Q2 2021 Zumiez Inc Earnings Call
[music].
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 comments concerning Zumiez, Inc. Business outlook and contains forward looking statements.
These forward looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties actual results may differ materially.
Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in zumiez filings with the SEC.
At this time I would like to turn the call over to Mr. Rick Brooks Chief Executive Officer, Mr. Brooks you may begin.
Hello, and thank you 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 second quarter, then I'll share some thoughts on sales for the third quarter to date before handing the call over to Chris who will take you through our financial results in more detail.
After that we'll open up the call to your questions.
Our second quarter results reflect the strength of our business model as we posted solid top line growth and better than expected profitability in the face of tougher comparisons.
Reflecting back upon the second quarter of 2020, our stores are open or open for roughly 70% 73% of potential operating days as a result of the pandemic.
Despite those closures our total sales in Q2 of 2020 increased 10% over 2019 due to our ability to capitalize on strong sales trends and pent up demand for more significant closures in the first quarter of 2020.
Therefore, we were pleased that our second quarter 2021, total sales grew 7% year over year and increased 18% on a two year basis, all while driving strong full price selling.
On the expense side spending returned to more normalized levels following last year's temporary cost saving actions and government subsidies.
And diluted earnings per share of <unk> 94.
<unk> <unk> shy of last year's record dollar or one and up over 160% from the second quarter of 2019.
Our teams once again did a terrific job adapting to the current environment to fulfill demand for our distinct merchandize offering.
This year's results reflect the shift back to a more historical mix between our store and digital channels as our customers increasingly turn to physical shopping.
This is a very positive development given the enriched brand experience that can be achieved through human to human connections.
Looking ahead, we feel good about our ability to continue to exceed 2020 sales levels over the second half of the year.
Even as we face tougher comparisons and more competition for discretionary spend.
With the majority of school districts around the country to resuming in person learning we've seen a more normalized start to the back to school season, which provide the business with good momentum to begin the third quarter.
Q3 to date through Labor day, total sales were up 23% year over year and up 7% compared with the same period of 2019.
These results are despite continued challenges related to the pandemic across the business.
With the recent uptick in Covid cases caused by the adult Delta Varian has created some additional uncertainties about operating conditions and consumer behaviors in the near term.
We are confident in the agility that our teams have shown throughout the pandemic.
And the financial strength of our business to weather any potential risk that lies ahead.
The agility is based on our strong culture brand and best in class sales team to help us drive incremental market share gains across the business.
Key to our success has been and will continue to be our one channel mentality and our proven ability to adapt to changing consumer needs.
This includes ideas like our in store fulfillment capabilities, including Zumiez delivery, which takes our best in class sales teams directly to our customers' doors.
Well a bunch of our model have and will continue to evolve in the years ahead, our overarching consumer centric strategy rooted in strong brand and culture will remain constant.
We build a business in which we partner with great brands to bring the diversity and uniqueness to our customers that allows them to individually.
We built a footprint that informs us of global trends and works with brands to emerge locally and grow globally to better serve our customer.
We built an infrastructure with the customer to shop with us to get what they want when they want how they want and as fast as they want.
We marked our business into a channel this organization with inventory visibility from all touch points and back end capabilities allow us to effectively leverage expenses, regardless of the channel in which sales originate.
The work together has been significant and the path ahead will require further focus to move even faster to serve the customer.
Therefore, we remain steadfast in our commitment to investing in our future. We continue to believe that the times such as these create great opportunities the right people strategies and resources in place, we are well positioned to emerge from this crisis, a stronger brand than ever before and clear winner in the ongoing consolidation of.
Retail.
That I will turn the call over to Chris to discuss the financials Chris.
Good afternoon, everyone given that our stores were closed for approximately 27% in the quarter last year due to the pandemic I'll provide comparisons to both the prior year and the second quarter of fiscal 2019, where appropriate.
Following my review of our second quarter results I'll provide an update on third quarter to date sales trends in our current perspective on the full year.
Second quarter net sales were $275.0 million up seven 3% from $254 million in the second quarter of 2020, and up 17, 6% from $232.0 million in the second quarter of 2019.
The year over year increase in sales was primarily driven by the reopening of stores our ability to capitalize on current trends and the continued impact of domestic economic stimulus on the business during the second quarter.
Paired with the second quarter of 2019, we saw comparable sales growth of 16, 6% and the net addition of 15 stores. Our stores were opened for approximately 96% of the potential operating days during the second quarter of 2021 compared to 73% in the second quarter of 2120% in the second quarter of 2019.
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From a regional perspective, North America net sales were $242.0 million, an increase of six 3% over 2020 and up 14, 8% compared to the same period in 2019 other international net sales, which consists of Europe, and Australia with $32.0 million up $15 seven from last year and up 45.
1% from two years ago, excluding the impact of foreign currency translation North America net sales increased five 8% and other international net sales increased seven 6% compared with 2020.
We experienced significant COVID-19 related store closures during the second quarter in Canada, Australia, and Europe, noting they were opened for approximately 68%, 77% and 88% of the available operating days respectively.
During the quarter. The men's category was our largest growth category, followed by accessories and footwear hard goods was the largest negative category followed by women's.
Second quarter gross profit was $105 million compared to $99.0 million in the second quarter of last year and $79.0 million in the second quarter of 2019 gross margin as a percentage of sales was 39, 1% for the quarter compared with $36 three in the second quarter of $2053 eight in the second quarter of 2019.
The 280 basis point improvement from the second quarter of 2020 was largely due to a 170 basis point decrease in web shipping costs related to a decrease in web sales from the second quarter last year, when we had a higher rate of store closures driving customers online.
The 100 basis point increase in product margin and a 70 basis point improvement in inventory shrinkage, partially offset by 60 basis point increase in distribution and inbound shipping costs.
Gross margin improved 530 basis points from 2019, driven largely by product margin improvement of 270 basis points.
<unk> deleverage of 170 basis points, and a shrink improvement of 90 basis points.
SG&A expense was $73 million or 27, 2% of net sales in the second quarter compared to $64.0 million or 23, 1% of net sales a year ago, and $70.0 million or 28, 7% of net sales two years ago.
Impaired to 2020, the 410 basis point increase in SG&A expense as a percent of sales primarily reflects the benefit from temporary cost savings tied to the pandemic last year the.
The most significant changes include a 150 basis points of deleverage in our store wages 60 basis points of deleveraging corporate costs 50 basis points of deleverage in annual incentive compensation and 40 basis points due to a decrease in governmental subsidies.
During the quarter, we also accrued a legal settlement, resulting in a 110 basis points negative impact.
Operating income in the second quarter of 2021 with $32 million or 11, 9% of net sales compared to $34.0 million or 13, 2% of net sales last year in the second quarter of 2019, we had an operating profit of $18.0 million or five 1% of net sales.
Net income for the second quarter was $24 million or <unk> 94 per diluted share. This compares to net income of $29.0 million or $1 <unk> per diluted share for the second quarter of 2020.
Our net income of 9 million or <unk> 36 per diluted share for the second quarter of 2019, our effective tax rate for the second quarter of 2021 was 26, 8% compared with 26% a year ago period, and 37% two years ago.
Turning to the balance sheet the business ended the quarter in a very strong financial position cash and current marketable securities increased 37, 7% to $412 million as of July 31, 2021, compared to $300.0 million as of August one 2020, the increase in cash and current marketable securities was driven by cash generated through.
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The company's report the company repurchased 200000 shares during the quarter and an average cost of $44 two one per share and a total cost of $19.0 million year to date as of September seven 2021. The company has repurchased 700000 shares at an average cost of $82.0
And a total cost of $35.0 million as of July 31, 2021, we have no debt on our balance sheet and continue to maintain our full unused credit line of $35 million.
We ended the quarter with $153.0 million in inventory up 17, 9% from the second quarter of 2020 and down one 1% compared to the second quarter of 2019 on a constant currency basis, our inventory levels were up 17, 3% from last year.
Overall, the inventory on hand, as healthy and selling in a favorable margin.
Now to our third quarter to date results.
Net sales for the 37 day period ended September six 2021 increased 23, 2% compared to the 37 day period ended September seven 2020.
As we saw our customers go back to in person learning and the majority of the regions in which we operate compared to the 37 day period. In September 19, 2019 total net sales increased six 7% our stores were opened 98% of the available days during the period in 2021 compared to 91% in the same period last year.
Comparable sales for the 37 day period ended September six 2021 increased 10, 5% on a one year basis and increased five 4% compared with two years ago.
From a regional perspective net sales for our North America business for the 37 day period into September six 2021 increased 25, 5% over the comparable period last year and were up five 1% compared to 37 day period ended September 19, 2019. Meanwhile, other international business increased to 3%.
<unk> versus last year, and increased 28, 8% compared with the same period of 2019.
From a category perspective men's was our most positive category followed by accessories footwear and women's Hardgoods was our only negative category.
Due to limited visibility in the business, we will not be providing specific guidance for the third quarter of 2021 or the fiscal year, but do you want to provide directional update on our expectations for the year.
Concerning revenue for the full fiscal 2021, we are projecting net sales to grow in the low to mid teens from fiscal 2019. This translates to net sales growth from 2020 between the high teens to just over 20% for.
For the back half of the year, we continue to anticipate top line growth on 2020 results that were above 2019 results for the third and fourth quarters of fiscal 2021, we anticipate we'll grow sales in the mid to high single digits from fiscal 2020 absent significant COVID-19 restrictions and Lockdowns for the third quarter. Specifically this is.
The slowdown from what we have just reported quarter to date. However, we believe is warranted as we had a slow start to back to school season in 2020 and saw continued strength through late September and October last year. This year, we've seen a more normalized cadence to back to school and do not anticipate that September and October will be as strong as they were in 2012.
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Moving onto gross margin 2021 gross margin is currently planned to grow year over year, driven by leverage of occupancy costs on increased sales a reduction in shipping cost as web revenue normalizes with stores being open and improved product margins, while we anticipate improvements in gross margin in our third and fourth quarter the year over year growth will be much more.
Modest in our first two quarters.
Fiscal 2021, SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons many related to the pandemic. The drivers of the increase include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021.
Governmental subsidies received in 2020, not anticipated to repeat in fiscal 2021 and.
An increase in incentive compensation and other discretionary accruals related to improved performance illegal settlement accrued during the second quarter and.
An increase in costs related to training and recognition events that were reduced significantly in 2020 due to the pandemic an increase in marketing events and other related spending that were not possible with their restrictions in 2020 and.
And an increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results.
In summary, we expect to see expansion in gross margin, while SG&A expenses grow much closer with overall sales on a net basis. However, we now anticipate operating margins will be up year over year and fiscal 2021, reaching double digits as a percent of sales.
We are currently planning our business, assuming an annual effective tax rate of approximately 26% in fiscal 2021 compared to 25, 6% in 2020.
We are planning diluted earnings per share to increase meaningfully in fiscal 2021, compared with fiscal 2020, primarily driven by a significant increase we achieved in the first quarter as we saw in the second quarter more expenses are coming back into the model as COVID-19 restrictions are reduced such as store payroll related to capacity and hours travel.
Training and other costs discussed above we are currently planning diluted EPS in the back half of the year to be flat to down modestly from the last six months of 2020 and.
In the event, our topline estimates exceed those outlined today, we would expect a strong flow through on incremental sales.
We are planning to open 25, new stores in fiscal 2021, including approximately eight 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 $22 million and $24 million in fiscal 2021, compared with $10.0 million in fiscal 2020, the majority of that capital spending will be dedicated to new store openings and planned remodels.
We expect that depreciation and amortization, excluding noncash lease expense will be approximately $22 million in fiscal 2021 compared to $28.0 million in fiscal 2020.
We are currently projecting our diluted share count for the full year to be approximately $28.0 million shares any share repurchases made after those disclosed today, we will reduce our share count from this estimate and with that operator wed like to open the call up for questions.
Thank you as a reminder, ladies and gentlemen that star one to ask the question.
Withdraw your question press the pound key.
Again, Thats star one please standby, while we compile the Q&A roster.
Our first question comes from the line of Janine Stichter with Jefferies. Your line is open.
Hi, Good afternoon. Thanks for taking my question and you acknowledged that the challenging supply chain environment. I was just hoping you could elaborate more on what youre seeing and maybe break it up between Europe.
Our private brands and then what Youre seeing from some of your third party brands that you work with and just speak to any areas, where you feel like there is challenges in getting product in and help us understand what you're currently seeing.
Yes.
Sure. Thanks Jeanine.
I'll take a crack at this and let Rick add anything if he'd like.
I'll try to address it maybe high level.
And then maybe just a few comments about the different lines.
I think from a supply chain.
Challenge perspective, I guess I would just start with this is really not something new we've been dealing with this really throughout.
The pandemic into early parts of 2020.
It's required us to work extremely close with our brands and our logistics vendors to navigate the different challenges that are out there, including how we think about raw material and commodity pricing factory capacity transportation capacity transportation costs labor shortages.
Country by country challenges, how this affects our our timelines and receiving and then obviously the general inflation challenges that are kind of tied to this so.
From an overall perspective, we feel like our teams have navigated this really well.
Clearly it has resulted in some delays in product, but I think because we've been dealing with this for the amount of time, we have we've we've been planning to it and as we just talked about we're really happy with the inventory levels I mean, a year ago, our inventory was much lower than we wanted it to be as Q2 of 2020 was was very.
Strong demand.
And we're really happy we built those inventories back up we think they are in a good spot.
So yes, it has impacted what we what we've wanted to receive but our teams have done a good job working around that with our vendors and I think that's how we kind of plan to address this moving forward I think we continue to work with our brands on.
On how we how we get through these challenges and really try to provide the best customer experience at the end of the day I think as we look at the supply chain moving forward. We continue to expect theres going to be issues through the back half of this year I think kind of moving out of back to school. We expect there to continue to be some challenges on the inbounds.
Like I've laid out here.
And I think we'll also start to see some of the challenges we saw in Q4 last year on the on the business to consumer side in getting product to our customers.
All that said I think we've got really good strategies to mitigate that Rick talked about our ability to deliver in.
We are working already with our shipping carriers on how to navigate that and I think.
We've got a pretty good plan in place. So we're not forecasting a material impact on the business at this point and the result in the estimates that we've kind of laid out for the year for you guys.
But I think we're able to manage through it to date and we will keep kind of keep keep tackling as we go.
Last thing I'd, just add to this as we think about supply chain.
It wasn't too long ago, we were talking about where we are all of our product was coming from and I think we've done a really good job I'm really proud of the teams on how we've diversified.
We have a much more diversified country of origin.
Lay out today within our business and we had two or three years ago. So I think I think that's a really good thing and that helps with how we think about kind of your question of branded versus private label right. We have obviously more say in how we run our private label goods. We've tried to to really diversify in that category and work with our brands and our brands are.
Very smart and <unk>.
They built their own logistics to to try to diversify their offerings. So.
It's a challenge it's a challenge I think we've got good strategies around and we'll see how it plays out as we move through the year.
Great and then maybe just on the hard goods side of the business can you speak to what Youre seeing there and just your views on what inning of the cycle, where and I'm guessing that the negative trend is more just a function of comparisons and what you saw last year. During the third during this time of Covid, but just any thoughts on where we are and maybe what your thoughts on that thank you.
Sure Janine I think as we look at it here relative to the skate hardgoods cycle. What we're really we're seeing I think to skate hardgoods is a good example, where because of the nature of the pandemic and the shutdowns and the closures of stores in.
Remote schooling and everyone being home.
The Lockdowns skate I think.
One of those categories much like campaign that everything got a lot of volume got pulled forward.
And so I think thats, partly what we're seeing that it is a tough comparisons coming across in skate hardgoods of having so much of that volume port forward because of the pandemic. So we'll have to see how this plays out next year, but again I think the great thing I always like to remind everyone is that our business responded really well and that despite the down.
In this case hard goods, which I.
I think we could all expect at some point.
Because it has been three years three plus years on the cycle.
That our business responded well and we are running still running gains by just selling more apparel. In this case are the predominant driver of our business. So it's been really good to see how the business responded we're maintaining our wallet share of our customers' business. So I think thats, our where our head is Janine is that we're thinking we just saw this big pull forward to see how this response next year too.
Where we're at but scale is one of those great categories of business from an inventory perspective that I think we can manage relatively quickly in terms of our inventory positions. So I feel good about where were on that side too.
Great. Thank you very much.
Thank you.
Our next question comes from the line of Jeff Van <unk> with B Riley Your line is open.
Yes, Hello. This is Richard Magnuson in for Jeff Van <unk>.
And thank you for taking our question.
We know about the business as Omnichannel, but what more can you tell us about the recent trends in in store traffic E Commerce and delivery and then are you seeing any significant changes in consumer behavior that could last longer as this COVID-19 impact of environment plays out.
Alright, Richard Let me start then I'll ask Chris to share some data with you, but again just remind you our job is to really is about <unk> and our customers with choice on how they want to shop with us and they get to choose their own journey into Zumiez world.
So our one channel business model is really designed to meet our customers' needs locally and then to leverage that cost structure, no matter, where the sales is digital or physical.
But that said I am I have to tell you how thrilled I am as I said in the script that our customers have chosen to return to our stores.
A very very strong way for their shopping and I say that because I really believe we can get a richer brand experience where that's the case.
All of the Gen Z research work do you see actually shows they prefer to shop in stores. So when we get them in our stores and that we get that human to human connection and the deeper deep brand experience I think makes choppiness zumiez, a really powerful experience when the when our customers get to connect with our employees so with that ill, let Chris share some data.
Yes, Richard I think this is something obviously, we put a lot of thought into heading into the year just given the increase in online demand in 2020, when we had our stores closed.
And we kind of look at it and said.
In 2020, we saw.
Our web penetration for the year go from about 16% to 26%.
And we kind of said, okay. We think it is going to be somewhere in between there and to Rick's point. We're just ecstatic that we're just so much closer in 2019 levels and as it relates to the even the second quarter here, we were about 15% digitally.
Originated in compared to the 27% last year and so I think you'll see some things in the model that are really favorable here early on one of the things I talked about in gross margin.
Was that we had leveraged web shipping by 170 basis point. What's interesting is if you go back to last Q2, you'd see what it's almost completely offsetting last year. So.
I think it's a richer experience for our customer it's.
Financially a good experience for our customer for us as our customers really their in store and gets the immediacy of the products. So really excited to see those levels go back to 2019, and obviously, we'll see how that plays out here on the back half of the year.
Hey, Richard.
So we are unclear and the response on this is this isn't just a U S issue and we've seen this across the broad swath of our business is included in Europe, where we've seen a return more are mixed returning more to our 2019 levels across our businesses. So it is as your question intimated a global trend.
Relative to how we're seeing and what we're seeing in our consumers' behavior and again I think is probably unique relatively to our brand experience and the nature of our consumer base.
Okay and then this is regarding the supply chain situation again are.
Are you seeing anything in terms of like effective alternatives thats, our ships being routed to other ports and then has the supply situations are encouraging you to pull forward. Some sales we referenced that a little bit I thought maybe there was more detail there.
Yes, I think from a supply chain perspective, we've tried to be as creative as possible to navigate lots of the different issues.
There are situations, where we have full price forward, where we've tried to get it sooner.
Navigate this and it really becomes a vendor by vendor discussion depending on kind of the demand we have for the product and what our expectations are selling patterns are going forward. So I don't have a specific call out for you other than I think the teams have really tried to navigate this in lots of different ways from moving parts to potentially.
<unk> things all depending on the need for the product.
Alright, well, thank you I'll get back in the queue.
Yeah.
Thank you.
Our next question comes from the line of Jonathan Komp with Baird. Your line is open.
Yes, hi, Thank you maybe first just a follow up on the hard goods question.
If I look at the last three or four years, and then 2020 I believe hard goods accounted for.
More than all of the growth for the company over that period. So I wanted to just follow up and ask do you think there is.
Risk that you go all the way back for hard goods I don't know if you have a view there and related to that are you seeing trends in other categories that you think could offset it if you do.
I'll go ahead and take a crack.
At rig add anything if you'd like from a from an overall perspective I guess John.
This really falls back to our model of.
Hard goods has been a huge growth driver we've been super happy to have it it's been a core part of our offering.
And like all of the trends, we see over long periods of times categories, ebb and flow and so to.
To the second part of your question of like how.
How far do we think it's going to go I'm not really sure I think that the best part of all we've got going is that we do have things offsetting it and we are running overall gains so.
So yes, we've seen hardgoods decreased a little bit we mentioned in men's has been our strongest category. We continue to have really strong results. There we've seen increases in footwear and now we've seen increases in accessory.
I think all of those are really good signs.
We kind of flip to the back to school, we see growth across all three of those areas I just mentioned as well as our women's business. So for me.
The hard goods results are still pretty phenomenal over a multi year stack.
And now that we've seen a little bit of a pullback here in Q2 and into Q3, we're running deep big gains in the other areas and that that's great because that's the model and the diversification we hope to offer with what what we're doing so that if things trend up or a trend down we have other things to offset them.
Yes, that's really helpful and just as a follow up but maybe theoretical as you mentioned.
Predicting where the categories.
We will trend towards but could you just maybe comment on the.
Relative product margin across your major categories, and if you do see hard goods fall back in favor of other categories, what that might mean for for product margin.
Sure I'm happy to speak to that and I think from a product margin perspective, we just could not be happier with kind of where.
Where we stand I think this is now year six.
US running product margin gains and if you look at the offering that we have the apparel categories in accessories are typically our highest product margin.
And this the snow.
Hard goods business and footwear.
Our lower margin for US now the beauty of this is as we look at the last six years, we've been able to grow margin both within departments as well as across the company with these changes happening right. So hard goods is has grown in nature over the last few years, we've continued to grow product margin.
Another interesting piece to this is we've seen our private label penetration over the last five years decline as we've been in such a strong branded cycle. We've continued to grow product margin I'm really proud of.
Our U S teams as well as our international teams, because we've seen product margin growth internationally as well as those businesses have scale. So I think we have a lot of different mix things maybe.
Maybe almost similar to my sales commentary, it's about how we drive the whole pool. So there are challenges from time to time, as we transition to say or hard goods or footwear, which are typically not as high from a product margin perspective.
When our teams are really doing everything they can which is our focus at all times, we can drive product margin, both zinc categories across countries and still see an overall result, even if mix is trending the wrong way.
Okay, Great and just last one for me as we think beyond 2021 any framework to think about the puts and takes for operating margin and your ability to hold on to.
A double digit margin.
Thank you.
Yes, Thanks John.
It will be very high level here.
Because we're not going to talk too much about 2022, but we script thats, even in our Q1 call that.
Anniversarying, what we saw in the first quarter of 2021 will be challenging as we move to 2022. Fortunately, we do view ourselves and continue to view ourselves as a growth retailer and we have a lot of things.
We're trying to do to to offset some of the stimulus related benefits we saw in the first quarter.
So I'm not going to talk specifically other than we are expecting a step backwards in the first quarter of 2022.
But we're working hard to build a model and a plan for 2020 to you that to try to offset that to the greatest extent possible now over the long term getting to double digit operating profit.
This is where I think the business has been driving.
If we go back and re went on to these same calls four or five years ago. We were in the mid single digits talking about getting into the high single digits and I'm really proud of what the teams have done I think we've driven a lot of value for our shareholders.
And we've really built a strong model.
Can drive now into double digits and so.
We are on track for that here in 2021, and I think we can build models that continue that that focus into 2022 and beyond.
Okay. Thanks again.
Thank you.
Our next question comes from the line of Mitch commits with pivotal research. Your line is open.
Yes, thanks for taking my questions.
Let me ask the hard goods question, a little bit differently, if I look at your sales growth.
Through the first half and even in the acute your early Q3, if I look at on a two year basis.
<unk> seen the sequential deceleration of the growth is it fair to say.
Is that all of that is due to the softening of the hard goods category.
Yes.
I'm not sure I am not sure I fully understand your question Mitch.
Q1 sales were up Q1 sales were up 31% over two years ago Q2 was up 18% I think Q3, you said you are trending something in the high single digits. So there's there's been this deceleration of the growth rate on a two Europe basis I'd be curious to know what those numbers were if you stripped out hard goods I'm guessing you will tell me.
But.
I don't know if you could sort of qualitatively say that most of that deceleration has been due to a softening of hardgood skate hardgoods.
Yes, I think it's probably more complicated than that too because you got to look at where we were the year before and I think.
This is something like let's just take Q3 as is.
As an example, where we've.
We've now run up for ads in 2020, this will be our fifth year of pretty major growth in back to school I mean, if I go back to August of 2017, we were up seven 4% August of 2018 were up nine 5% August 2019 were at seven 1%. So it's pretty significant multiyear stacks and I think you have to balance that across.
<unk>, where you are in the year and is as you know <unk> been following this for a long time, our peaks have been our biggest growth cycles really since 2016, and so we haven't had all of those peaks in the first couple of quarters and what we've seen now in the last couple of years is or at least in 2021, its pretty outsized growth in the first and second quarter.
So I think that the <unk>.
It plays out for me Mitch.
Again, it's kind of how we drive that total growth.
And hard goods.
<unk> is declining, but it's still on a <unk>.
<unk> perspective, I think.
I understand I mean, probably part of why I asked the question is just to get a sense as to how the rest of the business is doing.
Over the course of the last two and a half quarters. If it's been it's been holding pretty steady or if it's also been declining based on that trend, but we can maybe take that offline.
No if I.
I recall correctly that was challenging in Europe last year due to some resort closures COVID-19 a bunch of stuff.
If we have a more normal snow season in Europe this year.
Rick you've been doing this long enough so.
Do you do you anticipate some pent up demand therefore, both snow hard and soft goods.
I think Mitch that are.
I think the answer to your question is yes, we do if we have a bar notice from BARDA almost snow season in Europe now the flipside of that is we had an outstanding snow season here in the U S.
So I think there is always a balancing of the aspects of the two businesses.
The two geographies, so I think there'll be some it depends on the.
The overall result dependent upon.
What kind of associates, we have here in the U S too, but for Europe, Yes, I think that our thinking is it can't be much worse than it was a year ago not only to be clear not only was there not a lot of snow people could get there, but our stores are closed right at the same time, including some stores that are that really cater to that.
I can <unk> flogging that really cater thats still a customer.
So it couldnt got much worse mix. So I do think a decent snow year is going to be.
Good.
We have been it would be beneficial for us in Europe.
And then lastly, just on the gross margins again, if I look at your gross margins.
Versus two years ago, you are running up over 500 basis points for both Q1 and Q2, it sounds like and I would guess that a lot of that has to do with full price selling given all the way in channel inventory. It doesn't sound like you expect the same sort of to your margin expansion in the back half and I am curious.
Is that because youre not expecting the full price selling to continue to be as strong or is there some other dynamics that.
You're sort of factoring into your outlook.
Yes, we talked about Q2, specifically, but the same plays out in Q1.
We had 530 basis points.
Increase in gross margin in the second quarter, if I break that down 270 basis points is product margin itself, we had occupancy leverage of 170 basis points and then an improvement in shrink so as we move to the back half of the year I think that the reason why we're not forecasting the same level of growth is really a fact.
There are a couple of areas one that product margin growth that we're talking about that we've seen in Q1 and now into Q2 actually really started in the back half of last year and maybe even Q2 of last year. So so.
So we saw we saw really strong product margin growth in Q3, and four last year. So we're not forecasting that to be a significant and we've also run extremely strong shrink numbers throughout the pandemic and what we're really excited about is now in our in our first quarter really being primarily open so.
So we've run good shrink numbers here through the second quarter.
And so we don't we don't have the benefit in Q3 and Q4 on the shrink side, either so that's probably why youre seeing a little bit less.
Less aggressive in the back half of the year on gross margin, but again on a multiyear basis really excited about the result.
Okay. Thanks, guys. Good luck.
Thanks.
Thank you.
As a reminder, ladies and gentlemen, Thats star one to ask the question.
Okay.
I'm showing no further questions in the queue I would now like to turn the call back over to Mr. Rick Brooks for closing remarks.
Alright, Thank you and again, thank you all for joining us on the call today, we're always happy to engage with you. So really appreciate it and we'll look forward to talking to you in December for our Q3 results. Thank you everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Good afternoon, ladies and gentlemen, and welcome to Zumiez, Inc. Second quarter fiscal 2021 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 comments concerning Zumiez, Inc. Business outlook and contains forward looking statements.
These forward looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties actual results may differ materially.
Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in zumiez filings with the SEC.
At this time I would like to turn the call over to Mr. Rick Brooks Chief Executive Officer, Mr. Brooks you may begin.
Hello, and thank you 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 second quarter, then I'll share some thoughts on sales for the third quarter to date before handing the call over to Chris who will take you through our financial results in more detail.
After that we'll open up the call to your questions.
Our second quarter results reflect the strength of our business model as we posted solid top line growth and better than expected profitability in the face of tougher comparisons.
Reflecting back upon the second quarter of 2020.
Our stores are open or open for roughly 70%, 70% of potential operating days as a result of the pandemic.
Despite those closures our total sales in Q2 of 2020 increased 10% over 2019 due to our ability to capitalize on strong sales trends and pent up demand for more significant closures in the first quarter of 2020.
Therefore, we were pleased that our second quarter 2021, total sales grew 7% year over year and increased 18% on a two year basis, all while driving strong full price selling.
On the expense side spending returned to more normalized levels following last year's temporary cost savings actions and government subsidies.
Resulting in diluted earnings per share of <unk> 94.
Seven shy of last year's record dollar or one and up over 160% from the second quarter of 2019.
Our teams once again did a terrific job adapting to the current environment to fulfill demand for our distinct merchandize offering.
This year's results reflect the shift back to a more historical mix between our store and digital channels as our customers increasingly turn to physical shopping.
This is a very positive development given they're enriched brand experience that can be achieved through human to human connections.
Looking ahead, we feel good about our ability to continue to exceed 2020 sales levels over the second half of the year.
Even as we faced tougher comparisons and more competition for discretionary spend.
With majority of school districts around the country resuming in person learning, we've seen a more normalized start to the back to school season, which provide the business with good momentum to begin the third quarter.
Q3 to date through Labor day, total sales were up 23% year over year and up 7% compared with the same period of 2019.
These results are despite continued challenges related to the pandemic across the business.
With the recent uptick in Covid cases caused by the adult Delta Varian has created some additional uncertainties about operating conditions and consumer behaviors in the near term.
We are confident in the agility that our teams have shown throughout the pandemic.
The financial strength of our business to weather any potential risk that lies ahead.
The agility, it's based on our strong culture brand and best in class sales teams that help us drive incremental market share gains across the business.
Key to our success has been and will continue to be our one channel mentality and our proven ability to adapt to changing consumer needs.
This includes ideas like our in store fulfillment capabilities, including Zumiez delivery, which takes our best in class sales teams directly to our customers' doors.
What elements of our model have and will continue to evolve in the years ahead, our overarching consumer sector strategy rooted in strong brand and culture will remain constant.
We build a business in which we partner with great brands to bring the diversity and uniqueness to our customers that allows them to individually.
We built a footprint that informs us of global trends and worked with brands to emerge locally and grow globally to better serve our customer.
We build the infrastructure with the customer to shop with us to get what they want when they want how they want and as fast as they want.
We marked our business into a channel this organization with inventory visibility from all touch points and backend capabilities allow us to effectively leverage expenses, regardless of the channel in which sales originate.
The work together has been significant and the path ahead will require further focus to move even faster to serve the customer.
Therefore, we remain steadfast in our commitment to investing in our future. We continue to believe that the times such as these create great opportunities the right people strategies and resources in place, we are well positioned to emerge from this crisis, a stronger brand than ever before and clear winner in the ongoing consolidation.
A retail.
That I will turn the call to Chris discussed the financials Chris.
Thanks, Rick Good afternoon, everyone given that our stores were closed for approximately 27% in the quarter last year due to the pandemic I'll provide comparisons to both the prior year and the second quarter of fiscal 2019, where appropriate.
Following my review of our second quarter results I'll provide an update on third quarter to date sales trends in our current perspective on the full year.
Second quarter net sales were $275.0 million up seven 3% from $254 million in the second quarter of 2020.
And up 17, 6% from $232.0 million in the second quarter of 2019 the.
The year over year increase in sales was primarily driven by the reopening of stores our ability to capitalize on current trends and the continued impact of domestic economic stimulus on the business during the second quarter compared with the second quarter of 2019, we saw comparable sales growth of 16, 6% and the net addition of 15 stores.
Our stores were opened for approximately 96% of the potential operating days during the second quarter of 2021 compared to 73% in the second quarter of 2120% in the second quarter of 2019.
From a regional perspective, North America net sales were $242.0 million, an increase of six 3% over 2020 and up 14, 8% compared to the same period in 2019 other international net sales, which consists of Europe, and Australia with $32.0 million up $15 seven from last year and up $45 <unk>.
1% from two years ago, excluding the impact of foreign currency translation North America net sales increased five 8% and other international net sales increased seven 6% compared with 2020.
We experienced significant COVID-19 related store closures during the second quarter in Canada, Australia, and Europe, noting they were open for approximately 68%, 77% and 88% of the available operating days respectively. During.
During the quarter the men's category was our largest growth category, followed by accessories and footwear.
Our goods was the largest negative category followed by women's.
Second quarter gross profit was $105 million compared to $99.0 million in the second quarter of last year and $79.0 million in the second quarter of 2019.
Gross margin as a percentage of sales was 39, 1% for the quarter compared with $36 three in the second quarter of $2053 eight in the second quarter of 2019, the 280 basis point improvement from the second quarter of 2020 was largely due to a 170 basis point decrease in web shipping costs related to a decrease in web sales.
From the second quarter last year, when we had a higher rate of store closures driving customers online.
The 100 basis point increase in product margin and a 70 basis point improvement in inventory shrinkage, partially offset by 60 basis point increase in distribution and inbound shipping costs.
Gross margin improved 530 basis points from 2019, driven largely by product margin improvement of 270 basis points.
Occupancy deleverage of 170 basis points, and a shrink improvement of 90 basis points.
SG&A expense was $73 million or 27, 2% of net sales in the second quarter compared to $64.0 million or 23, 1% of net sales a year ago, and $70.0 million or 28, 7% of net sales two years ago.
Impaired to 2020, the 410 basis point increase in SG&A expense as a percent of sales primarily reflects the benefit from temporary cost savings tied to the pandemic last year.
The most significant changes include a 150 basis points deleverage in our store wages 60 basis points of deleveraging corporate costs 50 basis points of deleverage in annual incentive compensation and 40 basis points due to a decrease in government subsidies.
During the quarter, we also accrued a legal settlement, resulting in a 110 basis points negative impact.
Operating income in the second quarter of 2021 with $32 million or 11, 9% of net sales compared to $34.0 million or 13, 2% of net sales last year in the second quarter of 2019, we had an operating profit of $18.0 million or five 1% of net sales net.
Net income for the second quarter was $24 million or <unk> 94 per diluted share. This compares to net income of $29.0 million or $1 <unk> per diluted share for the second quarter of 2020.
Net income of $9 million or <unk> 36 per diluted share for the second quarter of 2019, our effective tax rate for the second quarter of 2021 was 26, 8% compared with 26% a year ago period, and 37% two years ago.
Turning to the balance sheet the business ended the quarter in a very strong financial position cash and current marketable securities increased 37, 7% to $412 million as of July 31, 2021, compared to $300.0 million as of August one 2020 the.
The increase in cash and current marketable securities was driven by cash generated through operations, partially offset by capital expenditure.
The company has reported the company repurchased 200000 shares during the quarter and an average cost of $44 two one per share and a total cost of $19.0 million year to date as of September seven 2021. The company has repurchased 700000 shares at an average cost of $91.0
And a total cost of $35.0 million as of July 31, 2021, we have no debt on our balance sheet and continue to maintain our full unused credit line of $35 million.
We ended the quarter with $153.0 million in inventory up 17, 9% from the second quarter of 2020 and down one 1% compared to the second quarter of 2019 on a constant currency basis, our inventory levels were up 17, 3% from last year.
Overall, the inventory on hand, as healthy and selling in a favorable margin.
Now to our third quarter to date results.
Net sales for the 37 day period ended September six 2021 increased 23, 2% compared to the 37 day period ended September <unk> 2020.
As we saw our customers go back to in person learning and the majority of the regions in which we operate compared to the 37 day period ended September nine 2019 total net sales increased six 7% our stores were opened 98% of the available days during the period in 2021 compared to 91% in the same period last year.
Comparable sales for the 37 day period ended September six 2021 increased 10, 5% on a one year basis and increased five 4% compared with two years ago.
From a regional perspective net sales for our North America business for the 37 day period ended September six 2021 increased 25, 5% over the comparable period last year and were up five 1% compared to 37 day period ended September <unk> 2019. Meanwhile, other international business increased to 3%.
<unk> versus last year, and increased 28, 8% compared with the same period of 2019.
From a category perspective men's was our most positive category followed by accessories footwear and women's Hardgoods was our only negative category.
Due to the limited visibility in the business will not be providing specific guidance for the third quarter of 2021 or the fiscal year, but do you want to provide directional update on our expectations for the year.
Concerning revenue for the full fiscal 2021, we are projecting net sales to grow in the low to mid teens from fiscal 2019. This translates to net sales growth from 2020 between the high teens to just over 20%.
For the back half of the year, we continue to anticipate top line growth on 2020 results that were above 2019 results for.
For the third and fourth quarters of fiscal 2021, we anticipate we'll grow sales in the mid to high single digits from fiscal 2020 absent significant COVID-19 restrictions and Lockdowns.
For the third quarter, specifically this is a slowdown from what we have just reported quarter to date. However, we believe is warranted as we had a slow start to back to school season in 2020 and saw continued strength through late September and October last year. This year, we've seen a more normalized cadence to back to school and do not anticipate that September and October will be a <unk>.
Strong as they were in 2020.
Moving onto gross margin 2021 gross margin is currently plan to grow year over year, driven by leverage of occupancy costs on increased sales a reduction in shipping cost as web revenue normalizes with stores being open and improved product margins, while we anticipate improvements in gross margin in our third and fourth quarter the year over year growth will be much more mass.
And our first two quarters.
Fiscal 2021, SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons many related to the pandemic. The drivers of the increase include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021.
Government subsidies received in 2020, not anticipated to repeat in fiscal 2021 and.
An increase in incentive compensation and other discretionary accruals related to improved performance illegal settlement accrued during the second quarter.
An increase in costs related to training and recognition events. They were reduced significantly in 2020 due to the pandemic an increase in marketing events and other related spending that were not possible with their restrictions in 2020 and.
And an increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results.
In summary, we expect to see expansion in gross margin, while SG&A expenses grow much closer with overall sales on a net basis. However, we now anticipate operating margins will be up year over year and fiscal 2021, reaching double digits as a percent of sales.
We are currently planning our business, assuming an annual effective tax rate of approximately 26% in fiscal 2021 compared to 25, 6% in 2020.
We are planning diluted earnings per share to increase meaningfully in fiscal 2021, compared with fiscal 2020, primarily driven by a significant increase we achieved in the first quarter as we saw in the second quarter more expenses are coming back into the model as COVID-19 restrictions are reduced such as store payroll related to capacity and hours travel.
Training and other costs discussed above we are currently planning diluted EPS in the back half of the year to be flat to down modestly from the last six months of 2020 and.
In the event, our topline estimates exceed those outlined today, we would expect a strong flow through on incremental sales.
We are planning to open 25, new stores in fiscal 2021, including approximately eight stores in North America 12 stores in Europe, and five stores in Australia, we are planning to close approximately five to six stores during the year.
Capital expenditures are planned to be between $22 million and $24 million in fiscal 2021, compared with $10.0 million in fiscal 2020. The majority of that capital spending will be dedicated to new store openings and planned remodels we.
We expect that depreciation and amortization, excluding noncash lease expense will be approximately $22 million in fiscal 2021 compared to $28.0 million in fiscal 2020.
We are currently projecting our diluted share count for the full year to be approximately $28.0 million shares any share repurchases made after those disclosed today, we will reduce our share count from this estimate.
And with that operator wed like to open the call up for questions.
Thank you as a reminder, ladies and gentlemen that star one to ask the question.
To withdraw your question press the pound key again Thats star one.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Janine Stichter with Jefferies. Your line is open.
Hi, Good afternoon. Thanks for taking my question and you acknowledged that the challenging supply chain environment. I was just hoping you could elaborate more on what youre seeing and maybe break it up between Europe private brands and then what Youre seeing from some of your third party brands that you work with and just speak to any areas, where you feel like there is challenges in getting product in and help us understand.
What you are currently.
Thank you.
Sure. Thanks Jeanine.
I'll take a crack at this and let Rick add anything if you'd like.
I'll try to address it maybe high level and then maybe just a few comments about the different lines.
I think from a supply chain challenge.
Perspective, I guess I would just start with this is really not something new we've been dealing with this really throughout the.
The pandemic into early parts of 2020.
It's required us to work extremely close with our brands and our logistics vendors to navigate the different challenges that are out there including how.
How we think about raw material and commodity pricing factory capacity transportation capacity and transportation costs labor shortages.
Country by country challenges, how this affects our our timelines and receiving and then obviously the general inflation challenges that are kind of tied to that so I think from an overall perspective, we feel like our teams have navigated this really well.
Clearly it has resulted in some delays in product, but I think because we've been dealing with this for the amount of time, we have we've we've been planning to it and as we just talked about we're really happy with the inventory levels I mean, a year ago, our inventory was much lower than we wanted it to be as Q2 of 2020 was was very.
<unk> demand.
And we're really happy we build those inventories back up we think they are in a good spot.
So so yes it has impacted.
What we've wanted to receive but our teams have done a good job working around that with our vendors and I think that's how we kind of plan to address this moving forward I think we continue to work with our brands on.
On how we how we get through these challenges and really try to provide the best customer experience at the end of the day I think as we look at the supply chain moving forward. We continue to expect theres going to be issues through the back half of this year I think kind of moving out of back to school. We expect there to continue to be some challenges on the inbound side.
Like I've laid out here.
And I think we'll also start to see some of the challenges we saw in Q4 last year on the on the business to consumer side in getting product to our customers.
But all that said I think we've got really good strategies to mitigate that Rick talked about our ability to deliver and we are working already with our shipping carriers on how to navigate that and I think we've got a pretty good plan in place. So we're not forecasting a material impact on the business at this point in the result.
Estimates that we've kind of laid out for the year for you guys.
But I think we'll we're able to manage through it to date and we will keep kind of keep keep tackling as we go.
The last thing I'd, just add to this as we think about supply chain.
It wasn't too long ago, we were talking about where we are all of our product was coming from and I think we've done a really good job I'm really proud of the teams on how we've diversified we have a much more diversified country of origin.
Lay out today within our business then we had two or three years ago. So I think I think that's a really good thing and that helps with how we think about kind of your question of branded versus private label right. We have obviously more say in how we run our private label goods. We have tried to to really diversify in that category and work with our brands and our brands.
Are very smart.
They built their own logistics to to try to diversify their offerings. So.
It's a challenge to challenge I think we've got good strategies around and we'll see how it plays out as we move through the year.
Great and then maybe just on the hard goods side of the business can you speak to what Youre seeing there and just your views on what inning of the cycle, where and I'm guessing that the negative trend is more just a function of comparison from what you saw last year. During the third during this time of Covid, but just any thoughts on where we are and maybe what you saw plus Olympics. Thank you.
Sure Janine I think as we look at it here relative to the skate hardgoods cycle. What we're really we're seeing I think to skate hardgoods is a good example, where because of the nature of the pandemic and the shutdowns and the closures of stores in.
Remote schooling and everyone being home.
And the Lockdowns scale I think is one of those categories much like campaign that everything got a lot of volume got pulled forward.
And so I think thats, partly what we're seeing it is a tough comparisons coming across in skate hardgoods of having so much of that volume port forward because of the pandemic. So we'll have to see how this plays out next year, but again I think the great thing I always like to remind everyone is that our business responded really well and that despite the downturn.
This gave hard goods, which.
I think we could all expect at some point.
Because it has been three years three plus years on the cycle.
That our business responded well and we are running still running gains by just selling more apparel. In this case are the predominant driver of our business. So it's been really good to see how the business responded we're maintaining our wallet share of our customers' business. So I think thats, our where our head is Janine is that we were thinking we just saw this big pull forward to see how this response next year.
To where we're at but scale is one of those great categories of business from an inventory perspective that I think we can manage relatively.
Quickly in terms of our inventory positions. So I feel good about where we're at in that side too.
Great. Thank you very much.
Thank you our.
Our next question comes from the line of Jeff Van <unk> with B Riley Your line is open.
Yes, Hello. This is Richard Magnuson in for Jeff Van <unk>.
And thank you for taking our question.
We know about the business as Omnichannel, but what more can you tell us about the recent trends in in store traffic E Commerce and delivery and then are you seeing any significant changes in consumer behavior that could last longer as this COVID-19 impacted environment plays out.
Alright, Richard Let me start then I'll ask Chris to share some data with you, but again just remind you that our job is to really is about empowering our customers with choice on how they want to shop with us and they get to choose their own journey into Zumiez world.
So our one channel business model is really designed to meet our customers' needs locally and then to leverage that cost structure, no matter, where the sales is digital or physical.
But that said I am I have to tell you how thrilled I am as I said in the script that our customers have chosen to return to our stores.
In a very very strong way for their shopping.
Say that because I really believe we can get a richer brand experience or if thats. The case that all of the Gen. Z research work you see actually shows they prefer to shop in stores. So when we get them in our stores and that we get that human to human connection and the deep deep brand experience I think it makes choppiness zumiez, a really powerful experience when they when our customers get the.
Connect with our employees, so with that ill, let Chris share. Some data, yes, Richard I think this is something obviously, we put a lot of thought into heading into the year just given the increase in online demand in 2020, when we had our stores closed.
And we kind of looked at it and said.
In 2020, we saw our web penetration for the year go from about 16% to 26%.
And we kind of said, okay. We think it's going to be somewhere in between there and to Rick's point. We're just ecstatic that we're just so much closer in 2019 levels and as it relates to the even the second quarter here, we were about 15% digitally.
Originated.
Compared to the 27% last year and so I think you see some things in the model that are really favorable here early on one of the things I talked about in gross margin.
Was that we had leveraged web shipping by 170 basis point. What's interesting is if you go back to last Q2, you'd see what it's almost completely offsetting last year. So.
I think it's a richer experience for our customer.
Financially a good experience for our customers for us as our customers really their in store and gets the immediacy of the products. So really excited to see those levels go back to 2019, and obviously, we'll see how that plays out here on the back half of the year.
Lastly, Richard.
So we are unclear and the response on this is this isn't just a U S issue and we've seen this across the broad swath of our businesses, including Europe, where we have seen a return more our mix returning more to our 2019 levels across our businesses. So it is as your question intimated a global trend.
Relative to how we're seeing and what we're seeing in our consumers' behavior. I think is probably unique relatively to our brand experience and the nature of our consumer base.
Okay and then this is regarding the supply chain situation again.
Are you seeing anything in terms of like effective alternatives, that's our ships being routed to other ports and then has it supply situations and intelligently to pull forward. Some sales we referenced that a little bit I thought maybe there was more detail there.
Yes, I think from a supply chain perspective, we've tried to be as creative as possible to navigate lots of different issues there.
There are situations, where we have full price forward, where we've tried to get it sooner to navigate this and it really becomes a vendor by vendor discussion depending on kind of the demand we have for the product and what our expectations are selling patterns are going forward. So I don't have a specific call out for you other than.
I think the teams have really tried to navigate this in lots of different ways from moving parts to potentially air freighting things all depending on the need for the product.
Alright, well, thank you I'll get back in the queue.
Thank you.
Our next question comes from the line of Jonathan Komp with Baird. Your line is open.
Yes, hi, Thank you maybe first just a follow up on the hard goods question.
If I look at the last three or four years, and then 2020.
<unk> hard goods accounted for.
More than all of the growth for the company over that period. So I wanted to just follow up and ask do you think there is.
Risk that you go all the way back for hard goods I don't know if you have a view there and related to that are you seeing trends in other categories that you think could offset it if you do.
I'll go ahead and take a crack.
Let Rick add anything if he'd like from a from an overall perspective I guess John.
This really falls back to our model of.
Hard goods has been a huge growth driver we've been super happy to have it it's been a core part of our offering.
And like all of the trends, we see over long periods of times categories, ebb and flow and so to.
To the second part of your question of like how far do we think it's going to go I'm not really sure I think that the best part of all we've got going is that we do have things offsetting it and we are running overall gains so so.
So yes, we've seen hardgoods decreased a little bit we mentioned in men's has been our strongest category. We continue to have really strong results. There we've seen increases in footwear and now we've seen increases in accessories.
Thank all of those are really good signs as we kind of flip to the back to school, we see growth across all three of those areas I just mentioned as well as our women's business. So for me.
The hard goods results are still pretty phenomenal over a multiyear stack.
And now that we've seen a little bit of a pullback here in Q2 and into Q3, we're running deep big gains in the other areas and that that's great because that's the model and the diversification.
Versification, we hope to offer with what what we're doing so that as things trend up or down we have other things to offset them.
Yes, that's really helpful and just as a follow up.
Theoretical as you mentioned.
Predicting where the categories.
We will trend towards but could you just maybe comment on that.
Relative product margin across your major categories, and if you do see hard goods fall back in favor of other categories, what that might mean for for product margin.
Sure I'm happy to speak to that and I think from a product margin perspective, we just could not be happier with kind of.
Where we stand I think this is now year six.
US running product margin gains and if you look at the operating that we have the apparel categories in accessories are typically our highest product margin.
And this the snow.
Hard goods business and the footwear.
Our lower margin for US now the beauty of this is as we look at the last six years, we've been able to grow margin both within department as well as across the company with these changes happening right. So hard goods is has grown in nature over the last few years, we've continued to grow product margin.
Another interesting piece to this is we've seen our private label penetration over the last five years decline as we've been in such a strong branded cycle. We've continued to grow product margin I'm really proud of.
Our U S teams as well as our international teams, because we've seen product margin growth internationally as well as those businesses at scale. So I think we have a lot of different mix things maybe.
Maybe almost similar to my sales commentary, it's about how we drive the whole pool. So there are challenges from time to time, as we transition to say or hard goods or footwear, which are typically not as high from a product margin perspective.
When our teams are really doing everything they can which is our focus at all times, we can drive product margin both within categories across countries and still see an overall result, even if mix is trending the wrong way.
Okay, Great and just last one for me as we think beyond 2021 any framework to think about that.
And takes for operating margin and your ability to hold on to.
A double digit margin.
Thank you, yes, yes.
Yes, Thanks John.
It will be very high level here.
Because we're not going to talk too much about 2022, but we script. This even in our Q1 call that.
Anniversarying, what we saw in the first quarter of 2021 will be challenging as we move to 2022. Fortunately, we do view ourselves and continue to view ourselves as a growth retailer and we have a lot of things we are.
We're trying to do to to offset some of the stimulus related benefits. We saw in the first quarter, so not going to talk specifically other than we are expecting.
Backwards in the first quarter of 2022.
But we're working hard to build a model and a plan for 2022 that to try to offset that to the greatest extent possible now over the long term getting to double digit operating profit.
This is where I think the business has been driving.
If we go back and re went on to these same calls four or five years ago. We were in the mid single digits talking about getting into the high single digits and I'm really proud of what the teams have done I think we've driven a lot of value for our shareholders.
And we've really built a strong model.
Can drive now into double digits and so.
We're on track for that here in 2021, and I think we can build models that continue that that focus into 2022 and beyond.
Okay. Thanks again.
Thank you.
Our next question comes from the line of Mitch commits with pivotal research. Your line is open.
Yes, thanks for taking my questions.
Let me ask the hard goods question, a little bit differently, if I look at your sales growth.
Through the first half and even into Q early Q3, if I look at on a two year basis.
Seeing the sequential deceleration of the growth is it fair to say.
Is that all of that is due to the softening of the hard goods category.
I mean, I'm not sure I am not sure I fully understand your question Mitch.
Q1 sales were up Q1 sales were up 31% over two years ago Q2 was up 18% I think Q3, you said you are trending something in the high single digits. So there's there's been this deceleration of the growth rate on a two Europe basis I'd be curious to know what those numbers were if you stripped out hard goods I'm guessing you will tell me.
But.
I don't know if you could sort of qualitatively say that most of that deceleration.
Due to a softening of hard goods skate hardgoods.
Yes, I think it's probably more complicated than that too because you got to look at where we were the years before and I think this.
This is something like let's just take Q3 as the edge.
As an example, where.
We've now run up for ads in 2020, this will be our fifth year of pretty major growth in back to school I mean, if I go back to August of 2017, we were up seven 4% August of 2018 were up nine 5% August 2019 were at seven 1%. So it's pretty significant multiyear stacks and I think you have to balance that across.
US where you are in the year and is as you know <unk> been following this for a long time, our peaks have been our biggest growth cycles really since 2016, and so we haven't had all of those state peaks in the first couple of quarters and what we've seen now in the last couple of years.
Or at least in 2021, its pretty outsized growth in the first and second quarter. So I think we have to see how that plays out for me Mitch.
Again, it's kind of how we drive that total growth.
And yes hard goods hardgoods is declining, but it's still on a multiyear perspective I think we are.
I understand I mean, probably part of why I asked the question is just to get a sense as to how the rest of the business is doing.
Over the course of the last two and a half quarters. If it's been it's been holding pretty steady or if it's also been declining based on that trend, but we can maybe take that offline.
No.
Recall correctly that was challenging in Europe last year due to some resort closures COVID-19 a bunch of stuff.
If we have a more normal snow season in Europe this year.
Rick you've been doing this long enough so.
Do you do you anticipate some pent up demand therefore, both snow hard and soft goods.
I think Mitch that are I.
I think the answer to your question is yes, we do if we have a bar notice from BARDA almost snow season in Europe now the flipside of that is we had an outstanding snow season here in the U S.
So I think there is always a balancing of the aspects of the two businesses.
Two geographies, so I think there'll be some it depends upon the overall result dependent upon.
What kind of associates, we have here in the U S too, but for Europe, Yes, I think that our thinking is it can't be much worse than it was a year ago not only to be clear not only was there not allowed us know people could get there, but our stores are closed right at the same time, including some stores that are that really cater to that.
I can <unk> flooding that really cater thats still a customer.
So it couldnt got much worse, Mitch so I do think a decent familiar is going to be a good day.
Be beneficial for us in Europe, Yes, Okay, and then lastly, just on the gross margins again, if I look at your gross margins versus two years ago, you are running up over 500 basis points for both Q1 and Q2, it sounds like and I would guess that a lot of that has to do with full price selling given all the way in channel.
Tori.
It doesn't sound like you expect the same sort of to your margin expansion in the back half.
I'm curious is that because youre not expecting the full price selling to continue to be as strong or is there some other dynamics that.
You're sort of factoring into your outlook.
Yes, we talked about Q2, specifically, but the same plays out in Q1.
We had 530 basis points.
The increase in gross margin in the second quarter, if I break that down 270 basis points is product margin itself, we had occupancy leverage of 170 basis points and then an improvement in shrink so as we move to the back half of the year I think that the reason why we're not forecasting the same level of growth is really a fat.
There are a couple of areas one that product margin growth that we're talking about that we've seen in Q1 and now into Q2 actually really started in the back half of last year and maybe even Q2 of last year. So so.
So we saw we saw really strong product margin growth in Q3 in Florida last year. So we're not forecasting that to be a significant and we've also run extremely strong shrink numbers throughout the pandemic and what we're really excited about is now in our in our first quarter really being primarily open so.
So we've run good shrink numbers here through the second quarter.
And so we don't we don't have the benefit in Q3 and Q4 on the shrink side, either so that's probably why youre seeing a little bit less.
Less aggressive in the back half of the year on gross margin, but again on a multiyear basis really excited about the result.
Okay. Thanks, guys. Good luck.
Thank you.
As a reminder, ladies and gentlemen, Thats star one to ask the question.
I am showing no further questions in the queue.
I'd now like to turn the call back over to Mr. Rick Brooks for closing remarks.
Alright, Thank you and again, thank you all for joining us on the call today, we're always happy to engage with you. So really appreciate it and we'll look forward to talking to you in December for our Q3 results. Thank you everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.