Q4 2021 Zumiez Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc. Fourth 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 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 will turn the call over to Rick Brooks, Chief Executive Officer, Mr. Brooks.

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 fourth quarter, then I'll share some thoughts on the past year.

And what it means for Zumiez going forward before handing the call over to Chris who will take you through the financials and some thoughts on the coming year.

After that we'll open up the call to your questions.

When we announced in early January that total sales for the combined November December period increased 9% fueled by another strong holiday season, we indicated that we expected trends to slow or there any month of the fourth quarter.

This was due to several factors, including a tough comparison for stimulus fuelled spending in January of 2021.

Store traffic likely been impacted this year by the fast spreading omnicom Covid variant and the fact that we start to see some sales patterns that resembled pre pandemic.

With volume focused around peak periods.

We're also cognizant of other potential issues, such as inventory shortages from global supply chain disruptions and added pressure on the consumer spending from rising inflation.

As you saw from our earnings release issued earlier today, our full fourth quarter results fell short of our expectations.

These headwinds combined to create a more challenging finish to what was overall a pretty phenomenal fiscal year.

Overall net sales increased four 6% year over year for for the fourth quarter to a record $346 7 million and diluted earnings per share reached $1 70.

Which was also a quarterly record.

While the prior year stimulus payments in current market conditions made it difficult to lap last year's January our performance to close out the fourth quarter does not diminish the incredible year, we delivered and the tremendous shareholder value created through record growth and earnings coupled with the repurchase of $4 6 million shares or 18% of our common.

Stock from the start of fiscal 2021.

For 2021 total sales were up 19.5% and 14, 5% compared to 2020 and 2019, respectively.

And we achieved record diluted earnings per share of $4 85.

Compared to a $3 last year and $2 60 to two years ago in.

In fact this brings the last five years compound annual growth and diluted earnings per share to over 36%.

This result has a direct correlation to the tremendous work of our teams and the strong culture and Brown brand Foundation, we have built over the past 40 plus years.

Looking back on the year there were a number of positive catalysts, we started the year with a historic stimulus fueled first and second quarter.

And we're then able to capitalize on an outsize back to school season as majority of school districts around the country resumed in person learning this year and finally experienced a growth in the fourth quarter I spoke to.

Throughout the year, we saw strong full price selling reflecting pent up demand and our ability to serve the customer with distinct merchandise through our integrated model. However, they choose to interact with us.

Overall 2021 was an incredible year for Zumiez, one where our success was directly attributable to the execution of our long term consumer centric growth strategy that the company has been building and evolving since our inception.

This strategy requires significant agility and navigating the trend cycles and speed desired by our customers.

Despite numerous challenges, including global supply chain disruption and labor shortages inflation and closures tied to Covid. We again proved our ability to adapt and capitalize on strong consumer demand and expand our market share this year.

Looking ahead, we remain confident of our ability to execute over the long term to serve our customer and drive total shareholder return.

As we enter 2022, we anticipate our results will be challenged domestically in the first half as we anniversary the impact of domestic stimulus that allowed us to have record results in the first and second quarter of 2021, when our business model again proved very efficient at grabbing extra discretionary spending.

Internationally, we expect 2022 will have some benefit as the business with businesses, we built in Canada, Europe , and Australia capitalize on our market opportunities that emerge that those economies reopen more fully.

Although more recently, we are concerned about the potential impacts of the ongoing conflict in Ukraine.

Remember, we built our strategy and manage our company not toward quarter to quarter results, but the long term financial results and overall shareholder value or.

Our overarching consumer centric approach rooted in strong brand and culture will remain constant.

We build our business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individually.

We built an infrastructure in which the customers can shop with us get what they want when they want how they want and as fast as they want.

We've worked 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.

We're internationally diversified, allowing us to capture global as well as domestic growth and work with brands and emerge locally and help them grow globally.

While much remains uncertain in the macro environment with the continued supply chain challenges inflation, the ongoing pandemic and the conflict in Ukraine. We remain confident in this strategy that has been the key to our success.

Before I close I would like to thank all of our teams and our brand partners for their dedication and commitment to zumiez over the last year and throughout the pandemic.

We have come so far since the period of widespread closures in early 2020.

And to emerge from the last two years a much stronger company.

Proud of our achievements to date and excited for the future as we continue to execute on our winning strategy.

With that I'll turn the call to Chris to discuss the financials.

Thanks, Rick and good afternoon, everyone I'm going to start with a review of our fourth quarter and full year 2021 results. I'll then provide an update on our first quarter day sales trends before providing some perspective on how we're thinking about the full year.

Fourth quarter net sales were $346 $7 million up four 6% from $331 $5 million in the fourth quarter of 2020, and a five 5% from $328 $8 million in the fourth 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 the short term store closures related to COVID-19, pandemic and the prior year and a more normalized holiday season in our U S business.

Our stores were open for approximately 99% of the potential operating days during the fourth quarter of 2021 compared to approximately 94% in the fourth quarter of 2020 and 100% in the fourth quarter of 2019.

From a regional perspective, North America net sales were $287 million, an increase of 0.6% over 2020 and up two 2% compared with same period of 2019.

Other international net sales, which consists of Europe , and Australia were $59 $6 million up 28% from last year and up 24, 6% from two years ago.

Excluding the impact of foreign currency translation, North America, net sales increased <unk>, 6% and other international net sales increased 36, 9% compared with 2020.

We continue to experience temporary COVID-19 related closures in Europe , which was opened for approximately 94% of the potential operating days during the fourth quarter of this year.

During the quarter. The men's category was our largest growth category, followed by footwear accessories and women's hard goods was our only negative category for the quarter fourth quarter gross profit was $133 $9 million compared to $129 $6 million in the fourth quarter of last year and gross margin was 38, 6% compared to 39, 1% a year ago.

The 50 basis point decrease in gross margin was primarily driven by 40 basis points of increased costs related to inventory shrinkage and obsolescence 30 basis points of deleverage in our occupancy costs and 20 basis points of deleverage in our distribution and fulfillment costs that were all partially offset by 40 basis point increase in product margins.

SG&A expense was $82 2 million or 23, 7% net sales in the fourth quarter compared to $75 8 million or 22, 9% net sales a year ago, and $79 5 million or 24, 1% net sales two years ago compared to 2020, the increase in SG&A expense as a percent of net sales was primarily driven by 90.

Basis points increase in store wages as we saw continued expansion of mall hours in 2021, and also a higher rate tied to wage inflation.

Operating income in the fourth quarter of 2021 was $51 7 million or 14, 9% of net sales compared to $53 8 million or 62% of net sales last year.

In the fourth quarter. If she has a 19, we had an operating profit of $48 9 million or 14, 9% of net sales.

Net income in the fourth quarter was $38 2 million or one.

$1 70 per diluted share compared to net income of $42 $8 million or $1 68 per diluted share in the fourth quarter of 2020, and net income of $37 9 million or $1 48 per diluted share in the fourth quarter of 2019.

Our effective tax rate for the fourth quarter of 2021 was 25, 1% compared with 23, 7% in the year ago period, and 24, 8% two years ago.

Looking at our full year results net sales for 2021 were $1 8 billion, an increase of $193 2 million or 19, 5% from $997 million for 2020, and up 14, 5% from one point over $3 billion in 2019, the year over year increase in sales.

Primarily driven by the reopening of our stores compared to the widespread short term store closures related to COVID-19, pandemic and the prior year, our ability to capitalize on current trends and the impact of domestic domestic economic stimulus on the business during the year for.

For the year, our stores are open approximately 97% of the possible days compared to approximately 78% of the possible days during fiscal 2020.

From a regional perspective, North America net sales were $1 3 billion, an increase of 19, 1% over 2020 and up 12, 7% compared to the same period in 2019.

Other international net sales, which consists of Europe , and Australia were $153 2 million up 22, 5% from last year and up 27, 8% from two years ago, excluding the impact of foreign currency translation North America net sales increased 18, 7% and other international net sales increased 21 four.

<unk> compared with 2020.

While not as significant as in fiscal 2020, we continued to experience temporary COVID-19 related store closures outside of the United States in fiscal 2021 for the year, our Canadian European and Australian stores were open for approximately 86%, 81% and 79% respectively as the potential operating day.

In fiscal 2021.

2021, gross margin was 38, 6% compared with 35, 3% in 2020 and 35, 4% in 2019, the 330 basis point increase versus 2020 was driven by meaningful leveraging our fixed cost structure compared to the period of COVID-19 related closures in the prior year.

The increase was primary driven by 140 basis points of leverage in our store occupancy costs when compared to the prior year, which includes the continuation of rent charges without associated sales during COVID-19 related closures in fiscal 2020.

In addition, there was 110 basis point increase in product margin and a 100 basis points decrease in web fulfillment web shipping costs as the volume shifted back to physical stores with fewer store closures in the current year.

Annual SG&A expense was $298 9 million or 25, 3% of net sales compared with $253 1 million or 25, 5% net sales in 2020, and $280 8 million 27, 1% of net sales in 2019.

The 20 basis points year over year decrease was primarily driven by 90 basis points of leverage of non wage store operating costs, partially offset by 50 basis point unfavorable impact related to fewer government subsidies received in fiscal 2021.

Operating income in 2021 was $157 8 million or 13, 3% of net sales compared with $96 9 million or nine 8% of net sales last year. In 2019, we had operating profit of 85, $885 8 million or eight 3% of net sales.

Full year net income was $119 3 million or $4 85 per diluted share up from $76 2 million or <unk> <unk> per diluted share in 2020, and $66 9 million or $2 62 per diluted share in 2019, our effective income tax rate for 2021 was 25, 7% compared.

25, 6% for 2020, the 26, 5% for 2019.

Turning to the balance sheet. The business ended fiscal 2021, and a very strong financial position, even as we accelerated our share repurchase activity late in the year cash and current marketable securities as of January 29, 2022 were $294 $5 million compared to $375 5 million as of.

Annually 32021, the change in cash and current marketable securities was driven primarily by share repurchases of $193 8 million and capital expenditures of $15 8 million, partially offset by cash generated through operations of $135 million during 2021, the company repurchased $4 6 million.

<unk> shares and average cost of $43 30 per share and a total cost of $198 4 million, we had $83 $3 million remaining on our current share repurchase authorization as of the end of the fiscal year.

First quarter to date as of March five 2022, the company had repurchased an additional one 2 million shares of stock an average price of $44 47.

And a total cost of $54 3 million as of that date, we had $29 million remaining on our current share repurchase authorization.

As of January 29, 2022, we had no debt on the balance sheet and continuing to maintain our full unused credit facilities.

We ended the year with $128 $7 million in inventory compared with $134 $4 million last year, a decrease of $5 6 million or four 2% on a constant currency basis, our inventory levels were down two 1%.

Overall, the inventory on hand, as healthy and selling at a favorable margin.

Given supply chain issues and lower than expected inventory at fiscal year end 2021, we anticipate the inventory will grow in excess of sales in fiscal 2022.

Now to our fiscal first quarter to date sales results total first quarter to date sales for the 35 days in March five 2022 decreased one 9% compared to the 35 day period ended March six 2021, our stores were opened for 100% of available days during the period in 2022 compared to approximately 93% in the.

Same period last year.

From a regional perspective total sales for our North America business for the 35 day period into March 5th 2022 decreased five 3% over the comparable period last year. Meanwhile, other international business total sales increased 17, 9% versus last year.

From a category perspective footwear was our most positive category, followed by women's and accessories hardgoods with our largest negative category followed by men's.

With respect to our outlook, while we refrain from giving specific guidance for most of 2020 and all of 2021 due to limited visibility we have decided to provide specific guidance for the first quarter of 2022 and some annual thoughts. We have made this decision based on the slow start to the quarter tough comparisons to prior year and the many moving parts.

It's affecting near term sales and margin.

I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales product margin and earnings growth given the variety of internal and external factors that impact our performance. Furthermore, while our guidance does include the negative impact in 2022 as we anniversary the 2021 domestic stimulus. It does not include any.

New closures tightened the pandemic over the last two years or a larger impact of the conflict in the Ukraine and eastern Europe .

With that in mind, we are currently expecting total sales for the first quarter will be between $215 million and $221 million and they will see continued pressure on sales during the second quarter as we anniversary the impact of domestic stimulus from 2021.

Consolidated operating profit as a percent of sales for the first quarter is expected to be between breakeven to positive one 5% and we anticipate diluted earnings per share will be roughly breakeven to 10.

Included in our guidance is the addition of costs.

Addition of costs as we continue to read.

Institute store hours for normal operations, and bring back travel and our events, including our 2000 2100 K event that normally occurs in January but it was moved out to Q1 for our employee safety.

I don't want to give you a few updated thoughts on how we're looking at 2022.

And looking at the annual picture, we had mixed thoughts as we exited 2021, just one month ago, assuming modest 2022 sales increases and double digit growth in earnings per share tied to the buyback.

Now with the first five weeks of 2022 behind US we are more cautious in how we are looking at the full year and the potential impacts of the current operating environment. After.

After the lapping the impact of the January 2021 stimulus payments. We are now expecting the first half of the year to be much tougher as we anniversary the larger March 2021 economic stimulus.

In addition, since the start of Russia's invasion of Ukraine, 14 days ago, we have experienced a noticeable change in consumer spending and expect the conflicts impact on global and feed inflation will be an added headwind in the near term.

For the back half of the year, we are more optimistic that trends will improve as our customer shops during the important back to school and holiday seasons.

As always we intend to remain flexible and agile in adjusting inventory expense and capital allocation plans based on any changes in these events.

For sales, we anticipate that total sales will be down in the low single digit levels in 2022 as compared to 2021.

This is inclusive of our Q1 guidance and anticipate our domestic business remains challenged heading into the second quarter before we return to normal during the peak selling seasons.

Internationally, we are playing strong growth across Canada, Europe , and Australia as we continue to capitalize on more normalized operations, albeit we are anticipating some near term softness in Europe due to the ongoing situation in Ukraine.

In fiscal 2021, we achieved peak product margins once again, representing our six year in a row of product margin expansion. We are currently working on initiatives to continue driving product margins domestically and internationally. How we recognize the external challenges are driving margins with continued inflation and economic uncertainty entering 2000 22022.

With that we are planning consolidated product margin to be roughly flat.

We continue to manage costs across the business. However, with our current sales projections and returning to more normalized operations. We are projecting some deleverage domestically, while our international entities show leverage as they capitalize on continued market share gains and more normalized operations. We currently anticipate year over year operating profit dollars will be down in the mid teens for FIS.

2022 diluted earnings per share for the full year is currently planned to increase in the mid single digits as we were able to capitalize on our buyback program executed over the last year.

We are currently planning our business, assuming an annual effective tax rate of approximately 25%. We are planning to open approximately 34, new stores during the year, including approximately 15 stores in North America 14 stores in Europe , and five stores in Australia, We expect capital expenditures for the full 2022% fiscal year to be between 30 million.

$32 million compared to $16 million in 2021 with the majority of the increase tied to addition of stores in 2022.

We expect the depreciation and amortization, excluding noncash lease expense will be approximately $22 million down slightly to the prior year.

And we are currently projecting our share count for the full year to be approximately $19 6 million diluted shares any share repurchases beyond our current repurchase plan will reduce our share count from this estimate.

And with that operator, we would like to open the call up for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Sharon Zackfia with William Blair. You May proceed with your question.

Hi, good afternoon.

I'm guessing you'll get a lot of questions on the current environment I'll avoid that and leave that.

To everyone else, but I did want to ask about the outlook for store growth I think if im not mistaken and this will be your fastest store growth since 2015, So and I think that also holds for North America as well as obviously the consolidated global.

Can you talk about what Youre seeing there that gives you the confidence to grow and reaccelerate at that pace and is this kind of a new pace for zumiez for the foreseeable future kind of moving into what I would call more mid single digit expansion versus what had been kind of more modest growth over the past several years.

Thank you Sharon I'll start and let Chris follow so the store growth really at let's start with the U S and I think we'll touch on.

We'll start with North America, then touch on Europe , and Australia separately because of it.

They are a bit different than what we're seeing in the U S. So you're really seeing in the U S. Sharon is a lot of our trade area work our analysis of markets across the country. How we're applying our knowledge of what's happening in those markets relative to our sales data and our stash data our loyalty program for our customers.

And what we're seeing is market opportunity in a number of markets across the country, where we believe we have an opportunity to add units to better serve customers. We believe not only in the physical world, but also that we think thats a positive for our digital business too.

That's first the second item in North America is really also about opportunity.

We have seen substantial savings in.

And lease costs and rent rent occupancy costs over the last few years.

We are now we've always had a list of I think roughly 40 locations that we wanted to be in but we either.

If we didn't believe we could afford the deals with the landlord to address.

Or that we couldn't find a good location that we would want those centers I think those things.

Become a little easier to navigate now so we've been adding some locations in that what I think are some of the better centers across the U S.

And because now we can find opportunity that works for our landlords and works for US and also meets our criteria.

With quality of location as well as economics, so and in the U S and North America, Sharon I think it's really those two things that I'd focus on our deeper understanding based upon a trade area analysis of what we're learning about how our consumer shops, where they shop, where the holes in our market are and then it's opportunistic about our ability to.

Go out and.

And really work with our landlords as partners to do deals I think that benefit both of us.

So again I think you might see.

This is a good pace for us.

I will tell you if there are more deals we would do that we felt we could do we probably would do them in this cycle, although that is not our plan at this point.

So then let me flip to international on the international side.

What you've seen us execute internationally as more of our traditional player. We are really investing heavily in people and so this will be our.

Our largest growth we've done in Europe at this point.

Our last few years of classes of stores, we're very pleased with the outcome of the performance of those stores.

We've also seen.

Rates in terms of occupancy rates rent rates fall in Europe .

To make it so it makes it more opportunities available to us again across the market.

And youre going to see us grow more towards that 50% to 20% unit growth year.

Year over year, because we have the opportunity those marks to grow the business.

And so as you might guess, we're also investing heavily in our teams to make sure that we are building the quality of people that we want to manage and run those stores.

And that's been an ongoing effort for the last few years preparing for this so we're ready to go and I think thats, what youre seeing in Europe , and in Australia and that those are going to play out for a number of years as we continue to grow at that level across those geographies in the U S. I would say again, we're going to we're doing this trade area work sharing we're looking hard at.

I can't tell you exactly we're feeling about it but I think we've got.

A bit broader runway over the next three years and we might have previously thought in terms of opportunities.

If you have anything to add Chris the only thing I would add is just as as we've reflected back to going backwards.

Some of the stores, we opened <unk>, where some of the best stores, we've opened and so when we talk when Rick talks about opportunities.

I'd just kind of reinforces we continue to work with our landlords I think.

This is a really good time for us to be adding stores that we think can really propel us over the next decade.

And then just a question Chris on your outlook for the year.

It does kind of sound like Youre expecting a tale of two halves I guess, it's hard to have confidence in anything given the dynamic environment that we're in but I mean, what what.

What gives you all the.

The.

Believe that much of what Youre seeing right now is related to year ago stimulus <unk>, Ukraine versus something maybe.

Long last in what the consumer pulling back.

Yes, I think it's a really good question Sharon and obviously, one we've spent a lot of time talking about internally and I think to really think through this you have to kind of look at how we performed last year and when we see the stimulus and it's not just Q.

Q1 of 2021, albeit that was our largest stimulus we saw I think multiple times within 2020, when the stimulus was put out there that we feel like we performed outsized to our peer group and.

That speaks to the model and while we have I mean, we are a full price full margin retailer I think we believe there there is a discretionary nature to us to win when our customer has additional cash to spend I think we will benefit outsized to that and so I think if we look back to last year's Q1 as you are well aware.

We're up over 100% to compared to 2020, but maybe more importantly, we are up 31% compared to 2019, which looking at normal growth curves that was pretty outsized growth. So.

As we got through these first five weeks and we we looked at kind of where we've laid out which we said on the call was.

Down one 9% I think what we saw was we saw some softness.

To start February .

Which kind of mirrored what we saw in January as we Anniversaried last year's stimulus and then it started to get actually a little bit stronger as we move through the back half of February with weak for starting starting really strong.

And then it got really tough right.

When we started to see some of the the global events that have emerged in Ukraine.

And that's continued through the first week of March So I think for US that's how we started to tie some of that in we could actually see those impacts across the business, obviously Europe being our Europe stores, which are close neighbors to the conflict.

But we also saw here domestically. So I think those items made us really think through okay. We knew we are already planning the back half of March we are planning April to be softer in the start to the second quarter.

Then as we as we thought about the full year and that confidence in the back part of the year. Our belief is based solely on the fact that our.

Our customer has reasons to shop, and and obviously you know very well.

<unk> controls a lot of the dollar here and so we know that and we expect our apparent to be out shopping for back to school, we expect them to be shopping for holiday and I think we continue to believe we have done a good job kind of planning for those seasons that would allow us some confidence that we should see some normalization in the back half now.

Obviously, there will be some I think some trailing impacts of these complex inflationary impacts.

Both here and in and in Europe , but where we're planning the business right now that hopefully most of this is resolved and the front half of the year and we can be more normalized in the back.

Again, I think that kind of mirrors in my mind sharing what we experienced in 2021, which we definitely got the the large.

Stimulus fuelled spending in Q1 and a little bit in Q2, and then we saw normalized holidays holiday our back just go on holiday season and again.

I guess I would just add to chris's commentary that I still believe strongly that our brand has never been stronger than it is today.

I think we're really doing a great job of meeting the needs of our consumer and I'd say likewise about our culture I think our people are amazing.

And that where we're aligned and focused on the things we're doing so.

Ultimately, though as always.

The most important things in my mind that gives me the confidence that if if if.

Outside of radically changed environment, So I think more than get our fair share in those peak windows.

Okay, great. Thank you.

Thank you. Our next question comes which coincides seaport you May proceed with your question.

Yes, thanks for taking my questions.

Got a few of them. So let's start housekeeping I know the case coming out shortly and you'll give the hard goods penetration materially I was hoping you might be able to provide that on the call today.

Sure happy to do that.

As a mix of all of our categories.

I'll lay them all out men's men's apparel was 43% accessories was 17% footwear was 13% our women's apparel was 11% and the hard goods was 15%.

Okay. That's helpful. Thank you.

And then also Chris.

Could you maybe speak to the blue tomato profitability I mean, it would be great. If you can give us like an EBIT number or a margin percentage, but I assume it was unprofitable for the year could you maybe elaborate on that.

And it sounds like I know Ukraine is an issue obviously for that business, but it sounded like you're pretty positive on Europe in general for 'twenty. Two so how do you think that that business sort of progressing through the year versus either 21 or 19, or however, you want to talk about it.

Sure, Yeah, and I guess I'd just start Mitch with.

We're super proud of our Europe team not only for their 2021 results, but for their results over the last few years under a really challenging backdrop and Rick mentioned earlier Sharon's real estate question around our confidence in expansion for Europe , and I think that's directly tied to what we're seeing in the stores that were opening today and I think.

Our thought process Thats gone into where we open in and how our classes of stores are planned has just gotten better and better over the last 10 years and our and our teams have been able to go out and execute which I think is great.

As it relates to 2021, specifically.

I think we continue to have pretty meaningful closures in 2000 and.

2021, I mean, we were close to 60% of the days in Q1, 12% in Q2, we got opened in Q3, and we're thinking we're in a good spot heading into holiday and then had 6% of our days closed in Q4, so this compared to 25% in 2020 so.

As we look as we looked at the year overall, we were down we were open more in 2021, and 2020, but still massive amount of unplanned and I think despite that we saw sales in Europe up over 21%.

Now we were down 6% to our budget, but the closures for the year were almost 20%. So I think when I look at that mix. What that tells me is that as we did close we were able to capture more of the volume online we were able to capture only we are open.

And I think it continues to show our brand strength across Europe is I think we've got a really good customer there and what's super unique to us and <unk> been following us for a long time. So you understand this but we have these different market dynamics in Europe .

And we're starting to see more and more markets and countries turned positive as we get scale and recognition within those markets. So I think that that's a real win obviously as we started 2022. We are now faced with some new challenges with this conflict in Ukraine I think.

Storage, we've not done a lot of digital business and Ukraine, it's very very small.

But our current expectation is there will be some challenge in the region due to the proximity of the conflict and obviously the connected dependence of the economies in the region I think we'll see that with.

A higher level of inflation across the region as well as some disruption and cost of helping this refugee crisis that will impact most of Europe here. So.

I think as we think long term.

Continue to believe that we're doing the right thing here, we mentioned on the call. We're going to open 14 stores on top of the 12. We've opened this year. This has included our first store this year in Norway, We expect to add two additional markets. While also filling end markets.

In 2022, this is aligned with our strategy and how we are growing in.

I think it's put us in a spot to really capitalize as the environment normalizes this year.

In Europe now.

As we play that all out I think we're we believe we're one of the largest lifestyle retailers in our niche in Europe , and I think that's a real benefit to the consumer because we can work with brands in a different way and bring newness to them and and all of that is is a pretty positive. So I would tell you. This on the profitability side, because I know thats something that it is.

Super interesting to everyone. We were more profitable in 2021 than we were in 2020.

Albeit not quite where we wanted to be we are still losing millions of dollars.

As we looked at 2022, and we looked at and said Okay. We're going to have all of our stores open we're not going to have that the challenges. There I think we saw a path that would get us to breakeven this year and maybe even a little bit of profit, which is sort of aligned with what we've been talking about for the last two years, where we said Hey, this is an <unk> 18 to <unk>.

Four months turnaround.

Tell you coming into this year, we were pretty confident this was the year.

Unfortunately, now with the war in Ukraine, we're not quite as optimistic, but we think we will do better.

Then where we were in 2021.

And we are definitely right on the cusp of turning that level of profitability and I think when we get to a more normalized year, we have a lot of confidence here in our teams in Europe have even more confidence in their ability to drive our profit here.

With more normalized environment.

Okay I appreciate that color and then lastly, I think you said for the year I know, you're not giving official guidance, but you did provide some color. Thank you said sales down low singles I think you said you bet.

Down double digits, so I feel like maybe there was a low double but.

Anyhow I think when I do the math around that I come up with like an operating margin of around 12% for the year, which is obviously down year over year, but still way up from 2019, I think up nearly 400 basis points or so maybe a little less than that from 2019 is there any way you can kind of walk us through the margin bridge.

<unk> from 19 to 22, I mean, I imagine a lot of those product margins. Some of Thats occupancy leverage is there any way to maybe kind of talk about some of those bigger puts and takes and maybe the stickiness of one.

Sure sure I'll try to do my best and I might speak to a little different time period, because the way we're thinking about it obviously 2021 was up about 350 bps 50 basis points to.

2020, and the guidance, we gave today, it's probably a little softer than what you put out there or what you just quoted but let's say we go backwards 200 basis points.

If you kind of look at that that has actually got it.

Not quite in the teens, but in the solid double digits operating profit as a percent of sales again, if we go back to where we were in 2016, when we were sitting at four 6%.

Operating profit as a percent of sales and talking to you about getting back to.

High single digits, and then moving into double digits, I think we've been able to kind of accomplish.

While we have been looking what we are looking for and obviously this year was pretty outsized with the stimulus, but still being in the double digits we feel.

Really good about the trajectory we're on and I. Appreciate you calling out just the growth over over 19, because I think thats really real now when I think about the puts and takes.

I think what's been sticky and is.

We have been able to grow product margin not only here domestically.

But internationally as well and as we look at 'twenty, one 'twenty two as a comparison, we are expecting to hold product margin and what that means is actually there probably will be some growth because we are expecting to have some mix challenge win by that I mean, our international entities are growing at a little faster clip than our.

Our North America entity and they are at a little lower product margin. So we should see some mix challenge, but we're expecting to hold and I think the six years of product margin gains. We've had has been a pretty big benefit to us.

Looking at 'twenty, one 'twenty, two we'll probably deleverage a little bit on occupancy on a negative top line, but if we look at that over a period of years, we've had a pretty meaningful gains in occupancy as we've been able to continue to grow sales to leverage the expense and work with our landlord partners to two.

To manage those costs I think.

There's areas of inflation that have impacted supply chain and labor obviously within gross margin I think we've been able to grow sales to try to offset those the best possible, we've been trying to to institute.

Current initiatives to manage expenses in hours and things like that that I think it helps offset that but there is no no mistake thats been a little more challenging on the gross margin side and within SG&A I think as we look at SG&A.

This is probably the area when you compare 2021 to 2022, where we will have a little more challenged there is definitely deleverage on on the on the sales going backwards, but we also are anticipating that store labor is going to go back to pre pandemic levels, we will see more travel.

We get it back out in stores and get our teams out in stores, we're going to do all of them were planning a full slate of our events, including as we mentioned on the call will have 200 K events planned within this year as we moved our event out of January into Q1 for the safety of our employees. So I think we'll see some challenges year over year now to your question on SG&A.

Over the long term.

Why are we seeing what's the stickiness, we are seeing and I'd really point back to just the operating model I think what's happened over the last five years is we have been able to unify one cost structure behind both of our in store and digital experience on sales and I just cant reiterate how important that's been not only from an inventory.

<unk> perspective, but just from a cost perspective, because as we've seen the swings which have.

Quite frankly been massive in this period of.

Of closure and reopened where we've gone online and then still been able to to fulfill from store and then we have gone back to store and seeing this huge influx back into store.

I think that's led to some operating profit expansion as we have been able to really hone in and have that one cost structure serve what we're doing so.

I know theres a lot there.

Lot of information, but.

But I think those are the types of things that have driven the product margin our operating profit margin up over the last few years and things that we're pretty proud that we're executing and Mitch I would just add to chris's thought too about the part of what we've been able to do I think over that longer time period again as bill just one channel model, but the most important part of that is it's so much better for our <unk>.

Because we are faster in every sense of every way how they can see product that you could see it local availability chart, our local assortments and we can also that's why zumiez deliveries come into play because we we can deliberate quick when they need it and with a great brand experience. So this goes back a lot to culture and brand what we're doing for our customers.

And how we are empowering our people to do it by localizing the experience for our customers connecting our customers our people even more together.

And I think those things also over the long term are really built not only a more optimized business model, but a better experience for our customers.

Alright, guys, thanks, and good luck.

Thanks Benjamin.

Thank you. Our next question comes from Cory <unk> with Jefferies. You May proceed with your question.

Good afternoon, and thank you for taking my questions.

My first question has to do with trends that you are witnessing from a product perspective.

What have you observed.

In terms of trends by product category that resonated with your customers in the fourth quarter and into the first quarter.

Alright, I'll start Corey, let Chris add in.

I would tell you again, we shared with you the top fourth quarter performing departments in shoes, I think was the first one and that may seem surprising at today's.

Constrained inventory position for shoes, but our shoe business has been quite good and I really appreciate the support of our shoe partners in helping us work through the challenges that we've had in supply chain on the shoe business.

And Thats continued and as I think as Chris gave some some color there on sales so far here through this quarter.

But and I think there's a potential opportunity for us based on better inventory as we look forward.

The flip side of that has been the difficulty around skate hardgoods again that is not any of this is not anything new for our business as a portfolio approach of how we manage departments across the business. So we ran gains last year with substantial loss of skate hardgoods throughout the year.

The good news for us in that front as we expect that those skate hardgoods losses are going to minimize here as we go forward. This year, because we are simply going to lap.

And we're looking at kind of targeting where escapes hard goods will get back to historical levels relative to the mix of sales. So we expect that they will see some relief of the pressure from the negative in skate Hardgoods and then from that I think we have we.

We have a number of good trends that are working in our favor.

And women's and apparel long bottoms shorts.

Tire Bob's business I think is very strong and of course, our graphic tee business.

We constantly are working on that bringing new brands and playing with that area and that will be a function of again, new brand launches, which I believe we still launch 100, new brands last year, we did despite the challenges of working through.

The difficult environment that we're in so I think our teams did a really great job there continue to uncover new and interesting brands local brands to serve our customers. So.

So I think as always it's about the business model again, Corey about our diversity of brands, our diversity of departments and categories covering the entire lifestyle and then.

And then we will have to manage our way through the.

Two.

Supply chain challenges right now.

A factor working closely with our partners know, Chris you have anything else you want to add there no I think you've covered it alright.

That's great and just a follow up on that last part about the supply chain challenges that you are witnessing.

What's embedded in the first quarter earnings guide in terms of freight headwinds and then how should we be thinking about this headwinds throughout the upcoming fiscal year and what mitigation strategies do you have in place.

Yes, I'll go ahead and take a crack and then let Rick add anything and I think when I think about supply chain. Obviously it also correlates so closely with inventory management and I think when I, we're really happy with how we've ended the year from an inventory perspective.

We are down about 4%, which.

I don't think is common across all of our peer set but we felt like it was really important as we're just cautious and what's out there and we have a we have a.

Good business in which a large portion of what we're doing is screening bowls and chase and we can chase that so I think our buying teams and give them a lot of credit I think they planned out pretty well.

How to think about the business and where we need to invest where we need to bring things in early where we can maybe.

Be a little more cautious and see what the sales results are telling us and so I think our teams have just done a really great job managing through the supply chain and I'd like to remind investors. We've been doing that we've had supply chain challenges really now for 18 to 24 months. I mean this is really started even when we closed in Q1 of 2020 so.

So our teams have done a really good job managing through this knowing when to bring product in and and as we think through the first quarter. This is really no different I mean, clearly there is areas of the business, where they've made it a little more impacted but I think our teams have managed through that really well in regards to the different.

Pushes and pulls that we can do on the inbound side. It all starts with working with our brands and just having really solid relationships and we have we've got really great brands and our teams have good relationships. So I think we'd be able to navigate that on that on the business to consumer side. It's also been challenged obviously, there's a there's a lot written about cost and.

And that but I think we've got good business partners, there and we just continue to try to innovate as well as you know.

We are we are.

Even delivering some of our product ourselves and again it kind of ties into to Rick's comment just a second ago about how we how we've managed it the one cost structure. I mean, this is really about a better customer experience and so so we'd be able to.

The increase the speed of delivery and do it with our Zumiez employee smiling face.

And so I think from a supply chain perspective, we continue to work through a lot of different things.

To enhance what we're doing and.

Theres, obviously, some inflation paas packed into the plan that we put out there today.

But we're trying to manage that to the greatest extent possible only.

Only thing I would add Corey is just again as Chris said in an earlier comment is this is our fifth or sixth year of product margin peak product margin results. So that doesn't happen by accident right and a lot of those years, we were having private label declines in our private label is still driving peak product margins. So I think what this looks at is the dedication and the focus we have.

The organization to always be driving inventory turns better and making sure that we're managing inventory as best as we can in this and of course in many respect to better manage inventory that fewer markdowns you have the less you have to move inventory around gets back to the localizing Assortments. This concept of trade area.

Hope you start seeing that over a period of years. So these are the consistent things that have been driving our ability to improve product margins.

Across our entire business and by the way we are seeing those product margin gains on our international entities too.

Chris right there at a lower starting point than we are here in the U S. We're driving gains across all these entities.

So as again I think I think of it too is our commitment to just working on this and getting better and it also effectively de risks our business to a large extent as we manage and improve <unk>.

That's great and then if I could just squeeze one final question in.

Whats your outlook for the promotional environment, it sounds like Youre expecting product margins to stay flat.

Believe.

But.

Most other retailers it seems are embedding a little bit more of a cautious outlook as it relates to promotions at least.

Throughout the remainder of this year I'd be curious to hear your thoughts there. Thanks.

Yes.

I'll take a crack at starting here I think from a from an overall outlet perspective, we are trying to our outlook is the plan to maintain product margins and I think that comes into the planning that Rick just talked about and how we think about our.

Our brands I mean, we do believe we sell brands that are full price brands and our game has never been discounting our marking off the entire store.

Our strategy has been let's bring in really cool unique brands that can sell at full price and let to support them.

And what they're doing so their brand equity stays high and so that's why I think ECS manage inventory pretty tightly and why and why we were able to plan the business. The way we are and the other piece I would say with that is it is not an accident that we had product margin gains for the last six years I think are our teams have been really smart about how we have.

We source and build product and how we work with brands.

To be able to do that over the long term and so again I think it's a testament to our buying teams and our sales teams overall.

And just beyond to build that plan to continue to drive growth over the last six years and I don't have a lot to add to Chris's comments, I mean, we never really quarter embarked out product period and that doesn't mean, we don't provide value for our customers and that's where our private label comes into play how we assemble packages what's in those packages of offerings as we.

As you Brian promotions, but those are about value for our customers, but for full margin for us so effectively and using our products to drive our high margin sales still.

And the last thing I'll add to this comment as again as Chris said, the our success there isn't by accident, we have a number of initiatives that we have in play looking forward.

And so we were going to continue to drive at this hard because we think it's fundamentally do it a great business, we have to be faster in all respects of meeting consumer demand and so we're looking at ways to improve speed throughout our supply chain and Theres a number of initiatives I think that we have in play over the next few years that is going to address that even more.

Great. Thank you very much and best of luck.

Thanks.

Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Jeff Van <unk> with B. Riley you May proceed with your question.

Hi, there. This is actually Catherine you can note on for Jeff today, and I just had a couple of questions for you guys.

Can you speak a little bit more about how you're managing labor cost pressures and what are you doing.

You gave some pressure.

Sure.

To the labor side I mean, this is obviously ill start with store labor. Specifically this has been a really crazy cycle because of the closure period and the influx of.

Our customers when they feel safe and maybe less traffic when they don't feel safe.

And then you have domestically here the the minimum wage expansion across the country and what that means from what we refer to as compression or meaning how does the minimum wage change move up the ladder of your different positions.

Pay rates increase.

So all of those things have created quite a bit of challenge over the last few years I think it's it's driven us to really.

It's more about how our scheduling works and how we how we staff stores in and trying to do that delicate balance of.

Serving the customer and being there for the traffic while also trying to manage costs and it hasnt been easy.

A lot of retailers, we have seen an increase in rate.

Over that time period, because of the cost of labor. So I think the best way you can manage it is.

Is to really be have have a strong plan around your staffing strategy.

But also you know that's part of why we're seeing cost increases too and.

And across the business so.

We're definitely seeing that we're seeing it on the corporate side of our business as well.

So we've had to kind of manage through that and I think what it comes down to is just really looking at the entire model and trying to figure out what are your puts and takes and we know that labor is an area of growth and it has been for a period of years.

And there's probably expect it to be.

In the near term.

And then we have to manage our other areas of cost. So I think our teams are really good and trying to find those offsets while still investing in our people and trying to keep that value over the long term because we've said we've said for quite some time in this business about brand and culture and the backbone of it is our people and so it's definitely a pressure in a chat.

But I think our teams are really engaged and trying to navigate through it.

Great. Thanks, and then one one final question from me.

Do you plan to pass through price increases to customers and how do you guys see that impact.

Sure.

The criteria.

Let let Rick jump in and I think.

The price to customers is really what the market will.

We will support and I think what we what we try to do is to really think about where are we seeing price increases where is it fair to paas prices through and we just have a diligent process to get.

To let that happen, where we think it can and.

I think in this environment as a consumer and as a CFO of the company I think we're kind of getting used to it right because the costs are going up and.

And I think our brand is supporting it because you can tell we were able to grow product margin and and I think that growth is inclusive of taking prices up.

Be able to navigate this it's really hard to talk about the overall percent we've increased because this is a.

Category by category Department by Department analysis, some areas, we arent taking prices up some areas are probably staying a little more stagnant. It just really depends on what the cost structure is behind it that supports it but we have seen overall price increases across the business and our strategy will be to continue to manage that based on.

John .

While our inbound supply chain and brand costs are.

Just to add to that Catherine that again as Chris said, there's always puts and takes.

As other areas, we can get better and more efficient in what we're doing.

And then again I'll tell you I think are a bit differently. We have to of course look at what our cost inputs are in product in all of the cost increases and how those puts and takes are playing out.

But I also think about this in terms of wallet share of our customer.

Because we expect a matter what the mix of businesses, we should maintain and always try to grow the wallet share of our customer base, so even in an environment where.

The average unit price may be going up.

We may see unit declines in that world.

But we will still drive dollar per trans increases in overall sales gains and I think that's what you've seen us do this last year.

So we think about this concept of Mckinsey stuffed up great product you still have to have that unique product that people can't get anywhere else and if we do that and do that well that's what our brands about provide that with great people will maintain and grow wallet share over time.

That's been our track record of course, we've been through other experiences like this in the cycle of our business back.

To the to the <unk>.

Dot com bubble of that major unit growth phase in the late Ninety's early two thousands we we've been through these cycles right.

The run up in spending.

Oh seven O eight so we know what this feels like we know how to manage our way through it and throughout all the cycles. We really did a great job I think driving at wallet share of our customer no matter, what the mix of units dollars and the average unit retail look like.

Great. Thanks for the time.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Rick Brooks for any further remarks alright.

Alright, well again I would just like to say again, thank you to everyone and thank you to all our brand partners. Thank you to all of our employees and thank you to our investors out there who follow so closely and pay attention to what we do we greatly appreciate it and we'll look forward to talking to you all in early June . Thank you.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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