Q3 2021 Zumiez Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to the Zumiez.
Third quarter fiscal 2021 earnings conference call at this time, all participants are in listen only mode.
That's the question, yes, especially towards the end of the conflict.
Before we begin I'd like to remind everyone of the Safe Harbor language Today's company Todays conference call includes comments concerning Zumiez, Inc. Business outlook and contains forward looking statements. These forward looking statements and all other and may be made on this call that are not based on historical facts are subject to victims certainty.
Actual results may differ materially additional information concerning a number of factors that could cause additional excuse me actual results to differ materially from there.
It is available if any filings with the FCC.
At this time I would like to turn the call over to Rick for cheating.
Chief Executive Officer, Mr. Brooks, you may begin.
Thank you and Hello, everyone and thanks 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 third quarter.
Then I'll share some thoughts on sales for the fourth quarter date before handling 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.
As you saw from our earnings release issued earlier today, our third quarter was historic what.
We are definitely navigated multiple external headwinds over the past 18 months, starting with the pandemic in early 2020.
Continued global supply chain disruptions labor shortages and inflation and in some cases closures due to COVID-19.
Despite these challenges this quarter, we grew net income five 4% over Q3 of 2020.
In our remark was 60% of the third quarter of 2019 pre pandemic levels.
In fact, we've now generated more income in the first nine months of 2021 than in any full year period in the company's history and we still have the important holiday season ahead of us.
Looking at the underlying drivers of the record earnings quarter, net sales were up 7% and 10% on a one and two year basis, respectively.
The majority of school districts around the country resuming in person learning this year back.
Back to school was highlighted by strong full price selling reflecting pent up demand and our ability to serve the customer through our integrated model. However, they want to interact with us.
The increase in sales combined with product margin growth.
All said an uptick in SG&A expenses as we saw an expansion of store hours and an increase in marketing.
And the completion of our first national store manager in person event in 18 months in North America.
Looking ahead, the fourth quarter has started well despite numerous challenges underscoring our ability to capitalize on strong consumer demand.
And our market share.
Fourth quarter to date through Tuesday November 30th total sales were up 11, 5% year over year and up eight 6% compared to the same period of 2019.
Our performance over the Black Friday weekend bodes well for the remainder of this holiday season.
While we continue to experience global supply chain challenges labor shortages collation closures tied to Covid and now risks associated new Omicron variant, we are confident that our investments in people sourcing and fulfillment will allow us to serve our customers with a distinct merchandise offering.
Service and seamless shopping experiences that are the pillars of Jimmy's long term success.
As we like to say periods of significant change create opportunities and companies have the right people strategies and resources in place can take advantage of times like this to advance their brand and business.
Jimmy as it fully resistant to all the challenges that are plaguing the industry. We believe the current environment will accelerate further consolidation globally and that our adaptability and focus on our customer will lead to further wallet and mind share gains.
We believe this is evident domestically and also internationally.
We continued to win share in Europe, and Australia, despite being hit with closures in both regions throughout the year and the current closures in Australia during the important lead up the holiday excuse in Austria.
And the lead up to holiday.
While we are tactically adaptable, our overarching consumer centric strategy rooted in strong brand and culture will remain constant.
To build a business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individually.
We build the infrastructure through which customers can shop with us to get what they want when they want how they want and as fast as they want we've morphed our business into a channel. This organization with inventory visibility from all touch points and backend capabilities that allow us to effectively leverage expenses, regardless of the channel in which sales originate.
Each of these distinct attributes will serve us well in today's hybrid shopping model and logistically challenged environment.
Our unique position in the marketplace leaves us well positioned to capitalize on consumer demand and expand our market share over the near and long term.
To close I want to thank the entire zumiez team for their hard work and dedication to upholding the cultural values that are directly tied to our strong third quarter and positive start to the fourth quarter.
Despite the fantastic financial results. These are not easy times to operate in.
Teams continue to work relentlessly and service of our customers.
With that I'll turn the call to Chris to discuss the financials. Thanks, Rick and good afternoon, everyone similar to last quarter I will provide comparisons to both prior year and the third quarter of fiscal 2019 were appropriate given the impact of the pandemic on the year ago period.
In my review of the third quarter results I'll provide an update on the fourth quarter to date sales trends and our current perspective on the full year.
Third quarter net sales were $289 $5 million up six 8% from $271 million in the third quarter of 2020 and up nine 6% from $264 million in the third quarter of 2019, the year over year increase in sales was primarily driven by our ability to capitalize on current trends the reopening of stores compared to short term.
Store closures related to Covid, 19, pandemic and the prior year and a more normalized back to school season in our U S business. Our stores were opened approximately 99% of the potential operating days during the third quarter of 2021 compared to approximately 95% in the third quarter of 2020.
100% of third quarter of 2019.
From a regional perspective, North America net sales were $257 $5 million, an increase of seven 1% over 2020 and up 8% compared to the same period in 2019.
Other international net sales, which consists of Europe, Australia were $32 million up four 5% from last year and up 25, 2% from two years ago, excluding the impact of foreign currency translation North America net sales increased six 8% and other international net sales increased 5% compared with 2020.
We continued to experience temporary COVID-19 related store closures during the third quarter in Australia, notably are open for approximately 42% of the available operating days.
During the quarter. The men's category was our largest growth category, followed by footwear and accessories hardgoods with the largest negative category followed by women's.
Third quarter gross profit was $114 7 million compared to $105 8 million in the third quarter of last year and $94 6 million in the third quarter of 2019 gross margin as a percent of sales was 39, 6% for the quarter compared with 39% in the third quarter of 2020, and 35, 8% in the third quarter of 2019 to six.
The basis point improvement from the third quarter of 2020 was largely due to 60 basis point decrease in web shipping a 60 basis point decrease in impairment losses related to operating lease right of use assets and a 50 basis point increase in product margin. These increases were partially offset by a 110 basis point increase in inventory shrinkage. After historically low results in 2012.
With stores closed.
Gross margin improved 380 basis points from 2019, driven largely by product margin improvements of 220 basis point occupancy leverage of 120 basis points and a shrink improvement of 40 basis points.
G&A expense was $74 8 million or 25, 8% of net sales in the third quarter compared to $67 9 million or 25% net sales a year ago and $73 million or 26, 6% net sales two years ago.
Impaired to 2020, the increase in SG&A expenses as a percent of net sales was primarily driven by 80 basis points of increased store payroll as many stores increased operating hours from the pandemic related reductions in the prior year 50 basis points due to corporate costs, consisting primarily of increased travel training and marketing and 30 basis points due to the decrease in government.
Our subsidies. These increases were partially offset by a 40 basis point decrease in annual incentive compensation and 30 basis points due to leverage of our non wage store costs.
Operating income in the third quarter of 2021 was $39 8 million or 13, 8% of net sales compared with $37 9 million or 14% net sales last year in the third quarter of 2019, we had operating profit of $24 3 million or nine 2% of net sales net.
Net income for the third quarter was $37 million or $1 25 per diluted share. This compares with net income of $29 1 million or $1 16 per diluted share for the third quarter of 2020, and net income of $19 2 million or <unk> 75 per diluted share for the third quarter of 2019, our effective tax rate for the third quarter of <unk>.
2021 was 25, 5% compared with 24, 7% a year ago period, and 25% 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 six 9% to $338 1 million as of October.
Over 30 of 2021 compared to $316 $2 million as of October 31, 2020, the increase in cash and current marketable securities is driven by cash generated through operations, partially offset by share repurchases and capital expenditures the company repurchased two 2 million shares during the quarter and average cost of $41 per share.
And a total cost of $91 $6 million fourth quarter to date through Tuesday November 30, the company had repurchased an additional.
4 million shares in an average cost of $47 91 per share and a total cost of $17 5 million.
This brings our total year to date stock repurchases to two 8 million shares at an average cost of $42 16 per share and a total cost of $120 million.
We have $68 $8 million remaining on the current share repurchase authorization as of October 32021, we have no debt on the balance sheet and continued to maintain our full unused credit facilities.
We ended the quarter with $175 $1 million in inventory up eight 8% from Q from the third quarter of 2020 and down four 5% compared with the third quarter of 2019.
On a constant currency basis, our inventory levels were up eight 4% from last year, we continue to be happy with our current inventory position in light of the current sales trends and operating environment as Rick mentioned, we are not immune to the global supply chain challenges facing the industry over the last 18 months, but continue to work closely with our brands and suppliers to navigate the challenges that are <unk>.
All of US overall, the inventory on hand, as healthy and selling at a favorable margin.
Now to our fourth quarter to date results.
Fourth quarter to date sales through Tuesday November 30th increased 11, 5% compared to the same period in the prior year ended December one 2020.
Compared to the same period two years ago ended December 3rd at the 19 total net sales increased eight 6% our stores were opened approximately 99% of the available days during the period in 2021 compared to approximately 97% in the same period last year with our current closures almost exclusively occurring in Europe, we continue to monitor the situation.
Europe with closures closely and at this time are planning these stores to be opened ahead of holiday.
From a regional perspective net sales for our North America business for the 31 day period ended November 32021 increased seven 5% over the comparable period last year and were up eight 3% compared to the 31 day period in December <unk> 2019. Meanwhile, our other international business increased 39% versus <unk>.
Last year and increased 10, 3% compared with the same period of 2019 as we continue to see closures in the current year, however, less frequent than in 2020.
From a category perspective men's was our most positive category followed by footwear women's and accessories Hardgoods was our only negative category.
Due to the limited visibility in the business, we will not be providing specific guidance for the fourth quarter of 2021 or fiscal year 2022, but do you want to provide directional update on our expectations for the year.
This updates assumes the current store closures in Australia, which are expected to reopen by mid December but does not include any other closures are significant impacts of current or future COVID-19 variance.
<unk> revenue for the full year fiscal 2021, we are projecting net sales to grow in the mid teens from fiscal 2019. This translates to net sales growth from 2020 to just over 20% for the fourth quarter, we anticipate sales growth from the prior year in the high single digits.
Moving to gross margin in 2021 gross margin is currently planned to grow substantially year over year, driven by leverage oxy costs.
On increased sales a reduction in shipping costs as web revenue normalizes with stores being opened and improved product margins, we do not anticipate gross margin.
Do anticipate gross margin growth in the fourth quarter, but more modest than the year over year growth experienced in the third quarter of this year.
Fiscal 2021, SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons discussed on our Q2 2021 earnings call many related to pandemic.
As a reminder, the drivers of the SG&A increase include store wages and benefits increased with expanded mall hours from reductions in 2020 due to the pandemic government subsidies received in 2020 not anticipated to repeat in fiscal 2021 at the same level, an increase in incentive compensation and other discretionary accruals.
Related to improved performance a legal settlement accrued during the second quarter, an increase in costs related to training 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 the restriction to 2020.
And 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 SGA expenses grow in line with overall sales on a net basis. However, we anticipate operating margins will be up year over year in fiscal 2021, reaching low teens as a percent of sales.
We are currently planning our business, assuming an annual effective tax rate of approximately 25% 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, driven primarily by significant increase we achieved in the first quarter and to a lesser extent our earnings in the back half and then and the impact of our stock buyback executed during the year for the fourth quarter of 2021, we anticipate that EPS grew.
<unk> will be in the mid to high single digits as a percentage over the prior year inclusive of the impact of stock repurchase previously discussed we are planning to open 23, new stores in fiscal 2021, including approximately seven stores in North America 12 stores in Europe, and four stores in Australia, we are planning to close approximately five to six stores during.
The year.
Capital expenditures are planned to be between 19 million and $21 million in fiscal 2021, compared with $9 1 million in fiscal 2020.
The majority of that capital spending will be dedicated new store openings and planned remodels.
We expect the depreciation and amortization, excluding noncash lease expense will be approximately $22 million in fiscal 2021, compared with $23 5 million in fiscal 2020.
We are currently projecting our weighted average diluted share count for the full year to be approximately $24 8 million shares given the repurchases over the past quarter. We expect the weighted average diluted share count for the fourth quarter of 2021 to be approximately 23 million shares.
Any further share repurchases would reduce these amounts with that operator, we'd like to open the call up for questions.
Thanks, again, ladies and gentlemen, if you'd like to ask a question.
And then one thing you touched on California.
One moment Paul.
Our first question comes from Sharon Zackfia.
William Blair Your line is open.
Hi, Good afternoon, I apologize, Chris you talked really fast. So if you talked about this I just didn't catch it.
Guess I'm curious there's been a lot of.
Conversations about.
Consumer shopping earlier this holiday season, and I'm wondering if you think <unk> seen any evidence of that and how you are handicapping that as you talk about the fourth quarter revenue growth rate, particularly in that last week and Christmas and then any thoughts on what youre thinking about for store openings in 2002.
Sure I'll go ahead and take that I think.
As it relates to Q4 in sales trends. This is certainly something we've been trying to monitor and understand I think from from our perspective, you can tell that our Q4 growth rate is.
Lower than what we produced.
To date and I think that's a factor of considering what you've mentioned here and also a factor of the fact that January last year was extremely strong and so if you look at our cadence last year.
Got quite a bump in January that really drove the quarter up and that was primarily related to that period a stimulus. So we're not expecting that as well. So I think if you take those two factors.
Is kind of factored into our guidance.
This is something we also heard a lot about last year people waiting until the end and we obviously didn't experience that as much last year. So we're kind of waiting that.
Probably a lesser impact than probably what we will see in January but definitely factored into our thoughts.
As it relates to store count in 2020.
Just wanted to R 22, thank you.
I think as we've always said, we'd like to be very opportunistic in how we think about this.
If we look back at the last significant downturn in rental rates, which is probably during the last recession.
We opened some really good stores in 2008, 2009, and coming out of that recession and I think we're looking at this market very similarly to say theres good opportunities to work with landlords to to fill spaces and find markets that we think we can do well over the long term. So at this point as we.
2022, I think you could expect us to to increase the number of store openings in each of the geographies that we operate.
Thank you very much.
Thank you again, if you'd like to ask a question.
Or are they one our next question comes from Jeff Van <unk>.
Anderson of B Riley your line is open.
Hi, Thank you guys can you just give a little bit more color on digital versus in store sales that you saw over Thanksgiving week, maybe if you could touch a little bit on black Friday, and cyber Monday, and how that deferred versus the same period in 2000.
Thanks.
Sure.
I think what we've seen in digital really throughout the whole year, let me start a little bit higher level before I kind of tackle the holiday.
Is that we've actually seen.
When we looked at where we were in 2019 compared to 2020.
We're about 16% annually penetrated digitally in 2019 that went to 26% in 2020 as we were predominantly closed during large portions of the year and as we are planning. This year, we actually sort of anticipated that we would be somewhere in between that that there'll be some level of digital that would hope.
<unk>.
And that but we wouldnt be as high as we were in 2020 I think we're really happy today to tell you that were much closer to the 2019 numbers.
Then we are to the 2020 numbers, which I think is a really good thing.
For our brand and our customer and again you have to kind of frame. This into that 12 to 24 year old who's trying to self express and figure out who they are and they.
They come into our stores, which are pretty energy filled with an awesome sales team.
I can talk with them human to human and connect and create a really good buying experience. So we're really we're really quite happy that our digital sales have moved much closer to 2019 that being said and as Rick said in his remarks, we're pretty impartial to how they shop. So we sort of set up our model too.
You can buy online you can buy in store, it's kind of their choice and we are here to serve them and we built our cost structure on the back end.
Really not care.
Which way that they would they choose to shop. So as it played out over the holiday weekend here, what's really interesting is.
Our results got stronger as we moved through November.
And the holiday weekend was good I think we saw a much larger return to stores than we had seen which was a detriment to the web but not quite as strong as.
Where we were in 2019, so probably somewhere in between.
Kind of like what we had while we have seen across the year in digital penetration.
Great. Thank you.
Another question can be so relevant to incoming spring merchandize. What changes are you guys seeing in supply chain and how you're planning inventory for the spring.
Well I'll take a crack at this and then I'll, let Rick add anything he'd like to add I mean, I think from a supply chain perspective.
It's certainly something that's gotten a lot of publicity and whether youre talking about spring or whether youre talking about many periods across this year, including holiday, it's been a grind and.
I think fortunately or unfortunately, however, you want to look at its not different than what we've been experiencing now over the last 18 plus months its been challenging since we came out of the significant closures of 2020.
I think our teams have done a phenomenal job working with our brands and our vendors to to get product in.
We certainly have departments that have been more challenging some of which had been pretty well publicized like footwear has been a challenge with some of the the global supply chain headaches.
And so I think as we as we move to spring our thought process is to continue to navigate this with brands and where we have areas, where our brands are going to have a tougher time delivering on what we are hoping to get to we're looking to other areas of the business that are working and trying to to.
Move those sales around and I think.
This actually gets to one of the strengths of our model is that if you look back at time and you look at our our sales in our comparable sales performance over time, what we know about our model is.
As much as we'd like to have all departments positive at all times, that's not very likely and what we find is that there's different cycles and departments get really hot for a year or two years, sometimes three to four years and then we typically see those dollars moved to other departments that we operate on and so.
That's why we're very happy with our positioning is really a lifestyle retailer of having the apparel accessories footwear the hard goods all of those things kind of play against each other and help us navigate periods like this specifically times late this spring that you've mentioned in your question, where we probably will have some challenges in some departments.
And we'll have to try to shift dollars to other places.
Awesome and then just quickly one final question can you speak a tiny bit more about what youre seeing in the Europe segment and any changes to strategy.
New initiatives, you're working on there.
Sure.
Yes, let me, let me just kind of cover Europe pretty high level I mean, we're super proud of the Europe team for their 2000 22021 results in light of the challenging backdrop.
This is an area where really stores across the region have continued to be challenged with closures does not like here domestically, where we've been open and pretty much all year, we saw 60% of the possible days in Q1, we are open.
I closed 12% of Q2, and while we are open to all of Q3.
We have now been closed 8% in November with all of our Austrian stores closed until right now we believe December 13th.
And this is compared to their closed 25% of all of 2020 so.
Our Austrian stores do represent about 25% of our store base over there they represent a higher percent of our store sales just because it's our it's our original market. So some of our strongest stores are in that market.
So we're currently estimating that we will have an impact on Q4.
But what I would say is despite those challenges and closures, we find ourselves in a spot where we're up double digits in sales to the prior year were only down modestly to our budget.
We view our customers extremely loyal I mean, we're seeing very similar trends to when we've had closure here of the moving to digital penetration and overall, we do expect this downturn to help propel us in the months and years ahead as I think we are.
We're creating a very strong loyal base, there and some of our regional players are challenged I think long term as you talk about strategy and your question of how we think about it I mean I would just say we continue to believe in the long term for Europe I think it's a.
It's a good time to invest in the market similar to Sharon's question about store growth next year I think we're seeing some good opportunities on the rent side.
In Europe, we are opening 12 stores this year with our first store in Norway, and we plan to increase that next year and continue to open new markets. Our strategy. There has been a mix of filling in markets, where we have a presence and then adding stores in markets that are new.
It is kind of a way to both grow markets and also manage the risk of each start class right as we kind of grow along.
So I think this is really.
Aligned with our strategy to continue to grow there.
We believe the investment we put in has put us in a place to really capitalize on the marketplace. We've got a really strong team there and have built out a lot of that back.
The back office to be able to manage this growth.
Now we believe we're one of the largest lifestyle retailers now in Europe, I think it's a pretty fragmented space and a space.
We can we can really win kind of market to market. So.
Then lastly, I'd just say it really ties in with our belief that being a global retailer right our ability to to find brands that emerge locally and grow them globally. So that can be brands here that we take to Europe and introduce their marketplace. It can be brands is start in Europe that we bring back here and I think it helps us be a better brand.
<unk> across the globe and obviously in working with our brand so.
We're really quite happy despite the challenges right and I think with 2021, we still have some uncertainties with COVID-19 and how that's going to impact the winter how much travel people can do what's going to happen from a restriction perspective, while we're able to open our stores in December there still are some travel restrictions and <unk>.
Other areas of the economy like restaurants, and hotels that arent able to fully open until after the holiday. So we're obviously monitoring that and I think our planning that we've laid out today is inclusive of those restrictions but.
Never quite sure where this is going to go that being said I think long term and as we look past 2021 think into 2022 and getting beyond this the virus I think we feel like we're in a really good spot.
I think we believe that the customer returns to kind of normal habits, and we can recapture what we have last year and some of the closures I think we're in a really good path to profit.
Still consider that in that kind of 12 to 24 month timeframe.
Great. Thank you so much.
Thank you.
Western comes with sand.
Of William Blair. Your line is open.
Hi, sorry, I had a follow up question I was just curious just given this being such a high season for you.
Are you doing on staffing in the stores and I mean are you going to bring in seasonal labor can you talk about your ability to actually kind of service.
This holiday season. Thanks.
Yes.
Sure Sharon to glad to give you some color around that topic.
I think we are.
As we said in our comments, we're clearly not immune to the challenges around labor and.
In the marketplace, but I also think we are.
More depth in many of our competitors are being able to be relative to our labor and that's.
Because we have such a loyal customer base and we essentially higher our customers. So we are hiring.
Seasonal staff through this season.
Getting hours for them on the floor of course, we're also maximize the hours for our existing alright.
Alright existing teams in our top salespeople through the process too.
I think again that the loyalty of our consumer base gives us a great population.
Young people to higher so we're seeing them a lot in our stores and it gives our manager has a chance to basically take a look at who which of those loyal customers have the cultural values that we want that we expected our employees, bringing them and giving them. The training and then unleashing them on the sales floor. So we've had some challenges here, but I think where we are.
Generally fared better than most people are on this on this topic.
Thanks, and then one more question for Chris I guess.
Lack of giving more color on the fourth quarter is that primarily due to the uncertainty around Europe at this point and did you touch on Australia.
Did I Miss that.
No I think I think when we think about the fourth quarter I think that is probably the biggest hurdle out there as well as the fact that.
The January stimulus impact is still something we're continuing to measure we certainly have our estimates. We've now had a couple of rounds of this and I think have some good planning there, but I think we felt it was best to kind of stay higher level. At this point until we have complete certainty around where where our stores are going to be and.
I think the second part of your question on Australia.
We are fully opened in Australia, I think they've done a really good job. They have had a lot of challenges to as I mentioned there are Q3. They were still closed the majority of the quarter. So there were happy to get them back open and I think they are performing at a really good clip we feel very similarly about Australia that we do at Europe, I think our growth there has been really successful.
<unk>.
We've been able to open new stores at both in existing and new markets and.
They performed pretty well so we feel good about where we're at in that market.
Great. Thank you.
Thank you I'm showing no further questions at this time ill turn the call.
Again, ladies and gentlemen, we like to ask a question. Please press Star then one.
Again, if you would like to ask a question Thats Star then one.
Okay.
Yes.
Yes.
I'm showing no further questions at this time I'd like to turn the call back over to Rick Wayne.
Any closing remarks.
Alright. Thank you Valerie I appreciate that again I just want to thank everyone for all of US your interest in Zumiez and the passion following what we do and wish everyone. A great safe holiday season, and we will look forward to talk to you again in March Thank you everybody.
Thank you.
Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now.
Have a great day.
Okay.
Okay.
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