Q1 2022 Zumiez Inc Earnings Call

June 2, 2022

Good afternoon, ladies and gentlemen, and welcome to the Zumiez incorporated first quarter fiscal 2022 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.

One of the Companys Safe Harbor language today's conference call includes comments concerning Zumiez incorporated 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 that are subject to risks and uncertainties actual results may differ materially.

Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available and zuni filings with the SEC at this time I will turn the call over to Rick Brooks Chief Executive Officer, Mr. Brooks you may begin.

Hello, everyone and thanks for joining us on the call today with me is Chris work, our Chief Financial Officer.

I'll begin today's call with a few remarks about the first quarter before I hand, the call over to Chris who will take you through the numbers and our outlook.

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

When we reported record Q1 results a year ago and more recently when we discussed our outlook for 2022 during our fourth quarter call in March we outlined several reasons why the first quarter of 2020 to be down on a year over year basis too.

To reiterate a year ago, we achieved over 100% revenue growth compared with Q1 of 2020 and over 30% compared with pre pandemic levels in Q1 of 2019 as our teams did an amazing job capturing a large share of the outsized consumer demand there was fueled by record record domestic stimulus in early.

2021.

This was all contemplated when we provide guidance for Q1 sales to be between $215 million.

$221 million.

As you saw from our release sales team at the high end of our range at $227 million, which represents a 21% decrease compared with Q1 last year and increases of 60% and 4% over Q1, 2000 22019, respectively.

On top of a difficult sales comparison operating environments become increasingly more challenging due to supply chain bottlenecks higher logistics costs, a tight labor market and high levels of inflation.

These factors were also incorporated into our outlook, but some of the headwinds were stronger as the quarter unfolded, which combined with a shift in timing of certain expenses resulted in EPS coming in <unk> below our guidance range of breakeven to 10 sets.

While we are disappointed that our first quarter profitability ship fell short of our expectations. There are elements of our performance highlight the underlying strength of our business and the progress we've made capturing market share over the past several years and.

In particular, we experienced strong full price selling across each of our geographic regions.

And despite the tough compare in the year in the U S from the stimulus fuelled spending a year ago product margins were up domestically to go along with the strong results across our international entities in Canada, Europe and Australia.

We believe this reflects the strength of our merchandise offering and deep customer connections.

If you remove the impact that Covid had our results both positively and negatively over the past two years.

And compare our performance to pre pandemic levels or look at the business over the past decade, you'll get a clear picture of the growth trajectory since the recession of 2009 and 10.

From 2011, and 2021, we grew sales at a 10 year compound annual growth rate of 8%. While during that same time period. We grew diluted diluted earnings per share at a 10 year compound annual growth rate of 15%.

This represents substantial progress towards our long term strategy and meaningful shareholder value.

Throughout Jimmy's 40 year, plus history, we have managed the business through multiple different fashion cycles countless trend changes in several economic boom and bust and now a global pandemic.

While the economies of the world and the consumer categories. We operate in are inherently volatile.

Our flexible business model and consumer centric growth strategy rooted in our strong brand and culture.

We've been evolving since the company's inception have allowed us to not just survive these periods of instability, but emerge from them even stronger.

While the first quarter wasn't without its challenges comparisons remained elevated throughout the remainder of the year, we're confident that when the consumer comes out to shop. During the peak periods of back to school and holiday, we will outperform the competition and extend our market leading position.

Our confidence is rooted in the strength of our teams and great brand partnerships, we have forged that bring diversity and uniqueness to our customers download them to express themselves in a unique way.

Our teams pretty significant amount of effort into understanding our customers not only today, but how they will continue to evolve and what will be important to future generations. Just thinking is embedded in our culture and is reflected in who we hire and how we operate the <unk>.

Past few months, we held both our annual 100, K training and recognition event as well as our manner to treat in person.

These are both great cultural events, where we're able to recognize our top performers and also bring our managers through a multiyear training format that allows them allows them to be better teachers and better leaders.

It is our belief that these events create momentum for our teams and motivate them as it returned to their stores with renewed energy and enthusiasm for the Zumiez brand and cultural experience.

Our carefully crafted model is built with the customer at the center, allowing.

Allowing them to control the what when and how of their shopping experience.

Our channel organization with inventory visibility from all touch points and backend capabilities allow us to create synergies regardless of the channel in which sales originate.

Each of these distinct attributes will serve us well with today's varied and rapidly evolving shopping trends and logistically challenged environment.

Neil at times, such as these create opportunities with the right people strategies and resources in place, we will work to capture those opportunities from our strong competitive position.

With that I'll turn the call to Chris discuss financials, Thanks, Rick and good afternoon, everyone Youre going to start with a review of our first quarter results. I'll, then provide an update on our second quarter to date sales trends before providing some perspective on how we're thinking about the full year.

First quarter net sales were $227 million down 29% from $279 1 million in the first quarter of 2021, and a three 6% from the pre pandemic first quarter of 2019 compared with the first quarter of 2021. The decrease in sales is driven by the significant benefits from the U S stimulus realized in early 2021.

And to a lesser extent the continued inflationary pressure on the consumer and increased competition for the discretionary dollar. These forces were partially offset by increased sales in each of our international geographies.

From a regional perspective, North America net sales were $186 3 million a decrease of 25, 1% compared to 2021 and a decrease of <unk>, 9% compared to the same period in 2019.

International sales, which consists of Europe , and Australia were $34 $4 million up 13% from last year and up 37, 5% for the same period in 2019, excluding the impact of foreign currency translation first quarter North America net sales decreased 25% and other international net sales increased 21, 8% compared with 2021.

First quarter gross profit was $72 4 million compared to $103 2 million in the first quarter of last year and gross margin as a percentage of sales was 32, 8% for the quarter compared to 37% in the first quarter of 2021 and 31, 2% in the first quarter of 2019.

As Rick highlighted product margins were strong in all geographies on full price selling this quarter, but the sales mix shift away from our higher margin U S business overshadowed this impact as the company company level, resulting in a mixed driven decrease of 20 basis points.

The 420 basis point decrease in gross margin was primarily driven by lower sales in the quarter, coupled with elevated expenses due to higher logistics and labor costs.

Store occupancy costs Deleveraged by 300 basis points on the lower sales volume web.

<unk> shipping costs increased by 80 basis points distribution center costs, Deleveraged by 70 basis points and product margin decreased 20 basis points related to the mix as discussed the decreases were partially offset by a 70 basis point improvement related to impairments of leased assets booked in the prior year first quarter that did not repeat this year.

SG&A expense was $71 9 million or 32, 6% of net sales in the first quarter compared to $68 9 million or 24, 7% net sales a year ago, and $65 5 million or 37% of net sales in our pre pandemic first quarter of 2019 to.

790 basis point increase in SG&A expense as a percentage of sales resulted from the following.

400 basis points in our store wages tied to both deleverage on lower sales as well as our wage rate increase.

200 basis points related to non wage store costs, primarily impacted by lower sales levels and increased rate pressure 180 basis points and training and events primarily rates. The movement of our annual 100 K event into the first quarter of 2022 and out of the fourth quarter of 2020, 130 basis points, a corporate costs and a 110 basis points in <unk>.

Non store wages. These headwinds were partially offset by a 150 basis point benefit related to a onetime $3 6 million government stimulus payment related to our European business.

And the 80 basis point decrease in incentive compensation.

Operating income in the first quarter of 2022 was zero point $5 million or 2% of net sales compared with operating income in the prior year of $34 3 million or 12, 3% net sales in the first quarter of 2019, we had an operating profit of $1 million or 5% of net sales.

Net loss for the first quarter was zero point $4 million or negative <unk> <unk> per diluted share. This compares to net income of $26 4 million or $1 three per diluted share for the first quarter of 2021, and net income of zero point $8 million or <unk> <unk> per share for the first quarter of 2019.

Our effective tax rate for the first quarter of 2022 was 134, 2% compared to 25, 7% in a year ago period, the tax rate in the quarter is inflated due primarily to the allocation of income across entities and the exclusion of net losses in certain jurisdictions.

We expect our annual tax rate for the year to be approximately 26%.

Looking at earnings in the first quarter compared to our guidance, we experienced a few deviations to what we laid out in march including cost challenges around labor shipping and various other items, where its 18th.

As well as timing of expenses that were previously planned later in the year, where it's <unk>.

These issues were offset by a large one time government subsidy payment in Europe were 12.

And a reduction of our incentive compensation expense.

Turning to the balance sheet the business ended the quarter with a strong financial position, we had cash and current marketable securities of $173 million as of April 32022, compared to $404 million as of May one 2021.

$227 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $281 6 million and capital expenditures of $16 5 million, partially offset by cash generated through operations of $83 5 million over.

Over the past 12 months the company repurchased $6 5 million shares at an average cost of $43 37 per share and a total cost of 281 6 million. Currently we have no open share repurchase authorization as of April 32022, we had no debt on the balance sheet and continue to maintain our full unused.

Credit facilities.

We ended the quarter with $141 $9 million of inventory compared with $136 5 million last year, an increase of $5 4 million or three 9% on a constant currency basis, our inventory levels were up four 1% overall, the inventory on hand, as healthy and selling at a favorable margin.

Now to our fiscal May sales results.

Net sales for the four week period ended May 28, 2022 decreased 29% compared to the four week period ended May 29 2021.

Compared to the four week period ended June <unk> 2019, net sales increased three 3%.

From a regional perspective net sales for the North America business for the four weeks ended May 28, 2022 decreased 23, 5% over the comparable period last year and were down two 2% compared to the four week period ended June <unk> 2019.

Meanwhile, our other international business decreased <unk>, 3% versus last year and increased 55, 4% compared to the same period of 2019.

Excluding the impact of foreign currency translation, North American net sales for the four weeks ended May 28, 2022 decreased 23, 2% from the prior year and decreased two 5% from 2019, while international net sales increased 13, 9% compared with 2021 and increased 62, 8% compared to 2019.

From a category perspective in fiscal May 2022, all categories were down in total sales from the prior year.

Men's was our most negative category, followed by hardgoods accessories women's and footwear.

With respect to our outlook I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales product margins 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 potential future closures tied to the pandemic.

With that in mind, we are currently expecting the total sales for the second quarter of fiscal 2022 will be between $232 million and $239 million with continued pressure on sales during the quarter as we anniversary the impact of domestic stimulus from 2021, the inflationary pressure on the consumer in the current environment and the continued competition for the discretionary dollar.

Consolidated operating profit as a percent of sales for the second quarter is expected to be between 5% and six 5% and we anticipate diluted earnings per share will be roughly 45 to 55.

Included in our guidance is the addition of costs as we continue to re institute store hours for normal operations bring back travel in and include the continuing impacts of some of the cost challenges we experienced in the first quarter.

Now I want to give you a few thoughts a few updated thoughts on how we're looking at fiscal 2022 with the first quarter of 2022 behind US we are more cautious in how we're looking at the full year and the potential impacts of the current operating environment, including the lingering impacts of the prior year stimulus inflationary pressures the continued pressure on <unk>.

Consumer discretionary spending and global unrest given these pressures, we intend to remain flexible and agile in adjusting inventory expense and capital allocation plans based on any changes in these events.

We now anticipate that total sales will be down in the high single digits in 2022 as compared to 2021.

This is inclusive of our second quarter guidance anticipates further pressures in the back half of the year given the outsized inflation concerns in the market.

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.

Recognize the external challenges are driving margins with continued inflation and economic uncertainty entering 2022.

Given this we are closely managing inventory and remain flexible as demand fluctuates, we exited the first quarter of fiscal 2022 of the healthy inventory, which was up approximately 4% from both the first quarter of fiscal year 2021 and 2019.

As such we currently believe we can drive consolidated product margin to be roughly flat for the year inclusive of the ongoing mix challenges we experienced in the first quarter.

We continue to manage costs across the business. However, with our current sales projections, we are anticipating 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 approximately 37% to 41% for fiscal 2022 on the drop in sales the return to normal for items like mall hours training and events as well as the added cost pressures we are experiencing in the current operating environment.

Diluted earnings per share for the full year is currently planned to decrease much less in operating profit as we're able to capitalize on our buyback program executed over the last year. We currently anticipate 2022 diluted earnings per share to be between $3 55.

And $3 80.

Compared to $4 85, and 2021, $3 2020, and $2 62 in 2019.

We are currently planning our business, assuming an annual effective tax rate of approximately 26%. 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 and $32 million compared.

Compared to $16 million in 2021, but the majority of the increase tied to the addition of new stores in 2022.

We expect that depreciation and amortization, including noncash lease expense will be approximately $22 million roughly flat to the prior year.

And we are currently projecting our share count for the full year to be approximately $19 5 million diluted shares.

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

Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one on your Touchtone telephone again, if we do have questions. Please press Star then one.

And our first question comes from Jeff Van <unk> of B Riley Your line is open.

Hi, This is Richard Magnuson for Jeff and Sandra and thank you for taking my call.

Given the higher fuel prices are there any discernible trends that you've noticed in store traffic versus <unk> that suggests that the consumers buying more onetime shopping less frequently.

I can't talk we'll look here, but I don't think I've seen the typical trends we see Richard in these scenarios is that is what happens weekends become a bigger people consolidate trips I have a sense that at this point.

And in the and looking at sales, but I think that is an ex patient we would have as.

As time progresses here with these high gas prices, we'll see consumers consolidate trip and we will expect to see.

Again that would mean weakens a little bit better historically has how it's worked for us rather than weekdays rich.

Richard I would just add to that I'd, just add to that kind of correlated to that we are seeing a pickup in our own private label merchandise as we think about kind of what that tradeoff could be.

We have seen a little bit of a spike there in the first quarter, which also indicate some of the pressures that the consumer might be under.

Okay.

And then can you speak more about how you have planned back to school merchandise receipt flow this year versus last year and any other color that you can add on supply chain getting better or worse overall.

Sure, Yes, I mean, I think what you saw from US here in this release is.

It's really kind of a re look at the back half of the year I think one thing that we've seen over the last couple of years is with the stimulus and outside spend and really actually our results coming into the pandemic in 17 18 19.

Really strong results and I think Thats, a testament to the strategies, we've put in place and the way that we're speaking to the customer and so we're really pleased with how we how we performed obviously when you run outsized results during the period of stimulus.

You might have more challenging results.

As you anniversary that so I think we're seeing some of that and then we're looking at kind of just where the consumers at with the the pressures on them the inflationary pressures on them the rising costs really across pretty much all areas of their ecosystem.

As well as.

Retail is probably over indexed a little bit over the last couple of years as people have been doing less travel and less experiential. So I think theres more competition for the discretionary dollar. So we thought about a lot of that coming into the year. How we planned Q1, obviously the results of Q1 and now that the first month of Q2, you had us just sort of revisit how we.

Thinking about the year as we think about back to school to your question specifically, we have planned a little bit more of a decrease than what we had coming into the year and we're starting to think about that both in back to school and into holiday.

Plan inventory receipts, a little bit lower in light of where the environment is.

No not going to be a major change in cadence year over year, we're still expecting the back to school season to flow in a similar cadence to what we've seen in the last couple of years, but I think overall, we're planning a little more conservatively just based on the backdrop of where our consumers facing and what we're seeing in the marketplace. Obviously one of the benefits of our business is.

We can adjust we have really good relationships with our brand partners and we continue to to work with them to navigate this environment as you know a large portion of what we do is screened bowls and quick moving so I think we can as we start to see differences or movement and trends, we will be adjusting but we are looking.

At the back half more conservatively as we've laid out in our guidance today and I would just add Richard that as we said the comments that I am very confident that as we get into those peak windows matter.

What the perform our performance is I think on a relative basis I feel good that it's going to be strong relative to our competitors.

Okay.

And then lastly.

So what else can you can you tell us about the trends of the European business some of the outlook there.

Sure, Yes, I mean, I think as we as we think about Europe . Overall I think obviously, we're very proud of how the Europe teams operating as a super challenging environment.

Had really strong hopes coming into this year about just the momentum we built there and obviously with the war in Ukraine, We talked about in our March call. We.

Did see a tick down on kind of their performance has been well documented here over the last couple of months is obviously really impacted the cost structure and inflation structure over there specifically around energy, but some of the same concerns we're having here so.

I think as we think about kind of where we're at in the short term.

The results remain positive, which we're really happy with they had some closures last year.

So that well while positive results in Europe , they're not quite as high as we originally anticipated I will say Q2's off to a better start it's still a little bit lower than what we are planning coming into the year. We stated on the call here just a few minutes ago that we did obtain a subsidy that helped to offset some of the losses, we had incurred across 2020.

And 2021, and the amount of about $3 $6 million, so that did help overall.

But I think it is it's still a difficult operating environment, but one that I think our teams are really executing here and that kind of gets me to thinking about the long term for Europe , and where we're at.

I would tell you we feel really confident in our position just as we have in <unk>.

March and calls prior to that and I think that that reasoning is really hinged on the fact that this is a good time to invest given where the market's at youre going to see us as we've laid out in the call opened 14 stores in Europe . This year, we'll open.

Some new markets. We did we did open our first store in Norway, and we expect to continue to grow across Europe I think it's in line with our strategy is aligned with kind of how what we feel is right and I think no.

Not only can this investment really help us capitalize on the European market, but.

But I think we're one of the largest lifestyle retailers.

Operating across Europe at this point and I think we have a lot of room for growth. So we're excited about that I think it means a lot for our customers there and I think it helps us from a global perspective with how we are able to serve brands and I think thats a big piece of what we're doing when you think about the idea of <unk>.

Brands emerge locally and they grow globally and this platform that we're building of.

Operations now in the U S, Canada, Europe , and Australia. It really does help us identify those trends work with those brands move brands around the world when we see things that might be working and I think that's something we're pretty excited about so.

As we mentioned in March coming into 2022, we had built a plan that we thought would get us to.

Breakeven or even slightly positive obviously, we had to rethink that a little bit just with the war and where things are at where.

We're not quite as optimistic but again, we feel like we're really close to turning to profitability level.

Feel like our teams are executing at a high level the stores, we've been opening over the last few years. Despite the pandemic challenges when they have been opened have have performed much better and I think we're really kind of dialing in that formula and I think this is a good growth opportunity for us in the future.

Right. Thank you I'll jump back in the queue.

And our next question comes from Macquarie Carlo of Jefferies. Your line is open.

Hi, good afternoon, and thank you for taking my questions.

How are you thinking generally about the promotional environment.

And what are your expectations for the environment going forward.

I'll start and then let Chris add his.

His thoughts too, but again as we've said here, we feel pretty darn good about our inventory position.

And we think we can.

The direction, Chris gave you in thinking about where product margin could be for this year.

We feel obviously pretty good about where we're at now there is one big caveat with that in this environment, depending on how much more difficult the broader macroeconomic environment as our competitors on a lot more inventory.

It could if things chip they drive down prices a lot with them, we may have to react to it but that is not our current plan. We feel we can manage through it.

Well and we gave you the direction kind of how we're thinking about our own cadence at this stage of the game relative to product margin because I don't really have anything else to add I'd just add I think the product margin for US. We mentioned on the call is last year was our six year in a row of product margin gains and as we've disclosed the last couple of years.

Last year was 110 basis point increase the year before that was 70 basis point increase so we've made real substantial progress on some of our initiatives over the last few years.

Both during the pandemic and prior to the pandemic. So I'd just call out that there's a big benefit there I mean, we were really happy with how our business performed in the first quarter I think our teams really executed the plan in regards to where we are planning product margin. We did mentioned product margin was down 20 basis points, but that's really more a factor of mixed in.

Anything else.

As you know our U S business runs at a higher product margins in our international entities.

Which is also an opportunity for us because our international teams as they gain scale and they continue to grow we will have more opportunity to grow product margin and we're seeing that today and how they are executing so.

I think Rick totally right.

We're going to kind of have to manage this to where the market's at but again our strategy has been pretty clean coming into this so we will see how the next few quarters play out.

And I would just add again the comment Chris made earlier Corey that the fact that.

We don't drive our private label to any particular target customers take us there and they are telling us at this point that the private level. It's important to all of our collection of private label brands. So we're seeing that tick up and so obviously, we'll be following our customer there too in terms of where it should be.

A good thing from a margin perspective for the business.

Mhm.

Question on the <unk> guide.

Whats embedded in the <unk>.

EBIT margin improvement sequentially from <unk>.

Yeah, I mean, I think you have a few different things. Obviously Q2, historically has been a little more of a profitable quarter than Q1 to start with I think Thats, where you have to you have to originally kind of.

Think through and then.

As we think through the second quarter I think.

We've got kind of cost plus.

<unk>, a little more appropriately for where they are we don't have the event load that we had in the first quarter. As you know we did our 100 K, which is our annual training and recognition event as well as our managers or tree in the first quarter, which is our two of our three annual events, we normally would have.

The first of those in January so it would fall into the prior year, but just because of safety for our employees and where the pandemic was that we moved into the first quarter. So youre going to see some movement of costs like that Thats played out into the second quarter and.

I think overall, that's going to tell the main story I think when we think about the second quarter and where earnings is that one of the things. We're really proud of is just how that bridges from the pre pandemic timeframe and I think again that maybe speaks to your earlier question around product margin because we have seen.

Really great product margin gains since 2019 as well as how we've tried to manage costs to offset some of the other areas, where we've seen increases. So that's kind of how we've thought about Q2 and and.

And obviously, we'll see how it plays out.

Very helpful and then just lastly.

What's your expectation around shipping and logistics costs as we move throughout the year.

Yeah.

Go ahead and take a crack at this and if Rick would like to add anything.

This has been one as we called out in our call list as one of our bigger misses in Q1, where we just saw costs increase at a level that we were not anticipating and I think.

As we move through the year, we're hoping there'll be some moderation of that but also knowing that.

There's been a lot of supply chain challenges and and and.

And higher cost there so we factored that in as we moved into our guidance and how we kind of our high level guidance for the I should say, our detailed guidance for Q2, and our high level guidance for the year that we are expecting there to be continued price pressure on the supply chain now to manage that we do we are working on some things.

Some initiatives internally that can consolidate packaging.

And decrease some of those cost overall and then we're hopeful those will play out but we've also factored in a higher cost here for the remainder of the year.

Understood. Thank you very much best of luck.

Thank you.

Ladies and gentlemen, as a reminder to ask a question. Please press Star then one our next question comes from Mitch comment Seaport Research. Your line is open.

Yes, thanks for taking my questions.

Hey, Chris on the categories I don't recall, you, saying what categories were for the quarter maybe.

But I guess, even more important than that I'm curious, how those stack up versus 2019, I don't know if you have that.

Versus 2019.

Well, let me, let me start with the quarter, we did see.

We did see all categories down in the first quarter as you would expect.

Hard goods led the way followed by our mens business, our women's business our accessories business.

And then footwear was our.

Our strongest negative.

I don't have them compared to 2019 in front of me today, what I what I can tell you is that that's a little more of a mixed bag. We have some that are up and some that are down.

But.

Overall, we've seen.

Short term category is down.

I guess as a follow up to that the some up some down did you know hard goods was down in the quarter versus 19.

Does your guidance.

Assume hard goods.

Your sales guidance now.

I think as up mid singles on a three year, if I did my math correctly.

Im wondering if hard goods was down in the quarter versus three years ago, and if the guidance assumes hard goods is down versus three years ago.

Hardgoods would not have been down versus three years ago, and I think the way we're thinking about hard goods, obviously as you know.

<unk> had quite a run up until last year.

And obviously last year right about in Q2, it started to become more challenged in 2021 was a pretty.

Tough tough year for hard goods I think if we look at that period of time 18 into 2020.

It went from 10% of the business in 18, and 19 span the business in 2020, So last year. It was at 15% of the business. So you saw that.

You know our strategy over the last 10 2040 years has really been to.

Just drive where those dollars are at but it came at the 2022, we did expect.

Hard goods to be down obviously, we expected the losses to moderate as we move through the year just as a as we saw a pretty big drop off during 2021 so.

As we look at Q3.

Q4, we've already seen pretty large drop off in 2021. So our expectation is that we will continue to see in Q2, our goods drop.

May continue to see it in Q3, and Q4 as well, but certainly at a lower level than what we've experienced over the trailing three or four quarters.

Okay, and then on again.

Again, I'm kind of working through the math, but it looks like on a three year.

Expect sales to be up mid singles EBIT to be up 16% or so mid teens call. It which I think gets me to kind of a 9% op margins for the year.

You gave the margin rate for the year I was hoping you could kind of talk through so I think you said in the past.

Long term sustainable op margins I think you said like in the low double digit range can you talk about some of the headwinds that are in the margin this year.

You think go away over time, and if there's any way to kind of isolate the impact they're having on the year yes.

Yes, certainly I think.

Your math.

Pretty much right on from.

Where we're thinking of the year and as we entered the year. We thought we had the opportunity to maintain double digits from where we're at but obviously with what we see now through the first quarter and the current trend. We are planning that really high high single digit operating profit dollars or operating.

As a percent of overall sales, which again would be as we look back at kind of where we performed here.

Would be pretty high compared to where we were at pre pandemic and I think that's one thing I would just call out even with the annual guidance.

Put out there today, well, while a step backwards.

Last year at <unk>.

<unk> to be our second highest sales in the history of the company and the second highest earnings in the history of the company and as you know these arent always straight lines, but over time it's.

It's about driving forward. So I think as we look at kind of two.

To your point of just where are we on this op margin.

If it is at that 9%, we do continue to believe that long term, we can drive that into the double digits and meaningful.

Above.

Maybe even into the low teens, so like where does that come from to your second question. I think there is theres going to be continued.

I think we can continue to margin expansion and while in.

In the short term, we've talked about that being a little more compressed I think long term. We do have initiatives here that we think we can continue to drive here in North America. We believe internationally, we have a lot of room to grow there I think youre going to see continued leverage up and down the model as we do have a pretty heavy fixed cost business, which is why you see something like in 2020.

One when we over index in sales you see a pretty strong flow through and on the flip side here in 2022, as we see a little bit of a pullback in sales you are seeing a bigger drop on the bottom line, but I think youll see leverage in occupancy and some of those areas. We will see some of the shipping cost moderate obviously one of the other areas that has been.

<unk> to us here in the short term has been labor.

And so I think that we'll see that component.

And then the other big piece of driver for US is on the international side.

When we look at kind of where we are not only we've spoken to product margin, but just on the overall, earning side and you've got a good feel on kind of where the European business is as we've stated on this call and other calls this is a business that's losing money not tens of millions of dollars of millions of dollars.

And this will be another big driver for us.

As we as we prove that business out we see that turn.

We will see a big benefit to our overall bottom line is that turns positive.

Great I appreciate all the color. Thanks.

You bet.

And Im showing no further questions I would now like to turn the call back to management for closing remarks.

Alright. Thank you all very much for interest in Zumiez again, as we've said here, we feel great about where rates may have a bit of a tough time not a straight line, but as we all know every time, we go through the tougher times, we come out stronger and better at the other side. So as always we appreciate your interest in Zumiez and we'll look forward to talk to you again in September thanks, everybody.

Ladies and gentlemen. This concludes today's conference you may now disconnect have a good day.

Okay.

Sure.

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Yes.

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Yes.

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[music].

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Great.

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Absolutely.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Zumiez incorporated first quarter fiscal 2022 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 incorporated business outlook and contains forward looking statements. These forward looking statements and all other.

Statements that maybe made on this call are not based on historical facts that 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 the boonies filing with the S. E C. At this.

Tom I will turn the call over to Rick Brooks, Chief Executive Officer, Mr. Brooks you may begin.

Hello, everyone and thanks for joining us on the call today with me is Chris work, our Chief Financial Officer.

I'll begin today's call with a few remarks about the first quarter before I hand, the call over to Chris who will take you through the numbers and our outlook.

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

While we reported record Q1 results a year ago and more recently when we discussed our outlook for 2022 during our fourth quarter call in March we outlined several reasons why the first quarter of 2020 to be down on a year over year basis.

To reiterate a year ago, we achieved over 100% revenue growth compared with Q1 of 2020.

Over 30% compared with pre pandemic levels in Q1 of 2019 as our teams did an amazing job capturing a large share of the outsized consumer demand there was fueled by record record domestic stimulus in early 2021.

This was all contemplated when we provide guidance for Q1 sales to be between $215 million and $221 million.

As you saw from our release sales team at the high end of our range at $227 million, which represent a 21% decrease compared with Q1 last year, an increase of 60% and 4% over Q1, 2000 22019, respectively.

On top of the difficult sales comparison operating environments become increasingly more challenging due to supply chain bottlenecks higher logistics costs, a tight labor market and high levels of inflation.

While we are disappointed that our first quarter profitability ship fell short of our expectations. There are elements of our performance that highlight the underlying strength of our business and the progress we've made capturing market share over the past several years and.

In particular, we experienced strong full price selling across each of our geographic regions.

And despite the tough compare in the year in the U S from the stimulus fuelled spending a year ago product margins were up domestically to go along with our strong results across our international entities in Canada, Europe and Australia.

We believe this reflects the strength of our merchandise offering and deep customer connections.

If you remove the impact that Covid had our results both positively and negatively over the past two years.

And compare our performance to pre pandemic levels or look at the business over the past decade, you'll get a clear picture of the growth trajectory since the recession of 2009 and 10.

This represents substantial progress towards our long term strategy and meaningful shareholder value.

Jimmy its 40 year plus history, we have managed the business through multiple different fashion cycles countless trend changes in several economic boom and bust and now a global pandemic.

While the economies of the world and the consumer categories. We operate in are inherently volatile our flexible business model and consumer centric growth strategy rooted in our strong brand and culture that we've been evolving since the company's inception have allowed us to not just survive. These periods of instability that emerge from them even stronger.

Our team is pretty significant amount of effort into understanding our customers not only today, but how they will continue to evolve and what will be important to future generations. This thinking is embedded in our culture and is reflected in who we hire and how we operate and.

In the past few months, we held both our annual 100, <unk> training and recognition event as well as our manner to treat in person. These.

These are both great cultural events, where we're able to recognize our top performers and also bring our managers through a multiyear training format.

<unk> allows them to be better teachers and better leaders.

It is our belief that these events create momentum for our teams and motivate them as it returned to their stores with renewed energy and enthusiasm for the Zumiez brand and cultural experience.

Our carefully crafted model is built with the customer at the center.

Allowing them to control the what when and how of their shopping experience.

Our channels organization with inventory visibility from all touch points and backend capabilities allow us to create synergies regardless of the channel in which sales originate.

Each of these distinct attributes will serve us well with today's varied and rapidly evolving shopping trends and logistically challenged environment.

Neil at times, such as these create opportunities with the right people strategies and resources in place, we will work to capture those opportunities from our strong competitive position.

First quarter net sales were $227 million down 29% from $279 1 million in the first quarter of 2021, and a three 6% from the pre pandemic first quarter of 2019.

Compared with the first quarter of 2021, the decrease in sales is driven by the significant benefits from the U S stimulus realized in early 2021 and to a lesser extent the continued inflationary pressure on the consumer and increased competition for the discretionary dollar. These forces were partially offset by increased sales in each of our international geographies.

From a regional perspective, North America net sales were $186 3 million.

A decrease of 25, 1% compared to 2021, and a decrease of <unk>, 9% compared to the same period in 2019.

Other international sales, which consists of Europe , and Australia were $34 $4 million up 13% from last year and up 37, 5% from the same period in 2019, excluding the impact of foreign currency translation first quarter North America net sales decreased 25% and other international net sales increased 21, 8% compared with 2021.

First quarter gross profit was $72 $4 million compared to $103 2 million in the first quarter of last year and gross margin as a percentage of sales was 32, 8% for the quarter compared to 37% in the first quarter of 2021 and 31, 2% in the first quarter of 2019.

The 420 basis point decrease in gross margin was primarily driven by lower sales in the quarter, coupled with elevated expenses due to higher logistics and labor costs.

Store occupancy costs Deleveraged by 300 basis points on the lower sales volume we have.

Shipping costs increased by 80 basis points distribution center costs, Deleveraged by 70 basis points and product margin decreased 20 basis points related to the mix as discussed.

The decreases were partially offset by a 70 basis point improvement related to impairments of leased assets booked in the prior year first quarter that did not repeat this year.

790 basis point increase in SG&A expense as a percentage of sales resulted from the following 400 basis points in our store wages tied to both deleverage on lower sales as well as our wage rate increase 200 basis points related to non wage store costs, primarily impacted by lower sales levels and increased rate pressure 180 basis points in <unk>.

And events, primarily related to the movement of our annual 100 K event into the first quarter of 2022 and out of the fourth quarter of 2020, 130 basis points, a corporate costs and a 110 basis points and non store wages. These headwinds were partially offset by 150 basis point benefit related to a one time $3 6 million government.

<unk> payment related to our European business, and 180 basis point decrease in incentive compensation.

Operating income in the first quarter of 2022 is zero point $5 million or 2% of net sales compared with operating income in the prior year of $34 3 million or 12, 3% net sales in the first quarter of 2019, we had an operating profit of $1 million or 5% of net sales.

We expect our annual tax rate for the year to be approximately 26%.

As well as timing of expenses that were previously planned later in the year, where it's <unk>.

These issues were offset by a large one time government subsidy payment in Europe were 12.

And a reduction of our incentive compensation expense.

Turning to the balance sheet the business ended the quarter in a strong financial position, we had cash in Caremark's securities of $173 million as of April 32022, compared to $404 million as of May one 2021.

Credit facilities we.

Now to our fiscal May sales results.

Net sales for the four week period ended May 28, 2022 decreased 29% compared to the four week period ended May 29 2021.

Compared to the four week period ended June <unk> 2019, net sales increased three 3%.

Meanwhile, our other international business decreased <unk>, 3% versus last year and increased 55, 4% compared to the same period of 2019.

From a category perspective in fiscal May 2022, all categories were down in total sales from the prior year men's was our most negative category, followed by hardgoods accessories women's and footwear.

Furthermore, while our guidance does include the negative impact in 2022, as we anniversary the 2021 domestic stimulus. It does not include any potential future closures tied to the pandemic.

Consolidated operating profit as a percent of sales for the second quarter is expected to be between 5% and six 5% and we anticipate diluted earnings per share will be roughly 45 to 55.

Included in our guidance is the addition of costs as we continue to re institute store hours for normal operations bring back travel and <unk> and includes the continued impact of some of the cost challenges we experienced in the first quarter.

Tumor discretionary spending and global unrest.

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

We now anticipate that total sales will be down in the high single digits in 2022 as compared to 2021. This is inclusive of our second quarter guidance anticipates further pressures in the back half of the year given the outsized inflation concerns in the market.

We recognize the external challenges are driving margins with continued inflation and economic uncertainty entering 2022.

Given this we are closely managing inventory and remain flexible as demand fluctuates, we exited the first quarter of fiscal 2022 at a healthy inventory, which was up approximately 4% from both the first quarter of fiscal year 2021 and 2019.

As such we currently believe we can drive consolidated product margin to be roughly flat for the year inclusive of the ongoing mix challenges we experienced in the first quarter.

We continue to manage costs across the business. However, with our current sales projections, we are anticipating deleverage domestically, while our international entity 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 approximately 37% to <unk> 41 per.

<unk> for fiscal 2022 on the drop in sales the return to normal for items like mall hours training and events as well as the added cost pressures we are experiencing in the current operating environment.

$3 80.

Compared to $4 85, and 2021, $3 2020, and $2 62 in 2019.

We expect capital expenditures for the full 2022 fiscal year to be between $30 million and $32 million compared.

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

We expect that depreciation and amortization, including noncash lease expense will be approximately $22 million roughly flat to the prior year.

And we are currently projecting our share count for the full year to be approximately $19 5 million diluted shares.

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

Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one on your Touchtone telephone again, if we do have questions. Please press Star then one.

And our first question comes from Jeff Van <unk> of B Riley Your line is open.

Hi, This is Richard Magnuson for Jeff and Sandra and thank you for taking my call.

Given the higher fuel prices are there any discernible trends that you've noticed in store traffic versus <unk> that suggests that the consumers buying more onetime shopping less frequently.

And looking at sales, but I think that is an ex patient we would have as.

As time progresses. There are these high gas prices, we'll see consumers consolidate trip and we will expect to see.

Again that would mean weakens a little bit better historically has how it's worked for us rather than weekdays rich.

Richard I would just add to that I'd, just add to that kind of correlated to that we are seeing a pickup in our own private label merchandise as we think about kind of what that tradeoff could be.

We have seen a little bit of a spike there in the first quarter, which also indicate some of the pressures that the consumer might be under.

Okay. Thank.

Sure, Yes, I mean, I think what you saw from US here in this release is.

Kind of a re look at the back half of the year I think one thing that we've seen over the last couple of years is with the stimulus and outside spend and really actually our results coming into the pandemic in 17 18 19.

We found really strong results and I think Thats, a testament to the strategies, we've put in place and the way that we're speaking to the customer and so we're really pleased with how we how we performed obviously when you run outsized results during the period of stimulus.

You might have more challenging results.

As you anniversary that so I think we're seeing some of that and then we're looking at kind of just where the consumers at with the pressures on them the inflationary pressures on them the rising costs really across pretty much all areas of their ecosystem as well as <unk>.

And about the year as we think about back to school to your question specifically.

We have planned a little bit more of a decrease than what we had coming into the year and we're starting to think about that both in back to school and into holiday to plan inventory receipts, a little bit lower in light of where the environment is.

Theres no not going to be a major change in cadence year over year, we're still expecting the back to school season to flow in a similar cadence to what we've seen in the last couple of years, but I think overall, we're planning a little more conservatively just based on the backdrop of where our consumers facing and what we're seeing in the marketplace. Obviously one of the benefits of our business is.

We can adjust we have really good relationships with our brand partners and we continue to to work with them to navigate this environment as you know a large portion of what we do is screening bowls.

And quick moving so I think we can do as we start to see differences or movement in trends, we will be adjusting but we are looking at the back half more conservatively as we've laid out in our guidance today and I would just add Richard that as we said the comments that I am very confident that as we get into those peak windows no matter what the performed.

Our performance is I think on a relative basis I feel good that it's going to be strong relative to our competitors.

Okay.

And then lastly.

What else can you can you tell us about the trends in the European business and the outlook there.

Sure, Yes, I mean, I think as we as we think about Europe . Overall I think obviously, we're very proud of how the Europe teams operating as a super challenging environment.

<unk>.

Had really strong hopes coming into this year.

Just the momentum we built there and obviously with the war in Ukraine, We talked about in our March call. We did see a tick down on kind of their performance and has been well documented here over the last couple of months is obviously really impacted the cost structure and inflation structure over there specifically around energy, but some of the same concerns.

We're having here so I.

As we think about kind of where we're at in the short term.

Sure.

The results remain positive, which we're really happy with they had some closures last year.

So that well while positive results in Europe , they're not as quite as high as we originally anticipated I will say Q2's off to a better start it's still a little bit lower than what we are planning coming into the year. We stated on the call here just a few minutes ago that we did obtain a subsidy that helped to offset some of the losses, we had incurred across 2020.

And 2021, and the amount of about $3 $6 million, so that did help overall.

I would tell you we feel really confident in our position and just as we have in March and in calls prior to that and I think that that reasoning is really hinged on the fact that this is a good time to invest given where the market that youre going to see us as we've laid out in the call opened 14 stores in Europe . This year will.

<unk> opened.

Some new markets. We did we did open our first store in Norway, and we expect to continue to grow across Europe I think it's in line with our strategy is aligned with kind of how well we feel is right and I think.

Not only can this investment really help us capitalize on the European market.

I think we're one of the largest lifestyle retailers.

Brands emerge locally and they grow globally and this platform that we're building of <unk>.

That's something we're pretty excited about so.

As we mentioned in March coming into 2022, we had built a plan that we thought would get us to.

Breakeven or even slightly positive obviously, we had to rethink that a little bit just with the war and where things are at we're.

We're not quite as optimistic but again, we feel like we're really close to turning to profitability level.

Alright, Thank you I'll jump back in the queue.

And our next question comes from Macquarie Carlo of Jefferies. Your line is open.

Hi, good afternoon, and thank you for taking my questions.

How are you thinking generally about the promotional environment.

And what are your expectations for the environment going forward.

I'll start and then let Chris.

His thoughts too, but again as we've said here, we feel pretty darn good about our inventory position.

And we think we can.

The direction, Chris gave you in thinking about where product margin could be for this year.

It could if things can shift they drive down prices a lot with them. We may have to react to it but that is not our current plan. We feel we can manage through it.

Last year was 110 basis point increase the year before that was 70 basis point increase so we've made real substantial progress on some of our initiatives over the last few years.

Both during the pandemic and prior to the pandemic. So I'd just call out that there is a big benefit there I mean, we were really happy with how our business performed in the first quarter I think our teams really executed the plan in regards to where we are planning product margin. We did mentioned product margin was down 20 basis points, but that's really more a factor of mixed in.

Anything else.

As you know our U S business runs at a higher product margins in our international entities.

I think Rick totally right.

We're going to kind of have to manage this to where the market's at but again our strategy has been pretty clean coming into this so we will see how the next few quarters play out.

I would just add again the comment Chris made earlier Corey that the fact that.

We don't drive our private label to any particular target customers take us there and they are telling us at this point that the private level is important to all of our collection of private label brands. So we're seeing that tick up and so obviously, we'll be following our customer there too in terms of where it should be.

A good thing from a margin perspective for the business.

Mhm.

Question on the <unk> guide.

Whats embedded in the EBIT margin improvement sequentially from <unk>.

Yeah, I mean, I think you have a few different things. Obviously Q2, historically has been a little more of a profitable quarter than Q1 to start with I think thats, where you have to.

You have to originally kind of.

Think through and then.

As we think through the second quarter I think.

We've got kind of cost plus.

The first of those in January so it had fallen in the prior year, but just because of safety for our employees and where the pandemic was that we moved into the first quarter. So youre going to see some movement of costs like that Thats played out into the second quarter and.

Really great product margin gains since 2019 as well as how we've tried to manage costs to offset some of the other areas, where we've seen increases. So that's kind of how we thought about Q2 and and.

And obviously, we'll see how it plays out.

Very helpful and then just lastly.

What's your expectation around shipping and logistics costs as we move throughout the year.

Yes.

Go ahead and take a crack at this and if Rick would like to add anything.

This has been one as we called out in our call list as one of our bigger misses in Q1, where we just saw costs increase at a level that we were not anticipating and I think.

As we move through the year, we're hoping there'll be some moderation of that but also knowing that.

There's been a lot of supply chain challenges and and and.

And higher cost there so we factored that in as we moved into our guidance and how we kind of our high level guidance for the <unk> I should say, our detailed guidance for Q2, and our high level guidance for the year that we are expecting there to be continued price pressure on the supply chain now to manage that we do we are working on some things.

Some initiatives internally that can consolidate packaging.

And decrease some of those costs overall, and we're hopeful those will play out but we've also factored in a higher cost here for the remainder of the year.

Understood. Thank you very much best of luck.

Thank you.

Ladies and gentlemen, as a reminder to ask a question. Please press Star then one our next question comes from Mitch comment Seaport Research. Your line is open.

Yes, thanks for taking my questions.

Hey, Chris on the categories I don't recall, you, saying, what the categories were for the quarter maybe.

But I guess, even more important than that I'm curious, how those stack up versus 2019, I don't know if you have that.

Versus 2019.

Well I mean, let me start with the quarter, we did see.

We did see all categories down in the first quarter as you would expect.

Hard goods led the way followed by our mens business, our women's business our accessories business.

And then footwear was our.

Our strongest negative.

I don't have them compared to 2019 in front of me today, what I what I can tell you is that's a little more of a mixed bag. We have some that are up and some that are down.

But.

Overall, we've seen.

Short term category is down.

I guess as a follow up to that the some up some down do you know if hard goods was down in the quarter versus 19.

Does your guidance.

Assume hard goods.

Your sales guidance now.

I think as up mid singles on a three year, if I did my math correctly.

Im wondering if hard goods was down in the quarter versus three years ago, and if the guidance assumes hard goods is down versus three years ago.

Our hard goods would not have been down versus three years ago, and I think the way we're thinking about hard goods, obviously as you know.

<unk> had quite a run up until last year.

And obviously last year right about in Q2, it started to become more challenged in 2021 was a pretty.

A tough year for hard goods I think if we look at that period of time 18 into 2020.

It went from 10% of the business in 18, and 19 span the business in 2020, So last year. It was at 15% of the business. So you saw that.

You know our strategy over the last 10 2040 years has really been to.

Just drive where those dollars are at but it came in.

2022, we did expect.

Hard goods to be down.

Obviously, we expect the losses to moderate as we move through the year just as a as we saw a pretty big drop off during 2021 so.

As we look at Q3.

Q4, we've already seen pretty large drop off in 2021. So our expectation is that we will continue to see in Q2, our goods drop we may continue to see it in Q3, and Q4 as well, but certainly at a lower level than what we've experienced over the trailing three or four quarters. Okay.

And then on again.

Again, I'm kind of working through the math, but it looks like on a three year you expect sales to be up mid singles EBIT to be up 16% or so mid teens call. It which I think just to me, it's a kind of a 9% op margins for the year.

Dave.

The margin rate for the year I was hoping you could kind of talk through so I think you said in the past.

Long term sustainable op margins I think you said like in the low double digit range can you talk about some of the headwinds that are in the margin this year.

You think go away over time, and if there's any way to kind of isolate the impact they're having on <unk>, yes.

Yes, certainly I think.

Your math.

Pretty much right on from.

As a percent of overall sales, which again would be as we look back at kind of where we performed here.

Would be pretty high compared to where we were at pre pandemic and I think that's one thing I would just call out even with the annual guidance.

Put out there today, well, while a step backwards.

Last year at <unk>.

<unk> to be our second highest sales in the history of the company and the second highest earnings in the history of the company and as you know these arent always straight lines, but over time it's.

It's about driving forward. So I think as we look at kind of two.

To your point of just where are we on this op margin.

If it is at that 9%, we do continue to believe that long term, we can drive that into the double digits and meaningful.

Above.

Maybe even into the low teens, so like where does that come from to your second question. I think there is theres going to be continued.

I think we can continue to margin expansion and while in.

One when we over index in sales you see a pretty strong flow through and on the flip side here in 2022, as we see a little bit of a pullback in sales you are seeing a bigger drop on the bottom line, but I think you will see leverage in occupancy and some of those areas. We will see some of the shipping cost moderate obviously one of the other areas that has been.

<unk> to us here in the short term has been labor.

And so I think there will we will see that component.

And then the other big piece of driver for US is on the international side.

And this will be another big driver for us.

As we as we prove that business out we see that turn.

We will see a big benefit to our overall bottom line is that turns positive.

Great I appreciate all the color. Thanks.

You bet.

And Im showing no further questions I would now like to turn the call back to management for closing remarks.

Alright. Thank you all very much for interest in Zumiez again, as we've said here, we feel great about where rates because they have a bit of a tough time not a straight line, but as we all know every time, we go through the tougher times, we come out stronger and better at the other side. So as always we appreciate your interest in Germany, and we look forward to talk to you again in September thanks, everybody.

Ladies and gentlemen. This concludes today's conference you may now disconnect have a good day.

Q1 2022 Zumiez Inc Earnings Call

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