we.
And we were down three 8% and total sales while comparable sales were down about 0.4%. So you know on a weekly cadence as we move through this will do get tougher as we move through February and then.
Turned much better and last week and and now even into this week.
So as we think about that and we try to dissect what we've seen here through the first five weeks again.
Closures had challenged US we talked about being closed about 7% of at the time, but I think there's some other factors that were pretty significant as well, including a delay and U S tax returns debt from our understanding we're starting to get distributed more towards the end of February versus maybe even as late as late January of the.
The year before <unk>.
Domestically, we called out some store closures related to some of the winter storms, specifically and the south and we have had ongoing closures in Canada and Europe, Canada was closed about 28% of the operating days through the first five weeks and Europe was closed about 70% of the operating days through the <unk>.
The five weeks so you know.
Our expectations as we move here through the rest of the quarter is that the tax refunds will get caught up and and we may already be seen at and our results.
Canada is substantially opened we are optimistic.
Hopefully as we move through the quarter, we will see more of Europe open up and the stimulus Bill signed today.
We expect to have a positive boost for our business. If we look back at 2020.
And we definitely saw a meaningful boost and the summer with the first stimulus and then in January of this year as well so.
I think that's kind of how we're thinking about Q1, obviously not quite where we'd like it to be to date, but I think there's good opportunity ahead of us as.
As it relates to Australia.
And they've done a great job of <unk>.
Managing through this pandemic.
Really shutting down their borders and being very stringent about how they have operated.
And like all of US closed in March last year and were closed substantially through the end of April.
But they also closed from the end of July until almost October. So they really did have a much higher level of lockdowns and seem to have actually been.
Drought driven of pretty Great result, so we're really happy with how Australia performed I'll tell you 2020 was of great year for them down there both on the topline and bottom line I think our teams have.
And have really performed quite well while growing the business. This is an area, where we still have a lot of growth ahead of us and we're excited about how the business is coming to form down there.
I think that's it.
Great. Thanks for all of the color.
Thank you. Our next question comes from Sharon Zackfia with William Blair You May proceed and to your question.
Hi, good afternoon I guess.
So to your question I don't think you guys mentioned zumiez delivery during the prepared comments and I'm, just curious kind of how that ended up unfolding and.
Any learnings as we go throughout 2021, or maybe even potentially for your international markets and the.
And also just curious whether youre seeing any issues with delayed inventory.
Okay, Great Sharon.
And I start off with just getting a bit of context for how we think about zumiez delivery and.
And I know, you're well aware of this but again I just want to make sure for everyone and we get this context out there in terms of what we're really trying to do around ideas like zumiez delivery and this is really about.
For me the sense of how we're trying to innovate for our customers and I'm going to make a few comments, let me ask Chris to the.
The follow up specifically on your question around Zumiez delivery.
So I like this is to make sure everyone thinks about what we're doing at Zumiez delivery of localized fulfillment is all about.
Innovating and leading the way, especially retail about redefining, how we serve customers and not only how we serve customers and how we can optimize our cost structure our cost structure around serving those customers. So we've talked about the most obvious examples of being localized fulfillment, which have been doing for a long time now and of course, our ability to rapidly expand our <unk>.
Islet of Zumiez delivery, which you've been playing with her about 18 months and and then and early late October and November of expanded to 26 trade areas across the United States, which is about half of the trade areas that we believe will operate in and the United States.
And really take again, the unique experience right to the door of our customers and it also of course it was really important because we knew we were going to be under a lot of pressure relative to our third party <unk>.
<unk> capacity restraints that were in place throughout the holiday season.
So I'm just wondering when and think about these as examples of how we have led on innovating to serve our customer and why we why simultaneously working to optimize the business model around just one channel of business concept.
So and then next I just wanted to understand that our roadmap for the future innovation is really really strong we have built out a lot of initiatives to continue to serve our customers better over the next three to five years that are already in process and and testing and many and many areas and we are building a number of these new innovations.
I'm not going to share with you the specific initiatives of plans I do want to just remind you of the consumer themes that drive our thinking the first of the importance of speed and you heard that at a number of times and our script.
Our consumer of in fact, I think not just our consumer all consumers.
Expectations are getting what they want when they want how they want us to ask at want has never been higher and we believe those expectations for speed are going to increase even more over the next five years and.
The other assumptions, we believe to be true is at the speed of trend cycles and brand cycles already of the fastest ever are also going to continue to increase.
The second key theme for us around why do we need to innovate is around our Gen Z consumer.
We know in particular that this consumer prefers to shop in stores all of our internal research, we do with our customer the external research we read in the cases, the GNC consumer overwhelmingly prefers to shop and stores.
And we're going to strive through our initiatives to increase our ability to create even more human to human connections.
Whether it be digital or physical right. We don't really care from that point of view, we just want to connect our customer with our people and make our local stores the center of that experience and the last of the three themes for me the kind of governing and how we're thinking about innovating for our customers is the concept of local and global agenda.
The Gen Z consumer is simultaneously of local and the global consumer they want to be active and the local communities, while being part of the same global communities. This concept applies and how the customer pursuits of personal areas of passion and and their expectations of that.
It will be the source of bringing cool new brands from anywhere in the world to their local store.
So again, Sharon and everyone is these are just the themes I think as you think about what we're trying to do.
And the innovation. These are the same sort of guiding us and we're going to execute the current initiatives. We have in place of course and align with our brand and culture to meet the consumer expectations to serve our customers even better to gain market share and of course to optimize our business results.
Zumiez delivery of just in context, and just one of those examples of how I believe specialty retail needs to be reinvented to meet these rising consumer expectations and I'll ask Chris to share some more of the details about the delivery at Zumiez delivery efforts sure I'll, just kind of jump into some of the data as Rick mentioned, we are operating and 26 trade areas, but at this is something.
We started two years ago, and one trade area really just the test and understand it and obviously with the shifting landscape that we had this year. We thought it was definitely prudent to rollout. So we did that we did that right at the.
The end of the third quarter, beginning of the fourth quarter and and you know the 26th trade areas account for about 5% to 10% of our daily deliveries and comes to US about 150 stores just to put some perspective around at during the quarter, we were able to deliver almost 55000 packages, which is just awesome to be able to bring that brand experience too.
Our customer's door from a cost perspective, it was comparable to that of our outside carriers. We definitely have some optimization down the road I think one of your questions was just kind of what the key learnings are and.
And I phrase this up to a lot of you that have followed us for some time you know five years ago, we closed our fulfillment center and move to localized fulfillment shipping 100% from stores. I think you know this is no different there are lots of things, we're going to learn and we're going to optimize and the year ahead. I think you know with 26 trade areas. We've got some some seasonality.
The considerations, we're going to work through and you know we're going to look at how we roll it out to additional trade areas. So I would say, we're overall very happy with the preliminary feedback from our customers and the work of our teams to put in and start to try and get something done and it's pretty pretty challenging to accomplish the second piece of your question around international.
National.
This gets back to a rich set of sort of innovating here and exporting and like we've done with a lot of our pieces here, whether it's ship from store reserve online pay and store reserve online pickup and store all of these tools are opportunities for us to move globally as well.
And so we do that we connect our teams and as we have scale and certain markets. We start to rollout some of these tools. So.
Overall, I think there is more opportunity for us delivery is just the domestic tool at this point, but as we gain scale of these will be things, we look at as we operate around the globe.
And then your second question just around inventory and inventory levels. As you can tell we ended the year and a pretty good spot for inventory, we're really happy of how our teams at managed through a very challenging time with inventory and 2020, our inventory went down slightly.
As you know it's been down much more meaningfully across the quarters. So we did have some catch up and the fourth quarter, we were able to to get back in stock and in many of the areas that had been tougher over the year. We certainly have some areas of the business that are still more challenged from a supply chain perspective.
And we're still chasing a little bit.
Typically more of the labor intense areas. So the areas like screen of bowls, we've been able to get up to speed quicker.
Hardgoods and footwear, where some of that lag and I would say, even still and footwear were still kind of chasing and trying to get where we want to be from an inventory perspective. So overall, though as I mentioned in my prepared remarks inventory ended the year Super clean and and and we're selling at a good margin heading into into the year.
Thank you.
Thank you. Our next question comes from Jeff and <unk>.
And Darren with B Riley you May proceed with your question.
Oh. Thanks, just wondering if you can speak a little bit more about the European business, including the digital component and I guess, what your overall outlook is for the European segment for FY 'twenty one.
Sure Yeah I'll go ahead, and I'll go ahead, and take that and I'll, let Rick chime in if there's anything I missed and and Jeff just for everybody's benefit I'll, just give a little bit of the background on the Europe business to get the Gist of your question you know.
Europe coming into 2000 and are coming into Q4 of 2020 was one of our strongest areas operating and we called out both Europe and Australia as being really really strong through the first nine months.
Specifically I think Europe performed pretty well through the first nine months because 50% of at sales were online heading into the pandemic. So as we close stores, we still saw good growth and markets, both where we had stores as well as where we would digitally.
Additionally, I think the teams throughout the year based on the the way we've been executing all of the years I've been taking share and they've executed at a really high level overall.
Overall, we expect.
This of propel us long into the future here now as we think about 2020 Q4 was extremely challenging our stores were closed 47% of the days across the quarter, including over the important holiday season beyond closures, we dealt with reduced hours and governmental stay at home orders and.
<unk> did or limited tourism and a lot of resorts closed and as you know these are pretty important things to our business.
And so Q4 was very challenged where it's historically been our strongest.
And our strongest quarter from a financial perspective, and so after being basically on budget through nine months, we did have our largest loss and a number of years and now what does this mean to long term well if we look forward as I kind of started the answer here, we do really expect.
We believe and the long term for Europe, I think to grow Europe to what at taken today is meaningful investment I think we believe that investments put us in place and a place to really capitalize on that market and we believe we're the largest lifestyle retailer and our niche in Europe and.
We think theres a lot of benefits to being a global retailer.
And how you serve brands and how you identify brands and and all in service of the customer so.
And for 2021, we're not out of the woods and the.
And the five weeks, we reported we talked about at our stores were closed 70% of the possible day. So we're still seeing large percentage of closures over there we're chasing at with web sales.
But there is some deleverage and the overall model because of that we do not have of 100% fulfill from stores, there and and.
And so as we turn to 2021.
Our focus is to really drive our results stronger, although probably not turning to profitability.
However, we believe that we can continue to make real progress and and we're again still excited about where we're at there. We continue to believe we're on path for profit there and that kind of 12 to 24 month timeframe and that's really what we're focused at and our teams are focused on and I think we have a pretty good path to get there.
Absent further COVID-19 variations and where macroeconomic conditions that were not aware of today.
And I'd, just add to Chris's comments, Jeff that the kidney at.
The fourth quarter it could have been the worst timing for having the shut half your store base of obviously with November December being the.
The peak volume months for our business of Europe, particularly when it combined with the strength of our business and the snow Hardgoods Arena, where we're the leader in the European marketplace. So.
It really unfortunate timing because we are on plan through the first three quarters of the year, but I think the team as Chris said, just did a great job of working their way through it and we remain to be clear bullish on it and in fact I think that.
We're seeing some of the best real estate deals, we've ever seen and our European marketplace. So as we said and our opening comments, we intend at 12, new stores, this year and Europe, and and really drive this business forward and so we remain really positive and where we're at I loved the hard work of what our teams accomplished over the last.
At year, and I'm very confident we're going to get the fourth quarter.
Back when we head into at the round, it's just hard to imagine and cross my fingers out Jeff it's hard to imagine that it could be any worse than it was at this last year in terms of the closures and the closure of the resorts the snow resorts, but then it could possibly in 2021 fingers crossed.
Yes exactly.
Okay. So just a follow up.
I know you gave quite a bit.
And maybe not guidance, but just kind of keeping in mind all of the puts and takes and your thoughts on FY.
Slide 21.
Which sounds like it's probably going to be a little bit of and odd recover a year and some ways. What's your latest thinking about overall operating margin and longer term for the company versus the recent levels you've been hitting.
Yeah, I appreciate that Jeff and I appreciate you're you're.
Your sympathy for the challenges of 2021, because it is going to be a rollercoaster just as 2020 was so hopefully kind of the directional prepared remarks, we gave helped people sort of outline that.
I think as we think about long term operating margin and what we've talked about probably as recently as three years ago was trying to drive to the higher single digits and and here, we are and I and so I think we're really proud of our teams.
And their execution of that I think it's come from multi years of planning of not just financial planning, but strategy and what what do we need to do to make this happen and what are the investments we need to make and the business and how do we streamline our results and you can take something like in store fulfillment I think it's been a huge contributor.
And <unk> to these levels of results, but it has taken us years to put it in place and refine it and drive it to where we are today. So as we look forward. We do believe this is a business we can drive into those low double digits.
Operating profit levels, and and I think we have a path to do at I think where we're focused on how we drive that we've got.
Different metrics for different areas of the business. So in North America, where we're much more mature.
There's not as much unit growth ahead of us.
It is about kind of looking at a reasonable sales level of growth and saying how do we grow earnings Cigna.
Significantly ahead of that and Thats kind of drive around optimization, and leveraging and and really pushing ourselves on how we look at the business here in North America internationally, we have a lot of growth ahead of us and we.
We know Europe is at.
And as a huge landscape for us and we also have a lot of growth and Australia, and so and those markets and it probably looks like our historical U S market, where we're adding a lot of units we're going to continue to grow total trade area sales. So those units will not only pick up the four wall brick and mortar sales, they're going to help drive the at.
And the experience and the whole experience within a trade area. So we will see elevated growth on the top line and we should see earnings flow through meaningfully ahead of that and we're using kind of boat channels to leverage each other so you know our focus is really there and we think this is something we can drive operating profits into the double digits and I.
Just at <unk>.
Jeff.
And tying back to the comments I made around how we're thinking about innovating for the business and then being able to export that will drive the sales and margin.
The margin in the U S business, but we're also can be able to export those those tools and skills to the markets around the world as they gain the scale to be able to lever too to lever those advantages and you need scale and market place and be able to lever the kinds of tools, we're putting in place and we've done that I think really well and as Chris said, we're doing it and Europe now, but it is at.
These new innovation coming through that will be the same process. So if you think about at three to five year window.
I would I would look back at what we've achieved the last three to five years and say our goal is to continue that process of long term investments that are going to yield both improved sales and improved margins as we optimize around the consumer behavior and innovate to serve them better. So I think the last five years of road map of what the future will be different initiatives, but what we.
We expect we can kind of roll out.
With new innovations again with the larger business not only here and the U S, but as Europe, and Australia scale those markets too.
Okay.
And good luck for the rest of Q1.
Thanks, Jeff.
Thank you and our next question comes from Jonathan Komp with Baird. You May proceed and your question.
Yes, hi, Thank you, Chris maybe first just to clarify your commentary of the first quarter and the second quarter compared to 2019 are you are you implying that the.
The first quarter could be up more.
2019 that and the second quarter, which I think you said up modestly and so I just wanted to clarify that.
Yeah, I think as we look at the comparison of at least in Q1 and Q2 right.
Our commentary was at Q.
Q1, we believe will regain the sales lost in in 2020, and we would be ahead of 2019 and as we look at Q2.
We think we'll be down in sales to Q2, 2020 and up over 2019.
Okay. Thank you.
And then maybe a question on the hard goods category can you just comment it seems at.
Seems like you might be drawing in new customers and figure that category. So I'm just curious what your data shows in terms of capturing a.
New customer base, and then your ability to cross sell them and keep buying across the store or on the.
And different categories.
Yes, John and I'll start and I know, Chris will be able to share some data with you on this too but I do if you look at the participation data and skateboarding I mean, it's been pretty remarkable over the last over the more than those of last year to be clear over the last couple of years and I think one of the exciting things for us is that theres been a lot of women.
Taking up skateboarding for the first time, so that's been a super exciting aspect of our business and UK and you'll see that and the participation data from the industry groups out there that publish at so I think I think from that side, yes, we are and and when we got on escape trend really beginning in 19 and early 19.
I think January February of 19.
We're just kind of exploded across the globe.
We looked at that and said we ought to own more share of that market. Because we're just we've seen so much consolidation over the last decade in retail that we ought to own a bigger share and so I know, Chris and our product team actually predicted that we thought we would true this multiyear escape cycle, we predicted we'd see escape peak.
As the share of our business at a higher level than it ever has previously through the cycle and simply because we own more share and the market globally.
And so I think yes, we are seeing new customers come in and particularly on the on the female side. We've also seen new customers because we are the destination now.
We saw more of the particularly assembled component skateboards at anyone in the world at this point. So I think we benefit that I'll, let Chris share some of the data around that yeah, absolutely and I think as Rick pointed out. This is a trend and that's really run strong for us for two years and.
Like a lot of trends and our business.
We definitely see ebbs and flows in the.
Alaska cycle, we saw was 2012 through 2015 and it was pretty tough between then and what we saw happen and really at the beginning of 19.
As you guys know, we typically start to break out some of our category performance specifically in our 10-K here that'll come out early next week.
But normally we have some movements.
And categories, but we actually had a pretty seismic movement. This year with men's apparel accessories and women's apparel stayed relatively constant year over year, but we thought hard goods both of the skate and snow side of the business, but for my primarily driven by skate go from 13% of our business to 19% of our business. So if you.
Look at that over a two year stack, it's gone from 10% of our business and 19. So I think you see really one of the higher levels of penetration and we've ever seen.
The the offset to that was mostly and footwear.
But this is you know.
A trend that we're really happy with we're happy that we've got it and we think it's something that can continue to propel us into 2021, albeit we think we've got good plans across all of our categories to drive into this next year.
And then spent and something just given the nature of the port where youre selling just any thoughts on why that hasnt translated or some sort.
Sort of.
Picked up higher level of demand and maybe supply of meeting today.
Well I think again, it's these are John really trend related issues and we've always seen movements in our business. So you remember we had a huge footwear run at really what skate tailed off last time, we moved into a big footwear run and so these are the trade offs, you see and in our mix of our business and not unusual for us and I think for.
And we achieved near and near high at some point and then it started on its way down here over the last couple of years. So these are just the normal cycles for us and.
And that you go through and our our mission is always to maintain our share of our customers' wallet. So as they move from footwear, we've recaptured those dollars and skate and why holding as Chris at the mix relatively speaking and the apparel categories and accessory Group Inc.
So I would just view this as at portfolio approached John.
John bolt on and how we think about covering all of the lifestyle aspects of what we offer our customer as well as the same concept with our portfolio approach to brand management and thinking about brands and new brands and how we're managing against that so this is normal I think evolution and changes and our business, where we see these kind of cycle change as Chris said, we had a big skate run.
From 12% to 15, and then sort of falloff and and negative years, there and we'd see footwear come on and so these are just the normal cycles, I think we see and our business and so.
So to be clear, though we also are looking at and footwear and say how can we minimize the losses. We run two as Chris said, we have plans across all of the departments to think about not only how do we drive volume higher but how do we minimize those that are running down. So they don't diminish the gains are running and other areas. So John I just view this as the <unk>.
<unk> portfolio of management of our business that we tend to see play out at a mall.
At the year basis.
Consistently.
And just the last one for me given the unit growth plans and Europe can you just comment on the return metrics that you're targeting there.
Yes.
And quite more capital because of the unit growth. Thank you.
Yes, I'll, let Chris talk about how we think about unit growth economics and and.
I'll talk just briefly again as I said earlier about the kind of environment Europe today and this is true on the real estate environment. This is true pretty much everywhere we're seeing.
Some of the best real estate.
Markets in terms of of economics for us that we've seen and a long long long time, and I would say that that's true and the U S. Canada, and it's definitely true and Europe is definitely true and Australia.
And as we talked about in our prepared comments. This is partly due to the consolidation of taking place and retail and what that has meant for landlords.
So it's a great time, I think if you're if you're a retailer you have got the capital resources and to expand to take advantage of that globally and before I, let Chris talk about four wall contributions and I'd like you to think even more broadly and that at some point of view.
Maybe be in the position to really share all of this with all of you out. There is we really think about our performance again in Europe, we look at at a country by country basis, what happens and we build out markets, where the tipping points of investments. So it may not be about tipping too I mean, we have a number of countries in Europe, where were very profitable and our business.
And it's because we build out those markets, we're able to make.
Make those investments across multiple stores debt.
And we're recovering and Marc just now we can do some of our omni channel programs as we have the scale and those countries.
And then of course because of the store base, we see a significant growth in the web business at the same time.
So we are going to be thinking more about this and thinking about the European business and I think it'll be one of the areas, where we'll think about this and the trade area perspective of where the tipping point of returns.
As we build out markets.
And drive more total volume and then able to lever with our omni tools of programs of the country by country basis in Europe. So we're doing a lot of work around that now and making sure that we really have a deep understanding about where those tipping points occur and the investments and it will play and how we think about our future expansion and the market. The way we go about at between larger countries and smaller countries.
And how do we think about those economic tipping points and the market now that said to be clear, we still expect that our stores are going to be four wall.
Profitable on their own basis, and they have to meet our economic thresholds for deals that hasn't changed one bit everything else is.
Yeah.
And the omni model is on top of that in terms of generating return. So I'll, let Chris sure. How we think about the store economics share and and I'll just add to what Rick said at in Europe, specifically.
You have to we have to take a 2020 off the table just based on the fact that at the stores have been closed, but if we look at multi years here now in Europe, one of the things that's given US a lot of confidence is how our classes of stores have have increased their performance over time and as you know John This is at.
And acquisition for US and 2012 I would tell you from 2012 to 2015, we were doing a lot of testing and really trying to test new markets debt.
That's where there's snow markets, where there's not no Jeff.
Germany, Switzerland, and really trying to dive out there and say hey, do we work on high streets do we work just off high streets are we working and malls are all of the things you would expect for us and a new market and expansion mode.
One of the beauties of this model is that we do have a very high web penetration and so the web penetration can be a good guide for us and where our customer exists and not only do we have web penetration, where we have stores. We operate across 14 different languages, all over western Europe and in the parts of Eastern Europe. So it allows us really good.
<unk> ability to wear stores might work so as we transition kind of through the middle part of the last decade, we stopped talking about testing because we were actually more scientifically putting classes of stores and to play and I think what we saw from that as we look back at our results pre 2020 was at each class of store.
Has it gotten a little bit stronger as we educate ourselves on what was working and what wasn't working and we did put stores day in a mall form at what should we be doing or if we did put stores and a street form at what should we be doing so.
So we did see our classes gets stronger and stronger and what I expect after we.
The anniversary of and get past 2020, as we would expect to see those same groups of stores continue to get stronger just as we have here in North America as we're looking at unit metrics as Rick pointed out we do look at them on a four wall that being said we know there is a lift from the overall trade area because everywhere. We've opened stores, we've seen an increase and web.
But we look at can we get cash on cash payback and at 18 to 24 month period.
As we kind of net out maybe the ta and other things that we might get and a location, but we'd like to we'd like to get a high rate of return on cash and then we look at a very high level over the internal rate of return over a three and five year window and say, okay. As we met and model. These out typically five to 10 years out can we get to a very.
High internal rate of return hurdle that would warrant doing these stores and in markets that we are established in you know where there's less risk we might look at that a little differently than markets, where they're newer to us and there is a higher risk thresholds and.
And so like I said like I've said, it before and I think Rick reiterated here today, we're really happy with the trajectory. We've got there we were getting to a tipping point, where we've got a and.
And SG&A, our corporate low debt there too to support these stores and we think if we can continue to execute the way we have over the last few years. This is the market that will turn profitable for us and in fact are just to finish the Christmas thought there.
John we use the same metrics of globally for returns on four wall returns on stores. So we don't we don't change those metrics and what we've learned historically, we do hold ourselves to very high standards on cash on cash payback as well as internal rate of returns and turn Richard thresholds.
Thank you.
Thank you and as a reminder is asking the question you will need to press star one on the telephone. Our next question comes from Mitch comments with pivotal research and proceed with your question.
Yes, thanks for taking my questions I think I've got three of them. So first on the on your inventory.
I guess for the quarter.
Product margins were up I think you said gross 20 bps I would've thought maybe there would be a little bit better but that of Richard also made the comment about you know.
The ski season in Europe, not really happening and so I'm wondering was there any snow clearance that took place in the quarter that negatively impacted product margin that.
And I have an opportunity to lap in Q4 of 'twenty, one that could be the opportunity or am I reading too much in the something.
Yeah, I'll go ahead and take a crack at it and let Rick jump in and if Theres anything that I would tell you as you look at Q4. It is really the tale of two tapes I think we have the here and the U S and Australia, we performed extremely well at.
And both in terms of sales and in terms of product margin.
In Canada, and Europe, where we had pretty significant closures specifically closures during the important holiday period and also having closures in Europe, where snow is such an important part of Q4 and the resorts weren't open and tourism wasn't happening they had an impact on the business and they had an impact.
And inventory so I think you have kind of the the.
And the two tapes being we saw stronger product margin than the consolidated result results and the U S and Australia, and we thought tougher product margin and Canada, and Europe, where we were closed and you're exactly right Mitch.
And it was driven and as Chris said by the store closures and particularly in Europe. It was driven by the winter conditions, we don't want to own the carryover inventories. So the market got very promotional we got out there and I think we actually cleared we did a good job of clearing inventories not endeavors, where you want it and now the U S is different and we blew through almost everything we owned at snow here and.
The U S. So we're super clean here and the U S but.
There's a number of strategies, we have in place with our brand partners and Europe about dealing with the snow product and how we're thinking about next year, but we did youre exactly right. When you we don't want to own the inventories. So we did move through it and we took the markdowns and Europe to move through it.
Got it thanks.
And then on your digital business because it sounds like in terms of your 2021 gross margin outlook, you expect less shipping so that would imply your digital percentage comes down can you just remind us of where the digital land and <unk>.
2020 versus 2019 and in terms of its penetration and kind of where do you think that ends up in 2020, one and then I have one final question.
Alright, I'm going to just kick this one off Mitch a little bit from my side because.
And this will be no surprise you as you as you've heard me say many times over the last few years.
We do not think these are critical measures, particularly if you have of one channel business model like we do where you can lever costs at their operating and private level no matter, where the sale is where the physical sale or digital sale and so I just want remind everyone that our goal is to empower our customers choice of all consumer touch points, we let them choose how the.
And one interact with us we they get the pick their own preferred customer journey with us that our job is to optimize our the experience for the customer and our business better around that around those journeys and that's why we don't tend to focus much on the physical and digital mix of sales and we just we just basically plateau and fallen and evolving and innovating around the customers behaviors.
Meet their needs and their journey, so that said, though we're going to share the data and I'll, let Chris share the data, yeah, and I just kind of quantify for the year. So we did end up at about 26, 4% and web penetration.
Compared to 16, 6% last year. So that gives you kind of perspective of how much. We grew so the web was at 51% 51 five per cent compared to the prior year end and our store comp was down four 1% with total store sales down about 15, 8%. So.
You do get you do get the feeling of of how we've moved across channels I think to my expense comments that type of growth and web has an impact on gross margin now.
And there so integrated I'm not so sure. It has the same impact on operating profit I actually think over time part of our ability to grow operating profit due to the levels that we have is a function of our integrated or integrated fulfillment. So that's how we think about it okay.
Try to ask about digital Rick, but thanks for thanks for giving the number.
Sorry, Matt and then.
Mitch Let me just let me just fill out because you had said 2021 and I didn't I didn't comment at that so as we think the 2021, we're actually targeting between those two levels. So we think that wed penetration will not be as high as it was in 2020, because we're going to open our stores and we're going to see people go back to stores and I.
I constantly remind people I know you know this but we have a customer that wants at physical experience. They want to get out they were one of the last ones to pull and the locked down and one of the first ones out so.
So we expect web penetration to be lower than it was in 2020, but we continue to believe it will grow from the 2019 levels and that's how we're planning the business got it Hey, Mitch and I feel of Love you too so I'd say.
Any of that.
And I still have the right.
And we're going to go with that response so.
The last thing just on footwear.
And I know that you guys go through these cycles and I can appreciate at about the business and it's the portfolio management and you guys do a great job, but I am curious and one of your competitors reported this morning, and they talked about.
Sort of all footwear and the kind of break other footwear business of the two buckets fashion athletic, which is somewhat similar to yours and then they have kind of of casual side.
And really how much of a casual side to your footwear business and then you mentioned this morning of that it's the casual piece, that's doing better than the fashion athletic and I'm just wondering if that's a potential opportunity for you guys.
And if it fits with your customer how do you think about that.
Yes Mitch.
And again don't get me wrong here, we were pushing hard to make sure our footwear business can perform at the best level. It can perform at.
Now like everything with footwear, and particularly when we're talking about.
And really a handful of brands and drive all of our footwear business across the globe. These days.
There really arent many small brands left on the.
Footwear business, so, yes, I think and part of the aspect of what you have to understand about the the discipline and the big brands and partners have is you do get locked into certain components of your business based upon your relationship with the major brand partners and we are.
Good partner with Nike were a good partner with vantage, we were the key partner I think for our niche of retail with both of those guys.
Outside of their own direct channel business.
It is a function of project of the ability and some cases too because we have of certain position that we're in with both of those major brand partners and all of the major brand partners for that matter. So.
We try to stay in our lane to somewhat in that regard, but that said youre going to continue to see US experiment, we will be having new brands show up and our footwear business here.
And here over the next few months and Youre going to see US continue to push experiment on any place. We believe we can push the business forward. So the.
The general attitude doesn't change, which is we don't like running down and any department and our business. So we're going to push hard and look at new things, we will optimize our existing portfolio of.
Of our brands working with our brand partners on it and.
We will do our best and minimize the loss through this cycle.
Alright, Thanks again good luck.
Thanks, David.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Rick Brooks for any closing remarks.
Alright, well, thank you very much and I guess I always as always I really appreciate everyone's interest and Zumiez and what we're doing and where we're going.
No.
Again, I want to thank all of our partners and our employees. What I think was just a really remarkable year theyre not many specialty retailers, who can say they had their most profitable year ever.
Many non essential retailers that can be seen that at this phase. So we're really proud of our teams. We're proud of our brand partners and supporting us through the cycle.
So thank you everybody and then we will look forward to talking to everyone with first quarter results here and a few much. Thanks.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
Boom.
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