Q2 2019 Earnings Call
We will conduct a question and answer session towards the end of this conference.
Before we begin I would like to remind everyone of the company's Safe Harbor language Todays 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 on this call that are not based on historical facts are subject to risks and uncertainties actual results may differ materially additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in zumiezs filing with the FCC at this time I will turn the call over to Rick Brooks Chief Executive Officer. Please go ahead Sir.
Hello, and thank you everyone for joining us on the call.
With me today, it's Chris work, our Chief Financial Officer.
I'll begin today's call with a few brief remarks regarding our second quarter and back to school performance to date, then I'll share some thoughts about the future before handing the call to Chris who will take you through the numbers.
After that well open the call up to your questions.
We continue to be very pleased with performance of the business is both top and bottom line results exceeded expectations.
Comparable sales increased 3.6% in the second quarter versus our outlook of flat to 2%, marking our twelveth consecutive quarter of positive comparable sales.
On a two year and three year stock basis second quarter comps are up 9.9% and 14.6% respectively.
Our relentless attention to serving our customers continues to fuel strong full price selling.
Which combined with a powerful operating model, we built around a single cost structure and a steadfast focus on long term strategy has translated into a significant improvement in profitability.
Second quarter earnings per share more than doubled year over year to 36 cents from 17 cents, which was 16 cents above the high end of our guidance range.
Actually moved into the third quarter, our momentum has accelerated with 7.1% comparable sales growth in August . This is on top of 9.5% in the year ago period and represents our fourth consecutive back to school season with strong comparable sales in the business.
Performance is a testament to our team's ability to consistently execute our consumer centric growth strategy.
It is a key elements of the strategy that we believe is separated us from the competition and we'll continue to distinguish series as a clear winner in the future of retail.
Before the call to Chris for the numbers, let me dig into those key elements.
It starts with having the right products and brands that our customers are looking for made up of a distinct mix of leading and emerging brands that are not broadly distributed.
We've been able to consistently achieve this balance through the strong relations we forward with our brand partners and more recently, our global reach that allows us to serve both our customers and brand partners at heightened levels.
This includes clearly articulating our culture driven lifestyle brand position.
And showcasing our ability to connect with the target audience in authentic.
Gauging environment does uniquely curated by our people all the way down to the local level.
There are many brands are important to our customers that may serve only a handful of our trade areas.
Our customers want to express their individuality through many different avenues, which could drive unique assortments, even in trade areas only miles away from each other.
Over the years, we spent significant time and resources, improving our localized merchandise assortments to investments our people and technology that enhance the customer experience at each touchpoint.
Our teams across organization put a 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.
These teams are in tune with the local and national trends are important to our customers. It can speak authentically to them across all of our channels. This approach allows us to serve the customer and authentic way bring it all the touch points together through the customer journey.
The next critical factor to our success is speed.
We're already faster than most of our competitors due to our decision over three years ago to shut down or E Commerce fulfillment center and deliver all digital orders out of our stores.
Not only does the concept the localized fulfillment mean that we now only have one cost structure to leverage, but we can now get product to customers into customers hands faster by reducing the order processing time cutting down the shipping distance to the customer and also offerings in store pickup.
Looking ahead, we are going to get faster in every aspect of serving a meeting customers needs than we are today.
This be driven over the next few years by getting to know our customers even more intimately through improved digital reactions and enhanced in store experiences.
Finally, we've taken our operating model and expanded internationally in order to identify consumer trends that emerged locally and grow globally and to achieve the scale necessary to work together with our brand partners in serving our customers around the world.
Our expansion has established a strategic physical presence in seven countries across three continents with a digital platform that allows us to reach even further.
We apply learnings and best practices from each of our markets. It's true that we are.
We are on top of the latest fashion trends and brands cycles, which can now launch from anywhere in the world and quickly spread globally due to the proliferation of smart devices and social media.
Furthermore, as our international business are primed for future growth.
We're exporting our processes and tools from our more mature U.S. operations and seeing good results.
Our international businesses accelerated in the second quarter with comparable sales in both Europe , and Australia growing into double digits.
The strong topline growth through the first half the year, we've seen improved operating performance as well.
We're excited about the progress being made by the Blue tomato and fast times teams and continue to build upon the benefits of a globally integrated business.
We are the only retailer and our lifestyle niche that can offer our brand partners global reach in major markets to meet consumer demand.
With regard to our financial model. We believe two key factors have contributed and we will continue to contribute to our ability to drive improved results over the long term.
First as a lifestyle retailer, we have built our business to be exceptionally nimble continuously evolving customer trends and preferences.
The capabilities, we have built continue to provide us with a defensible strategy in maintaining and growing share with our segment of the lifestyle market does seem to be unique and different.
The first half of 2019 is a great example of this as we saw a category shift in our business globally with footwear and hard goods, leading the comparable sales trends by men's and women's apparel have shown softer results.
This is a meaningful change from one year ago, we saw the apparel category is driving our positive comparable sales overall the goal continues to be selling at full price and full margin by listening to the customer with regard to the categories and brands they want to see assume it's.
This focus has resulted in growth.
Comparable sales and 34 of our 40 years and there's something we believe will continue be advantage into the future.
Secondly.
As we transition into the digital age we've done a tremendous amount of work, creating an operating model that position zumiez to win with today's empowered consumer.
By combining our digital and physical sales channels to work seamlessly in service of the customer with one of them with one inventory that is accessible from all consumer touch points integrated sales teams aligned goals and value sets and localized fulfillment, we are well positioned to scale the business in todays integrated world.
This strategy directly contribute to our 2018 results as we increased operating profit by 25.3% and 5.5, 0.5% growth in revenue for the year.
And Weve continued that trend in 2019, delivering operating profit growth of 153.4% for the first half of 2019 on sales growth of 3.8%.
We're very pleased with how 2019 has unfolded through the first half and back to school.
And feel we are well positioned to capitalize on the upcoming holiday season, and deliver another year of record financial results.
Longer term I believe that by staying true to our customer or culture and brand with an intense focus on our long term strategies. We can continue capturing market share while generating increased value for our shareholders.
With that I'll hand, the call the Kris for his review the financials Chris.
Thanks, Rick and good afternoon, everyone I'm going to start with a review of our second quarter 2019 results. I'll then provide a brief update on August before discussing our third quarter guidance and our updated perspective on the full year second quarter, net sales increased $9.4 million or 4.3% to $228.4 million from $219 million in the second quarter of 2018.
Contributing to this increase were positive comparable sales growth of 3.6% and the net addition of seven stores since the end of last year's second quarter, partially offset by a decrease of $1.2 million due to changes in foreign currency rates.
During the 2019 second quarter, our comparable sales are driven by an increase in transaction volume as well as an increase in dollars per transaction.
The increase in dollars per transaction resulted from higher average unit retail and higher units per transaction.
During the quarter the hard goods category was our largest positive comping category, followed by footwear and accessories.
Men's was our largest negative comping category followed by women's.
From a regional perspective, North American net sales increased $5.9 million or 2.9% $206.9 million.
In other international net sales, which consist of Europe , and Australia increased $3.5 million or 20.2% to $21.5 million, excluding the impact of foreign currency translation North American net sales grew 3% and other internet National net sales grew 25.8% for the quarter.
Second quarter gross profit was $77.2 million, an increase of $4.7 million or 6.4% compared to the second quarter of 2018 gross margin was 33.8% in the quarter, an increase of 70 basis points compared to 33.1% a year ago.
The increase was primarily driven by 40 basis points to leverage our store occupancy costs and 20 basis point decrease in distribution and shipping costs.
As you know expense was $65.5 million in the second quarter compared to $65.8 million a year ago as soon as a percentage of net sales was 28.7% compared to 30% in the prior year.
The decrease was primarily driven by 100 basis points to leverage our store costs, including 30 basis points of depreciation.
And 20 basis point decrease related to the accrual of annual incentive compensation.
Operating income in the second quarter, 2019 increased 74.3% to $11.7 million or 5.1% net sales compared with the prior year second quarter operating income of $6.7 million or 3.1% of net sales.
Net income for the second quarter was up 106.2% to $9 million or 36 cents per share compared to net income of $4.4 million or 17 cents per share for the second quarter of 2018.
Our effective tax rate for the second quarter, 2019 was 30.7% compared to 39.1% in the year ago period.
The decrease was primarily due to a reduction in net losses in certain jurisdictions, which are excluded from our estimated annual effective tax rate due to the uncertainty and the realization of deferred tax assets and the proportion of earnings or loss before income taxes across each of our jurisdictions.
Turning to the balance sheet cash and current marketable securities increased 41.9% to $188.6 million as of August Threerd 2019 up from a $132.9 million as of August four 2018. This increase was primarily driven by $84.9 million in cash flow from operations, partially offset by $20.3 million of capital expenditures, primarily related to new store growth and remodels.
We ended second quarter 2019, with $151.1 million in inventory up 1% from last year, excluding the year over year impact of foreign currency translation inventory grew 1.8% from the prior year.
Now to our August sales results.
Our comparable sales increased 7.1% during the four week period ended August 31, 2019, compared to comparable sales increase of 9.5% for the four week period ended September Onest 2018, the comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction.
Dollars per transaction increased for the four week period due to an increase in units per transaction, partially offset by a decrease in average unit retail.
During the four week period, the hard goods category was our highest positive comping category, followed by footwear accessories and men's.
Women's was our only negative comping category in the month.
Looking at guidance for the third quarter of 2019, once again I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimate sales product margin and earnings growth given the variety of internal and external factors that impact our performance.
Additionally, the following guidance does not contemplate the impact of changes in global tariffs. We are actively working with our vendors to minimize any potential impact on our customers with that in mind. We currently expect a comparable sales will increase between 3% and 5% for the third quarter of 2019 with total sales in the range of $258 million to $263 million consolidate operating margins are expected to be between 7% and 7.7% and we anticipate earnings per share will be between 55 cents and 61 cents compared with last year's earnings of 55 cents.
Now I want to give you a few updated thoughts around 2019, given our performance year to date.
We are now building on 12 consecutive quarters of positive comparable sales as we look to the back half of 2019 and beyond we continue to believe that the investments we've made in our infrastructure, creating a seamless sales experience for our customers our unique approach to merchandising as well as those investments we continue to make in the Zumiez team will drive long term top and bottom line growth.
With that in mind, we are updating our annual expectation of consolidated comparable sales growth to between 2% and 4% compared to our previous guidance for comparable sales growth in the low single digit range for fiscal 2018.
In fiscal 2018, we achieved peak product margins improving from the previous high point in 2017, despite a heavily branded cycle, resulting in the reduction of private label share of 370 basis points in fiscal 2090 to date. We have also experienced mix shift impacting margin. These mix shifts include our category sales trending towards hardgoods in footwear, which have lower product margins and the apparel categories as well as higher topline growth in our international businesses.
Well international product margins continue to grow and have additional opportunity there currently lower than our us operations based upon where those businesses are in their lifecycle.
As a result of these mix shifts in the business. We are revising our annual product margin guidance. We now expect product margin to be down between 10, and 20 basis points from the prior year compared to our previous guidance of roughly flat.
We continue to manage costs across the business with the more mature concepts in North America focused on leveraging at a low single digit comparable sales growth.
Internationally, we are focused on managing costs, well within our current sales and unit growth rates and driving our content is closer to breakeven reducing the impact of the losses on the overall business.
We are currently planning our business, assuming an annual effective tax rate of approximately 27% as compared to our prior year rate of 27.5%.
Diluted earnings per share for the full year are now expected to be between $2.10 and $2.20 up from our previous guidance of $1.84 to $1.94 representing year over year growth between 17% and 23%.
We are planning to open approximately 60, new stores in 2019, including six towards North America, seven stores in Europe , and three stores in Australia.
We expect capital expenditures for the full 2018 fiscal year to be between $90 million and $21 million compared to $21 million in 2018. The majority of the capital spend will be dedicated to new store openings and planned remodels.
We expect that depreciation and amortization, excluding noncash lease expense will be approximately $25 million down slightly from the prior year.
And we are currently projecting our share count for the full year to be approximately 25.5 million shares any share repurchases during the back half of the year, we reduce our share count from this estimate and with that operator, we'd like to open the call up for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchstone telephone. If your question has been answered or you wish from we resell from the queue. Please press the pound key again, that's star then one to ask a question to prevent any background noise and ask that you. Please place your line on mute. Once your question has been stated.
And our first question comes from Sharon Zackfia with William Blair. Your line is now open.
Hi, Good afternoon, sorry for my voice today.
A couple of questions on the.
The guidance for the third quarter I guess I'm curious given the strong start in August how your.
Looking at September and October and why you would expect.
Such a deceleration in the comp trend and then on capital allocation.
A little surprised there wasn't more share repurchase activity. So if you could kind of talk about your thoughts as it relates to the share repurchases.
Sure sure and I'm happy to take those.
Obviously as it relates to our Q3 guidance and in our annual guidance, where we're super happy to to show the growth that we've projected here now with our our annual guide plan to be over 20% and our our Q3 guide of earnings growth well over 10%. So.
Obviously as it relates to the sales cadence, it's pretty interesting position as we think about where we were last year, where we.
We did a nine plus comp in August that was followed by comps that were much much lower and September and October so as we thought about even our guidance last year after coming out with a nine.
We ended up at we guided to four to six and came in at a 4.8 comp for Q3, So clearly what we've seen for the consumer over the last couple years or couple of cycles of back to school is that there tends to be some slowdown after back to school now obviously our goal is not to to feed into that we're still pushing very hard here with right around 50% of the quarter end to continue to drive comp, but we took a little more conservative approach in that guide for Q3 based on the trends Weve seen over the last couple of years.
As it relates to the capital side of the business and what we're thinking from a cash perspective.
No a lot of change from where we've been historically.
Obviously, we're super happy with where the cash balance dance around a $188.5 million.
Pretty good increase up 42% since last year.
That year over year increase is really driven by cash flow from operations offset by Capex. So the business is doing a good job of generating cash and as you know we have a $75 million buyback still outstanding and we continue to review that capital plan with the board.
Our strategies very consistent with what you've heard from us in the past, we're going to first and foremost invest in the business and I think we're doing that through our capex, we're going to find ways to to look outside the business that we can return value to shareholders and.
And lastly, you'll we'll return cash to shareholders and I think if we look back historically, we've executed on all those things you know we've invested in our store base, both domestically and globally. We've invested in our teams we've invested in our integrated approach to retail really bringing those stores and web through one customer experience.
We've gone through acquisitions, we've done both the blue tomato and fast time acquisition and and we bought back over 20% of the company. Since 2012. So as we look at a future I think this is kind of what the winners and retail are going to be able to do though build you. All those things. We continue to review, where we're at with the board and and we'll continue to try to execute on that strategy as we move into the future.
Okay. Thank you.
Thanks Sharon.
Thank you and our next question comes from Janine Stichter with Jefferies. Your line is now open.
Hi, great. Thanks for taking my question.
Just wanted to get any updated thoughts you have on your long term operating margin potential I think in the past you've talked to high single digits and you're going to end up pretty close to that this year, even with some of the headwinds you talked about between hardgoods mix shift that international being lower margin of that just private label still being above historical norms. So give us some thoughts just about how you think about where you potentially push towards is there a chance to get back to double digit margins that you've seen in the past and then as a corollary to that can you talk about how you're thinking about private label. This year, you had a big decline and penetration last year are you assuming that you mix back a little bit into private label is here and your merchandise margin guidance. Thank you.
Sure well I'll jump into the the first question on operating profit and then maybe share a couple of thoughts on private label and let let Rick add anything if if he'd like I think overall from an operating profit perspective, our goal is to drive this to the high single digits.
As we look at this year I think we're kind of getting to the low end of that which where we're excited about.
Our strategy here as we've laid out in the past is really kind of two fold as we look at it.
Canada and the us in North America, there, they're fairly built out from a store network perspective, we're looking at these long term and we can grow sales in the low single digit.
Be very opportunistic in how we think about our investments and really try to push forward in these markets.
And grow earnings ahead of sales internationally as Rick even played out in the call today in his comments, we got a lot of growth ahead of US we are super optimistic with how those businesses performed here in the first half of the year and especially Q2 I think we're getting some good momentum kind of with our global strategy here of a really sort of incubating some process in.
And and ways to serve the customer here in our mature markets in North America, and exporting as our international concepts already and and we feel like that's working.
And I think if we can do that right. We continue to drive profit in the international markets, which will help.
The overall operating profit and we can push to kind of that.
Higher single digit operating profit level at this point to get back to double digits.
I'm not going to say, we're not going to try but we're looking at the model here.
It kind of that high single digit level here in the long term.
As it relates to private label.
So we're going to listen to the customer here and our private label teams I think have done a good job managing that business. Despite the declines we've seen but we're just in a heavy branded cycle and as we know about the business over 40 plus years, the business cycles in and out of a lot of different things, whether it's across categories within categories from brands to private label.
And so on and so forth so.
We're not going to comment on kind of where private labels going for the year I think we need to see that all play out and see how some of our seasonal categories perform in the back half.
But overall, we're going to manage private label to where the consumer wants it I think what we're really happy with is what we pointed out here over the last couple of years is we've got a good good growth in product margin. Despite private label going from just over 20% of the business to about 13.5% of the business as at the end of 2018 so.
We feel good about where that business is positioned and we'll see where the consumer takes over the long term.
Very helpful color. Thank you very much.
Thank you and our next question comes from Jeff Van Sinderen with B. Riley FBR. Your line is now open.
Hi, everyone and let me say congratulations on great work for back to school.
One question then a follow up.
Can you speak a little bit more about how you're thinking about the overall apparel segment of your business. It's trended positive in men's for August seems like we're still on the strong branded cycle for your niche and I guess, how would you expect the apparel category to evolve for holiday. This year once we get through kind of the interim post back to school period.
Well I'll start.
Jeff and then Chris add in his thoughts too.
I can't I want to go back to the strength of our model. Our model is about diversity of categories and with the departments and categories and then of course diversity of brands both trendy brands.
As well as emerging and growth brands.
So I'm going to say, what I always say and I know you guys love to US, which is I just want to run again and I don't care, how we get the game I don't care, what it's a mix of apparel. Our teams are working super hard on all fronts to get gains in all departments. All the time, frankly, and what we have to do is again listen to our customer.
Go where they tell us to go and right now, they're telling us that skate hardgoods and footwear is where they really want to see newness and freshness of what we're doing.
And yes, I'm encouraged by I'll, let Chris comment a little bit on.
On the difference in men's and in August that's great I think our buyers have done a great job around again getting newness into the market in August .
But really Jeff I, just want again, I think a weekly rent gains we can pin dry product margin dollars reduced gross margin dollars and we're really good at controlling the cost side of the business that will drive our even in today's world, where we don't have to run a big gain we can drive a lot of operating margin dollar flow through.
Profit dollar flow through on these gains and that's what I want to get the comps deliver results drive the bottom line I don't care, how we get them. So.
We'll let our customer drive that Chris you want to share a little bit more about the change between Q2 in August in terms of apparel, yeah, absolutely I mean, obviously you know one of the things. We are looking at here is over the last two quarters apparel has trended down and and it's been really the hard goods in footwear, that's driven the business and obviously to see man's turn positive in August was upon it was a good sign for us as well I think.
I wanted to add on to what Rick say and this is just kind of another example of how our model works and we look at obviously sales many different ways one of the ways. We we tend to look at these things is kind of hey, our top 10 trending brands how did they compare in relation to the bottom 10 trending brands and I think what's really unique about August is again. It just speaks to the model is the top 20 brands performed significantly better than the bottom tending 10 direct trendy brands. So that's a really exciting thing and then you couple that with two of the top 10, including the number one.
Weren't even in our ecosystem a year ago, and I think that again speaks to just our buyers.
Ability to generate trends, our entire teams nimbleness to move and get that product in house and out to stores and and our sales teams to sell it so.
I think this is a really good thing as you would imagine a lot of these brands play in the T shirts, and fleece area, which is a big part of our business in back to school and so we saw some good trends there and.
Well, we'll see how that plays out for holiday back to school has been a good indicator of us for holiday. We are obviously up against much stronger two year and three year stacks here as we move into the back half of the year.
But where are you.
We continue to believe we can grow through that so I think it's.
To be determined on holiday, but we're feeling good about where were positioned here with our with our Q3 guidance.
Okay. That's helpful and then.
If we can switch to international for a minute just wondering if you can elaborate a little bit more on the trends and drivers of international I'm wondering if you're seeing.
Footwear and hard goods trends lead there similar to the U.S. and then any thoughts on the outlook for international for holiday.
Yes, I'll start again, let Chris add in Jeff but.
The headline to your question is yes.
And that we are seeing hardgoods and footwear being strong in these in fact strong all around the globe and they basically almost turned on all at the same time in really late January early February and then have accelerated in through the spring months in terms of skate hardgoods. So this is one of those areas for me that we've always seen we've seen this as you know we have the evidence that it's true that emerging brands can quickly become global buys go from local to global and then of course, the localized in every market around the world for us.
We've seen that with trendy brands, where we've seen the kind of fashion retro Ninetys brands go quickly and when they go they go everywhere in the developed world at the same time.
This is the first time, we really seen it with a category driver like skate number we've been running down for four years in our skate Hardgoods business and then literally just turns on everywhere and we're we're not exactly sure. We've asked our teams what was the catalyst we're not exactly sure what the catalyst was but this is why we stayed consistent and authentic.
With the imposition never going away from skate sticking with as a core part of who we are and how our customers express their individuality that consistency is super important our brand partners understand that and.
We're not going to chase it like other retailers might try to do we're going to stay true at authentic will write those four years of top result, and now we probably have a multi year cycle of positive results relative to skate hardgoods. So yes, those are benefiting our international businesses all geographies for that matter.
So, but more broadly I'd just tell you I think I'm really pleased with the progress we're making our teams have made on the international front in particular again want to credit all our teams and the hard work they've had in building a strong alignment or in culture and brand strategy and how we execute Chris comment about how we are been exporting our tools and processes as we develop markets in Europe , we're able to export all of our omni tools.
And have our teams apply and of course that we're finding that customers like love those tools everywhere that we can we can get them into the marketplace. So I would tell you that I think a lot of our improved response is the hard work of our teams dedication of building out and starting to really position ourselves as a as having scale in key markets in Europe .
And of course in Europe , you have to do that on a country by country basis and in particular, I'm really pleased with Germany in Europe at this point because they have some of our strongest comps in what is a very tough economic environment, where we're seeing them near a recession, but yet we're doing incredibly well there and they're kind of been a big driver our business I should say they've been an important driver of our business in Europe . So I'm really encouraged about that.
So I think it's a combination of trend cycles.
Ron brands and categories and then even more so it's a hard work our team have done our ability to export tools and have our teams internationally.
Put our practices and our best best in class practices and processes in place to drive a result.
Well I think I'll add about this before I, let Chris.
His his thoughts if he has any on this is.
You know that long term international expansion is really again, it's about serving customers.
Our customers, who want to express into bridge individuality, we see this consistently across all marketplaces.
It's also about serving our brand partners.
With high quality retail distribution across the global markets.
And and were seeing that again brand cycles trend cycles are very consistent on a global basis.
And while I'm excited about long term as we continue to build out our presence in markets around the world and we have a lot of work yet to do in Europe and Australia.
Is that we are going to be the only platform. We are going to have the only retail platform in our lifestyle nish that can serve our brand partners. Because we know that trend cycles are as passive or Ben I would tell you that I think in the next five or 10 years, they're going to get faster so to take advantage of the opportunities that present themselves we need to be there for our brand partners.
To help them execute globally against a very fast trend cycles. That's the whole idea of international expansion. This whole idea of rolling out our best.
Our best practices and processes are best in class best practices and processes across the international businesses that we have and then driving those things for yield and optimize our business and get good strong results.
So long term I think those are the things I'm most excited about Jeff in terms, how we think about the international business. I think we are a very unique position in the marketplace for for doing this effect I think where the only retailers position our lights on it in our lifestyle needs to serve both customers and brand partners in this way.
Okay I wasn't sure if Chris is going to land there.
Yes, I mean, I think the only thing the only other thing I would touch on Jeff is you asked you asked about holiday and.
To add some more color to what Rick said, I mean, Rick talked about Germany, I would tell you we're super excited about our stores and Austria, and Switzerland, as well or you were excited about where the web trends have gone I think it's all working together.
And we're optimistic we're going to drive a much better result here for 2019.
Then where we were in 2018 and Thats built into our guidance and our annual thoughts here, obviously holiday is always dependent on weather and we do still have a big snow business and while that's diversified over the last couple of years as we've continued to grow.
Into northern Germany, and the Netherlands, and other places, it's still a big part of what we do over there. So that's a big part of Q4 more of their businesses in Q4 than any other part of the year, but obviously the signs are our super positive here and how the classes of stores are performing and the business overall and our ability to leverage here on the elevated comp.
Okay, Thanks and continued success.
Thank you Jeff.
Thank you and our next question comes from Mitch Kummetz with pivotal research. Your line is now open.
Yeah, Thanks for taking my questions.
I was hoping to drill down on Germany, a little bit obviously it wasn't surprised.
Rick for you to say that Germany was a big part of the kind of the the nice comp and you're seeing in Europe , and correct me, if I'm wrong, but.
I, if I recall correctly, what are you guys opened up Germany, you've got was a bit of a struggle some of those stores Didnt go so well and I think that puts some pressure on the profitability of the blue tomato business and help me understand what's changed.
Figure something out I mean is it systems is that leadership is it something else that has sort of sparked a turnaround in Germany and <unk>.
Guessing the stores are still.
In terms of like productivity, that's probably still a kind of lack the rest of the European business I'm, just trying to understand like how much opportunity is there.
As those stores are comping better to kind of get to.
You know sort of a maturity ramp.
Does that make sense. So yes, yes that does Mitch and again I want to make sure I'm clear my comments about Germany, Germany is the leader in terms of our comp, but we're getting good results across our store platform in Europe , So and our web platform just want to be clear about that Germany, just a stronger player within that platform, but we're doing well in Austria as Chris said, we're doing well in Switzerland.
We've been opening a couple of new markets are I think we feel good about how we're performing in those new markets or out of the gate. So.
Germany is just the leader and I think it's a it's a factor of a couple of things and.
We knew from the work we did before we entered the German market. We had done a lot of work we work with some outside parties to help us kind of understand the marketplace and we knew from the beginning that the German market was a tough market to crack that would take three to five years from opening of our stores are really start to have the consumer trust and believe in us in that marketplace. So I think some of it met your simply.
We've been there a while and we've started to build scale in the marketplace, which is important I think for customer recognition of what we're doing and we're gaining customer trust through through the fact that we're delivering a really good experience for our customers and I think Germany is take a little bit more time to accept.
New new retail ideas and what we're seeing is our dedication to that the hard work of our team and I can tell you our engagement in our stores is at the highest level, it's ever been in terms of serving them with customers and and that's a large part because the hard work they have done and the fact, they rolled out art art.
Store training programs here from the U.S. localized.
The markets that we are doing businesses and across Europe . So the engagement of our sales teams in our European stores as I think at an all time peak in terms of their how they are interacting with customers. So it's more a function I would tell you Mitch as we did have more opportunity as you're seeing in Germany, We're reaping the better benefits of that from the work we put in about executing best practices and processes like rolling out our training programs are really seen after three years really start to take hold.
Getting that better engagement, but its also the emerging brands that are flowing across the business trendy brands emerging brands. So those are all things are better because with those comments. This concept of gaining some scale and gaining acceptance in the marketplace, which it takes a bit of time I think in the German market place and I would expect that this is our opportunity as we are starting our load or lower productivity base relative to Austria, and how we performed in Switzerland. So we do have opportunity I think to run some significantly strong results over the next few years as we're able to ramp up productivity and we continue to execute this in our effort to serve our consumers.
Great I appreciate that color and then Chris I think you mentioned in your gross margin discussion that shipping or distribution shipping improved by 20 basis points, if I heard that correctly.
That was the case could you.
That's just a function of.
No just the scale that you are getting through your ecommerce business right I know that when you guys well actually that's maybe that's not right, but I know this move towards sort of trade Harry optimization and shipping out of the stores I think initially there were some issues with like split orders I'm wondering if.
If you've gotten better at that or what's really driving the improvement from a distribution shipping standpoint.
Yes, absolutely and Mitch is there's a there's a variety of things that relate to this obviously the comp levels are helping we're getting a little bit of leverage out of some of the fixed cost structure within our distribution network. There are some things within the four walls of our DC that we're working on.
The head that have helped to provide some leverage.
As we go outside the DC.
We had some initiatives around some of the shipping cost that we have around moving product around our store system.
That has actually taken due to fruition and create some value here in the first six months in the second quarter, specifically and then on the BDC shipping perspective, you're absolutely right. This was something as we as we moved out to all stores.
We've seen challenges.
We split orders we saw challenges.
Upfront.
With how we allocated product around the country and shipping times to customers. That's something we continue to work on is how do we operate optimized product within a trade area. How do we optimize those shipping algorithm, so where we do see increases in splits at times were able to offset that through other types of shipping and overall, it's come together to show some value really.
Across all of those things. So I mean, we're super happy to be leveraging distribution shipping cost, it's an incredibly hard area to to leverage from our rate perspective, whether you're working with.
Obviously, the carriers and or the the minimum wage impact specifically with our distribution center located in California, but like a lot of things Izumi as we've tried to be really creative and where we can.
Worked to optimize or take costs out of the business and I think we've been pretty effective at it through the first six months and the only thing I'd add to Chris' comments Mitch as this we continue to work hard on the concept of what trader means for us how we define it what the role of the stores are within a trade area.
And the roles of key people, even within the trade areas for serving customers. We have we're now moving beyond the discussion of definitions and things like that how do we execute against this.
A higher level, we have new measures around how much of product is available every day to meet consumer demand total consumer demand in a trade area and our buyers are as you would guess with our competitive teams are responding really well to that and we're getting better at it and so all these factors get into play that.
That will have a multiple benefits of being again fast to the consumer showing to consumers, having more what consumers want in every trade area and.
And then of course that more of it means were faster getting it shipped and delivered to them et cetera, et cetera, et cetera, and we gain share as we do that from delivering to the customers higher expectation. So this is one of those areas for me said is about us making progress in the execution of the concept of trade or how we see it playing out how we understand the role of stores understand the role of key managers within that and how our teams work to serve customers.
Cross functionally in the organization reduce split it reduce splits right more more more of the product always available every single day to meet demand. This is a continuous effort to improve every single day that Chris mentioned and this is something working really hard on to improve a lot more and I think we have great potential to do it.
Great all right. Thanks, guys. Good luck.
Thanks Mitch.
Thank you and our next question comes from Jonathan Komp with Baird. Your line is now open.
Yes, hi, Thank you I want to I want to ask about some of the emerging brand trends that you called out and especially water in particular, perhaps scaled back quicker than we've ever seen over the last few months and then I just want to ask more specifically and maybe what's changed or what's different.
Thats, allowing you to scale new trends so quickly.
And then also.
In the past you've talked about hot hot individual brands, maybe reaching.
Mid to high single digit type sales penetration when they're really hot and I just want to.
Ask if thats the type of opportunity you see for some of the more recent brands that you've scaled.
I mean, I would tell you John that I don't think we're seeing anything new here and our ability, it's our ability to react to customers, where we constantly are buyers of a whole program for rolling out new brands for how many stores are wrong too. There is no one answer to be clear, it's based on each brand.
We continue to run a lot of new brands and I believe we're on track for our goals. This year rolling out new brands. So it is then up to the customer adoption. It is up to the job of our brand partners execute on their end.
Then what their marketing and brand positioning in the market.
And I would tell you that we still have a ton of room for improvement in our ability to respond to customer demand here and that we we need to get way better yet at being able to respond to customer demand in that we actually have too many gaps yet and how quickly we're able to respond and our teams are looking at how can we improve that to both serve our customers better but to serve our brand partners better too.
Because the last thing any just want to do is have to buy it kind of product and see it in stores all at once and then see it go to adopting we'd rather have a flow consistently through those products through our system.
Always with maybe just on the edge of running out of product rather than having too much product. So I would tell you that we have a lot of work to do here yet in working with our brand partners rethinking the ecosystem for our consumer nish.
And reworking.
Who does what on behalf of those consumers so.
I don't think anything different or unique about what we're doing here, we're doing what we always try to do with the skandi edge stay listening to our consumer base react quickly.
And as Chris said, a lot of this product that really drove particularly augusten man's risk greeneville product. So we could react very quickly to the marketplace and and I would tell you, we just need to get even better than where we're at in terms or our ability to react to the marketplace. So.
Key messages I don't think there's anything different Jonathan in what we're doing our job is to be the absolute best partner for young brands that debt.
Anyone of any retail partner they can do out there to scale at their pace, we don't determine how fast we want Francisco, we work with brand partners and they decide how fast they want to go in our world.
And.
Where our job then is to help deliver for them and help them execute in areas that they don't have expertise and then of course, we work together to meet all this.
Our mutual customers demand for the product so I don't think anything new per se.
We're getting better at it but I'll again as the good news is from my perspective, we have a lot of room to get even better at executing for the speed that the consumer world moves today.
And I guess as a follow up maybe maybe your model hasn't changed per se, but would you say the current attitude of the consumer and the speed of the trends you're seeing as well as the openness to try new brands do you think your model and the advantages it provides our more.
More advantageous given the current consumer environment going forward relative to maybe what you've seen in the past.
I think our model is built to do exactly this and our customers now know us as a place to come to find what's next.
And if thats, even if that's the trend cycles relative to trend brands like retro nineties my expectation for our product team as we have those transactions at the very front of the cycle not trailing others, but right there at the front of the cycle and so our job is to be there to lead in those areas I think we're pretty good at doing it.
I think our big challenge Jonathan is going to be over the next five years and 10 years and we look forward is that I really believe that trend cycles are going to speed up even more.
And so if you have brands of pick off where they have global demand again, I think we all have to sit down and think about how we work together to meet that global demand when trend cycles are going to be even faster.
So those are the kinds of things that we're working on here and actually trying some new things about how we might execute against that and as we trust test and try those things in the U.S., we'll be able to export them as weak as Chris and I, both talked about here to our door international platforms, creating one really big fast retail platform to meet the demands of what we think are going to be faster and higher expectations for our customers. Our cops can have in the future. So.
Always look for continuous improvement in this area.
But yes, I think this is right up our alley and I think as.
Brand cycles get even faster.
We're going to see maybe the only retailer that can respond in our lifestyle needs to the demands of the consumer for global for global trending product.
We were just comments on the product margin for the third and fourth quarter wait what you're seeing there.
Yes.
Let me start with product margin is that kind of leads into the overall.
Operating margin and growth.
Just a couple of things here.
From a product margin perspective, we called out in my comments on the script some of the challenges the models, having right now in relation to product margin and that specifically being.
That's the most the highest training items of hard goods in footwear I have a lower product margin than the apparel categories that were trending a year ago. So we have some mix issues. There and then also the international entities.
Topline is growing at a faster pace in the domestic entity. So that international entities also have a lower overall product margin based on where they are in their lifecycle. So you take those two items together, we are seeing some drag on product margin, we guided the year to down 10 to 20.
That would be an acceleration.
To get there we have an acceleration in the back half from where we've been in the first and second quarter. So the Q3 guidance. For example has product margin down around 30 basis points at the top end. So really all mix related in fact, we feel pretty good about the margin rate both within our international entities as well as how it's trending.
We've seen margin increases in some of our best performing categories and we've seen margin increase in our international entities. It's just a matter of how the mix plays together.
Thats, creating some some challenge there in relation to the overall operating margins and how the growth is I mean, obviously, we've had pretty phenomenal growth here in the front half of the year. We've had great top line as well we are not planning our top line to be as strong in the back half, but again based on kind of that two and three year stack comp. We also saw some things like SGN a was actually down slightly as you probably noted in Q2, it's not how were planning in Q3 and Q4 up we had a couple of things.
In the quarter that were helpful. As well as we've had some initiatives that are really have some cost savings associated with them we'll have some.
Smaller dollars not significant to call out, but they are going to move from the front half to the back half. So I think with all of that we're playing in the back half a little bit.
More conservatively and obviously our goal is always to to meet or beat that high end and we're going to give our best shot to do that here as we roll through the back half.
Okay. It makes sense best of luck. Thank you.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from John Morris with D.A. Davidson. Your line is now open.
Thanks, and congratulations everybody on the great results, there and start to back to school.
I guess, Chris picking up on that last one.
Where you were talking about some of the shifts going on in the benefits that you saw.
Can you just.
There's probably nothing significant but any of the bigger pieces just enumerate those for US just to pick up on what you were talking about there.
Question.
Yes, I think the bigger items are just the timing of incentive.
And how thats played out year over year and through the second quarter of last year, we were really accelerating on our on our growth and therefore, increasing our incentive accruals through the second quarter. This year were generally more on track around the target levels, maybe slightly above target levels. So we have some benefits there. There's some marketing dollars that have moved out and a few other from a store cost perspective that have moved out. So for example, we still have some stores to open this year, which will add to our asked unit growth in Q3 and Q4.
So those types of things are what we are seeing a move out that we didnt experience is heavy in Q2 and the front half of the year and and therefore, we're playing a little little softer obviously still happy to be growing earnings.
Double digits here in Q3, and and over 20% earnings growth here for the full year is where we forecast at the high end.
Got it and then.
It could be the one to ask that China Kara for trade tariff question China.
And whatnot, but since we talked last throes since then.
Last quarter have you seen anything really different what are the kinds of initiatives you're working on with respect to diversifying its within your control buys.
Hi, I'm kind of a sub question here, which is also.
I haven't thought about it before about heart or hard goods more more any any different in terms of sourcing.
Geographically, so maybe just give us the update on that and then talk hard goods.
Sure so from an overall tariff perspective.
You know our update as of Q1 as we had indicated you guys. We get a few categories that were already subject to the higher level of 25% tariff.
Those per primarily were around the accessory categories.
To date, just kind of managing that since those went into effect, we have not felt any meaningful impact on tariffs as we've been out of work with the brands to mitigate it in and work with our overall sourcing strategy, obviously, starting September onest of this month.
There are many new tranches of apparel and footwear that went into effect to that 15% tariff.
Apparel and footwear, our large percentage of our business as you're aware, but we've been working with our brands to really actively mitigate this this is a little little more unique scenario for us because we do have such a high brand.
Position within our portfolio of sales.
But we're currently seeing through the second quarter about 41% to 42% of our product come from China. This is down from 45% in the first quarter and down from about 60%.
For all of 2017, so about 18 months ago. So.
You can see that our brands and and I with our own private label, we've started to position ourselves.
Differently I think the other piece that I caution with these numbers is we don't have the exposure from China.
There may be others do because so much of our product is.
Screen print so a lot of what's coming out of China is the blanks in things like.
That are the raw the raw good where a lot of value is still being added here in the states, which obviously diminishes the impact of the imported value in the tariff. So like all retailers. We are working to decreases in our exposure through responsive planning with our vendor partners and our manufacturers and overall our goal is really to maintain share with the customer right. While also delivering the value that we tried to lay out for this year.
This means we continue to work with the vendors.
In light of where the FX rates have gone and different opportunities from a process perspective. They have this includes moving production.
Includes finding other potential offsets cost savings within our supply chain process and on the last case scenario raising prices, which we may add to look at for some of our smaller brands that have less scale and scope to be able to move production, but to this point, we haven't seen it.
And it's still kind of an issue we're monitoring and we'll see where that goes and the last question you had around hard goods I think it really depends on the type of hardgoods much of the skate hardgoods is actually not impacted here.
Some of the snow boards and things like that do have.
More of the international component, but.
Overall, we feel like the hardgoods is a is a safer spot to be in regards to whats trending on the ski side of the business.
Great. Good luck for the rest of fall. Thank you.
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, Chief Executive Officer for any closing remarks.
Thank you Daniel and again I just want to thank everyone as always for the interest in Zumiez and what we're doing I think.
We view, our our path through the rest of your rest of the year out as we've laid out with our guidance relatively conservatively, but yes optimism about our deliver ability deliver really another strong record year of earnings. So we'll look forward to getting back with you in early December and talking about our third quarter results and then hopefully looking towards a great holiday season. Thank you everybody. We appreciate your interest.
Ladies and gentlemen, thank you for participating in today's conference. This concludes todays program you may all disconnect everyone have a wonderful day.