Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. Fourth Quarter Fiscal 2020 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 Zoomies, Inc., business outlook, and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risk 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 Zumi's filings with the SEC. At this time, I'll turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Hello, and thank you everyone for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the fourth quarter. Then I'll share some thoughts on the past year and what it means for Zoomies going forward. Before handing the call to Chris, who will take you through the financials and some thoughts on the coming year. After that, we'll open up the call to your questions. We're very pleased with our overall holiday performance, given the challenging operating environment. For the fourth quarter, we delivered a total sales increase of 0.8% and comparable sales growth of 4.7%. The significant efforts of our teams helped to offset meaningful governmental temporary store closures in Canada and Europe, as well as reduced operating hours and store capacity restrictions across much of our business. Our fourth quarter was no different to how we performed throughout the rest of the year. delivering results despite the headwinds we face and driving full price selling while efficiently operating with a lean cost structure to deliver record diluted earnings per share of $1.68 for the quarter. Our results demonstrate once again the power of our brand and culture that have propelled us throughout this unusual year. For 2020, we delivered comparable sales growth of 13.6% And despite total sales being down 4.2% for the year, we achieved record diluted earnings per share of $3 for the year, as we leveraged the tremendous work of our teams and the strong foundation we've built over the past 40-plus years. On our Q4 earnings call a year ago, I talked about how Zumi's then-recent results were directly attributable to the execution of the long-term consumer-centric growth strategy that the company had been building and evolving since our inception. I highlighted how this strategy requires significant agility in navigating the trend cycles and speed desired by our customer. I closed with comments about my confidence in our organization's ability to adapt to industry change over the next decade and how the company was well positioned to continue winning with the consumer over the next five and ten years as buying behaviors further evolve. That call took place a day before the U.S. President declared a state of emergency in response to the COVID-19 outbreak. While the number of daily new cases were escalating quickly, I don't think anyone anticipated the full impact the pandemic would have globally over the next 12 months. With respect to the retail industry, what we expected to happen over several years in terms of consolidations of winners and losers in retail has significantly accelerated. Our ability to respond to these dramatic changes that quickly unfolded and successfully navigate back to school and holiday seasons that were unlike anything we've ever experienced, demonstrate the competitive advantages of our model and underscore the strength of our people and culture. Thanks to these cornerstones of our foundation, we enter fiscal 2021 with confidence in our ability to continue to gain share and drive results. Key to our success has been and will continue to be our dynamic teams, our one-channel mentality, and our advanced in-store fulfillment capabilities, including Zoomy's delivery, which we expanded in the fourth quarter to take our best in-class sales team directly to our customers' door. While elements of our model have and will continue to evolve in the years ahead, our overarching consumer-centric strategy, rooted in strong brand and culture, will remain constant. We built a business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate. We built an infrastructure in which the customer can shop with us to get what they want, when they want, how they want, as fast as they want. We've morphed our business into a channel-less organization with inventory visibility from all touch points and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which the sale originates. The work to get here has been significant, but the path ahead will require further focus to move even faster to serve our customer. While much remains uncertain in the macro environment as you balance the ongoing pandemic with the rollout of vaccinations across the globe, we remain steadfast in our commitment to continuing to invest in our future. We know that times such as these create opportunities. With the right people, strategies, and resources in place, we are well positioned to emerge from this crisis a stronger brand than ever before. Before I close, I would like to thank all of our teams and our brand partners for their dedication and commitment to Zoomies over the last year. I'm immensely proud of our achievements to date and even more confident and our ability to drive future success. With that, I'll turn the call over to Chris to discuss the financials.

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our fourth quarter and full year 2020 results. I'll then provide an update on our first quarter to date sales trends before providing some perspective on how we're thinking about the full year. Fourth quarter net sales were $331.5 million, up 0.8% from $328.8 million in the fourth quarter of 2019. The increase in sales was driven by a 4.7% increase in comparable sales and the net addition of three new stores during the year, partially offset by temporary store closures due to the pandemic during the quarter. Breaking down the comparable sales further, we saw meaningful digital strength, with comparable web sales growing 31.8% for the quarter, while comparable sales for physical stores were down 3.1% year over year. Our stores were open for approximately 94% of the potential operating days during the fourth quarter of 2020. From a regional perspective, North American net sales increased $4.3 million, or 1.5%, to $285.2 million. Other international net sales, which consist of Europe and Australia, decreased $1.6 million, or 3.2%, to $46.3 million. Excluding the impact of foreign currency translation, North American net sales increased 1.4%, and other international net sales decreased 11.3% for the quarter. Both our European and Canadian operations had impactful temporary COVID-related store closures in the fourth quarter, and were only open for approximately 53% and 73% of the available operating days, respectively. During the quarter, the hard goods category was our largest positive comping category, followed by accessories and men's. Footwear was our largest negative comping category, followed by women's. Fourth quarter gross profit was $129.7 million, compared to $128.3 million in the fourth quarter last year, and gross margin was 39.1% compared to 39% a year ago. The 10 basis point increase in gross margin was primarily driven by an 80 basis point improvement in inventory shrinkage and obsolescence, 40 basis points of leverage and occupancy costs, and 20 basis points improvement in product margin. These improvements were partially offset by an 80 basis point increase in web shipping costs due to increased web activity associated with the pandemic, a 30 basis point increase in distribution and fulfillment costs, and 30 basis point negative impact related to the Stash Loyalty Program deferred revenue adjustment made in the prior year. SG&A expense was $75.9 million, or 22.9% of net sales in the fourth quarter, compared to $79.5 million, or 24.1% of net sales a year ago. The 120 basis point decrease in SG&A expense as a percent of net sales was primarily driven by 50 basis points of leverage in our store wages, 50 basis point decrease in national training and recognition events, 40 basis point decrease in corporate costs primarily related to governmental payroll credits and decreases in professional fees and other administrative expenses. These improvements were partially offset by a 30 basis point increase in web-related expenses such as advertising costs due to increased web activity. Operating income in the fourth quarter of 2020 was $53.8 million or 16.2% of net sales. compared with operating income in the prior year of $48.9 million, or 14.9% of net sales. During the quarter, we recognized flow-through on incremental sales of almost 180%, based on the factors outlined above and our ability to adjust quickly in this challenging time. Net income for the fourth quarter was $42.8 million, or $1.68 per share, compared to net income of $37.9 million, or $1.48 per share, for the fourth quarter of 2019. Our effective tax rate for the fourth quarter of 2020 was 23.7%, compared with 24.8% in the year-ago period. Looking at our full-year results, from a sales and earnings perspective, 2020 was incredibly volatile quarter-to-quarter and across months within each quarter. For the year, sales declined 4.2%, or $43.5 million, while diluted earnings per share increased 14.6% to $3.00. Our bottom-line performance benefited from both our optimization efforts within the model as well as from the one-time adjustments we have made in response to the pandemic around managing our payroll costs, reducing events, travel, and training, managing marketing efforts, working with our landlords, receiving governmental subsidies tied to continue to pay our people, and reducing projects and other expenses as feasible, giving the uncertain nature of the environment. In 2021, we expect quarter-to-quarter volatility to continue as we transition back towards a more normalized sales and expense environment, which we will discuss shortly. Turning to the balance sheet, the business ended the year in a very strong financial position. Cash and current marketable securities increased 49.5% to $375.5 million as of January 30, 2021, compared to $251.2 million as of February 1, 2020. The increase in cash and current marketable securities was driven by cash generated through operations, including the deferment of $30.1 million in payments composed of lower inventory levels, extended vendor terms, landlord obligations, and deferred payroll tax payments, as well as net income improvements related to abatements, credits, and expense reductions. We expect that this will be a reduction to our positive cash flow in 2021. The increase was partially offset by $13.4 million of share repurchases through the company's stock buyback program prior to our stores closing in March 2020 due to COVID-19 and other planned capital expenditures. As of January 30, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the year with $134.4 million in inventory, compared with $135.1 million last year, a decrease of $0.8 million or 0.5%. On a constant currency, our inventory levels were down 3%. Overall, the inventory on hand is healthy and selling at a favorable margin entering 2021. Now to our fiscal first quarter to date sales results. Total first quarter day sales through March 6th decreased 3.8%, compared with the same time period in the prior year ended March 7th, 2020. Our stores were open for roughly 93% of the potential operating days during this timeframe, compared with no closures last year, due primarily to ongoing governmental mandated store closures, both domestically and internationally, as well as significantly lower levels of foot traffic, metering, and reduced hours. Total comparable sales for the quarter-day period into March 6th decreased 0.4%. By channel, our quarter-day comparable sales decreased 6.9%, and our e-commerce sales increased 29.5%. From a regional perspective, our North America business has experienced a 6.1% decline in total sales in the first quarter through Saturday, March 6th, while our other international business has seen an increase of 11.4%. There are several factors that have impacted the North America business, including the delay of U.S. tax returns, store closures for the winter storms in the south, as well as short-term store closures in Canada. The quarter-to-date comparable sales decrease was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in average unit retail, as well as an increase in units per transaction. Quarter to date, the hard goods category was our largest positive comping category, followed by accessories. Boatwear was our largest negative comping category, followed by women's and men's. Due to limited visibility in the business, we will not be providing guidance for the first quarter of 2021 or the fiscal year. That said, we do want to give you a few directional thoughts on how we are currently expecting the full year to play out. Starting with revenue. For the full year of fiscal 2021, we anticipate that we will recapture lost sales from 2020 and drive total sales ahead of the levels that we experienced in 2019, absent a deterioration in the macroeconomic environment. On a quarterly basis, year-over-year comparisons between fiscal 2020 and fiscal 2021 will be challenged due to the seasonality shift caused by the pandemic. Throughout the year, we'll be comparing our results not only to 2020, but also to 2019, anticipating a return to more normalized seasonality, making the 2019 comparability more appropriate in some circumstances. Examining the high-level impacts by quarter from 2021 to 2020 and 2019, we note the following. In the first quarter of 2021, we've gotten off to a slow start. but there are significant contributing factors and offsets that lead us to believe there will be a positive correction within the quarter. Specifically, the delay of tax returns, significant closures due to snowstorms across the South, COVID-related store closures persisting early in the quarter, and the 2021 domestic stimulus package signed today. If stores open as scheduled without meaningful further closures due to COVID or otherwise, We believe our results in the first quarter will be ahead of our results for the same quarter in 2019 and that our results will be meaningfully ahead of our results for the same quarter in 2020 when our stores were only open for approximately 50% of the days available during the quarter. In the second quarter of 2020, as restrictions began to lift, our stores were open for approximately 73% of the potential operating days during the quarter. In addition, we experienced a surge in demand recapturing some of the lost sales from the first quarter of 2020 and producing a record second quarter 2020 for the company in both total sales and earnings. We believe as seasonality normalizes in 2021, that sales in the second quarter will be down from fiscal 2020 in total despite a more normalized operating environment, but will grow modestly from the second quarter of fiscal 2019. As we look to the back half of the year, we grew sales year over year in both the third quarter and fourth quarter of fiscal 2020 compared with fiscal 2019, despite the continued challenges of the pandemic in both the back to school and holiday seasons. Our current projection would show total sales growth in the third and fourth quarter of fiscal 2021 compared with fiscal 2020. Moving to gross margin, Fiscal 2020 gross margin was down modestly, finishing 10 basis points below the 2019 levels. The primary cause was increase in shipping and fulfillment costs related to the increase in web revenue penetration driven by store closures and the deleverage of store occupancy costs. These costs were mostly offset by improvements in inventory shrinkage and product margin. As we look to 2021, we are currently planning year-over-year growth in gross margin and driven by a reduction in shipping costs as web revenue normalizes with stores being open and leverage of our occupancy costs on increased sales. Product margin improved by 70 basis points in 2020 versus 2019 and grew for the fifth year in a row. We are planning product margin in 2021 to be flat to down slightly year over year. Fiscal 2021 SG&A costs are expected to increase in excess of the sales growth for 2020 for several reasons related to the pandemic. The drivers of this include store wages and benefits reductions in 2020 due to store closures and reduced mall hours that are not anticipated to repeat in 2021. Governmental subsidies received in 2020 not anticipated to repeat in fiscal 2021. an increase in costs related to training and recognition events that were significantly reduced in 2020 due to the pandemic, an increase in marketing events and spending that were not possible with restrictions in 2020, and an increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results. In summary, we expect to see expansion in gross margin while SG&A expenses grow ahead of sales for the reasons just outlined. On a net basis, however, we anticipate operating margins will be down slightly in fiscal 2021 as the percent of sales compared to fiscal 2020, while we expect operating margin dollars will grow year over year. We are currently planning our business assuming an annual effective tax rate of approximately 26.7% in fiscal 2021 compared with 25.6% in 2020. We are planning earnings per share to increase in fiscal 2021 compared to fiscal 2020 with a significant variability quarter to quarter in comparison to 2020 and more normalized in comparison to 2019. We are planning to open 22 new stores in fiscal 2021, including approximately five stores in North America, 12 stores in Europe, and five stores in Australia. We are planning to close approximately five to six stores during the year. Capital expenditures are planned to be between $20 million and $22 million in fiscal 2021, compared to $9.1 million in fiscal 2020. The majority of the capital spending will be dedicated to new store openings and planned remodels. We expect that depreciation and amortization, including non-cash lease expense, will be approximately $23 million in fiscal 2021, compared with $23.5 million in fiscal 2020. We are currently projecting our share count for the full year to be approximately 25.5 million shares. Any share repurchases during the year will reduce our share count from this estimate. And with that, operator, we'd like to open the call up for your questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To answer your question, press the count key. Please stand by. We compile the Q&A roster. Our first question comes from Janine Spichter with Jefferies. You may proceed with your question.

Hi. Good afternoon. Thanks for taking my question. I wanted to ask a little bit more about the quarter-to-date trend. Maybe you could help us just parse out what you've seen over the last week or so as we start to see some of those tax refunds flow through. And then also curious what you're seeing in Australia. We're hearing really positive things about the trends there. I'm curious if you're seeing that in your business as well and maybe how you think about that. the proxy for what the U.S. hopefully looks like when we start to reopen. Thank you.

Yeah, thanks, Janine. You know, so as we talk about the first quarter, I guess, you know, we gave results kind of here through the first five weeks, and You know, I think generally they were below where we thought they would be coming into the year, but I think there's some good reasons for that. So just to reiterate what we said on the call, overall we were down 3.8% in total sales, while comparable sales were down about 0.4%. So, you know, on a weekly cadence as we moved through, this did get tougher as we moved through February and then turned much better last week and now even into this week. So, you know, as we think about that and we try to dissect what we've seen here through the first five weeks, again, you know, closures had challenged us. We talked about, you know, being closed about 7% of the time. But I think there's some other factors that were pretty significant as well, including a delay in U.S. tax returns that, from our understanding, were starting to get distributed more towards the end of February versus maybe as late as late January of the year before. Domestically, we called out some store closures related to some of the winter storms, specifically in the south, and we have had ongoing closures in Canada and Europe. Canada was closed about 28% of the operating days through the first five weeks, and Europe was closed about 70% of the operating days through the first five weeks. Our expectations as we move here through the rest of the quarter is that the tax refunds will get caught up, and we may already be seeing that in our results. Canada is substantially open. We are optimistic, hopefully, as we move through the quarter, we'll see more of Europe open up. And the stimulus bill signed today, you know, we expect to have a positive boost for our business. If we look back at 2020, we definitely saw a meaningful boost in the summer with the first stimulus and then in January of this year as well. So I think that's kind of how we're thinking about Q1. Obviously not quite where we'd like it to be to date, but I think there's good opportunity ahead of us. As it relates to Australia, I mean, they've done a great job of managing through this pandemic, really shutting down their borders and being very stringent about how they have operated. They, like all of us, closed in March last year and were closed substantially through the end of April. But they also closed from the end of July until almost October. So they really did have much higher level of lockdowns and seem to have actually been driven a pretty great result. So we're really happy with how Australia's performed. I'll tell you 2020 was a great year for them down there both on the top line and bottom line. I think our teams have really performed quite well while growing the business. This is an area where we still have a lot of growth ahead of us and we're excited about how the business is coming to form down there. I think that's it.

Great. Thanks for all the color.

Thank you. Our next question comes from Sharon with William Winter. You may proceed with your question.

Hi. Good afternoon. I guess a few questions. I don't think you guys mentioned Zumi's delivery during the prepared comments. I'm just curious kind of how that ended up unfolding and you know, any learnings as we go throughout 2021 or maybe even potentially for your international markets. And then also, I'm just curious whether you're seeing any issues with delayed inventory.

Okay, great, Sharon. I'm going to start off with just getting a bit of context for how we think about Zoomies delivery. And I know you're well aware of this, but again, I just want to make sure for everyone we get this context out there in terms of what we're really trying to do around ideas like Zoomies delivery and This is really about, for me, this sense of how we're trying to innovate for our customers. So I'm going to make a few comments. I'm going to ask Chris to follow up specifically on your question around Zoomies delivery. So I like to just make sure everyone thinks about what we're doing with Zoomies delivery or localized fulfillment. It's all about innovating and leading the way in special retail about redefining how we serve customers. And not only how we serve customers, but how we can optimize our cost structure around serving those customers. We've talked about the most obvious examples of being localized fulfillment, which we've been doing for a long time now. And, of course, our ability to rapidly expand our pilot of Zimney's delivery, which we've been playing with for about 18 months. And then in early, late October, early November, we've expanded to 26 trade areas across the United States, which is about half the trade areas that we believe we'll operate in in the United States. And really taking, again, that unique experience right to the door of our customers. And It also, of course, was really important because we knew we were going to be under a lot of pressure relative to our third-party shipping capacity restraints that were in place throughout the holiday season. So I just want everyone to think about these as examples of how we've led on innovating to serve our customer and why simultaneously working to optimize the business model around this one-channel business concept. And then next, I just want everyone to understand that our roadmap for the future innovation is really, really strong. We have built out a lot of initiatives to continue to serve our customers better over the next three to five years that are already in process and in testing in many areas, and we're building a number of these new innovations. I'm not going to share with you the specific initiatives or plans. I do want to just remind you of the consumer themes that drive our thinking. The first is the importance of speed, and you heard that a number of times in our script. Our consumer, in fact, I think not just our consumer, all consumers, expectations for getting what they want, when they want, how they want, as fast as they want, has never been higher, and we believe those expectations for speed are going to increase even more over the next five years. Another assumption we believe to be true is that the speed of trend cycles and brand cycles, already the fastest ever, are also going to continue to increase. The second key theme for us around why we need to innovate is around our Gen Z consumer. We know in particular that this consumer prefers to shop in stores. All of our internal research we do with our customer, the external research we read indicates that the Gen Z consumer overwhelmingly prefers to shop in stores And we're going to strive through our initiative to increase our ability to create even more human-to-human connections, whether they be digital or physical, right? We don't really care from that point of view. We just want to connect our customer with our people and make our local stores the center of that experience. And the last of the three themes for me that are kind of governing how we're thinking about innovating for our customer is the concept of local and global. A Gen Z consumer is simultaneously a local and a global consumer. They want to be active in their local communities while being part of the same global communities. This concept applies in how our customer pursues their personal areas of passion and in their expectations that will be the source of bringing cool new brands from anywhere in the world to their local store. So again, Sharon and everyone, these are just the themes I think as you think about what we're trying to do for innovation, these are themes that are guiding us. And we're going to execute the current initiatives we have in place, of course, in alignment with our brand and culture, to meet the consumer expectations, to serve our customers even better, to gain market share, and, of course, to optimize our business results. So Zumi's delivery, just in context, is just one of those examples of how I believe special retail needs to be reinvented to meet these rising consumer expectations. Now, I'll ask Chris to share some more of the details about the delivery, our Zoomies delivery efforts.

Sure. I'll just kind of jump into some of the data. You know, Rick mentioned we are operating in 26 trade areas, but this is something we started out two years ago in one trade area, really just to test and understand it. And obviously, with the shipping landscape that we had this year, we thought it was definitely prudent to roll out. So, We did that. We did that right at the end of the third quarter, beginning of the fourth quarter. And, you know, the 26 trade areas account for about 5% to 10% of our daily deliveries. This encompasses about 150 stores, just to put some perspective around it. During the quarter, we were able to deliver almost 55,000 packages, which is just awesome to be able to bring that brand experience to our customers' door. From a cost perspective, you know, it was comparable to that of our outside carriers. We definitely have some optimization down the road. I think one of your questions was just kind of what the key learnings are. And, you know, I phrase this up to, you know, a lot of you that have followed us for some time. You know, five years ago, we closed our fulfillment center and moved to localized fulfillment, shipping 100% from stores. I think, you know, this is no different. There are lots of things we're going to learn and we're going to optimize in the year ahead. I think With 26 trade areas, we've got some seasonality considerations we're going to work through, and we're going to look at how we roll it out to additional trade areas. So I would say we're overall very happy with the preliminary feedback from our customers and the work of our teams to put in and start to try to get something done that's pretty challenging to accomplish. The second piece of your question around international trade, You know, this gets back to what Rick said of sort of innovating here and exporting. And like we've done with a lot of our pieces here, whether it's, you know, ship from store or, you know, reserve online, pay in store, reserve online, pick up in store, all of these tools are opportunities for us to move globally as well. And so we do that. We connect our teams. And as we have scale in certain markets, we start to roll out some of these tools. So, Overall, I think there is more opportunity for us. Delivery is just a domestic tool at this point, but as we gain scale, these will be things we look at as we operate around the globe. And then your second question, just around inventory and inventory levels. As you can tell, we ended the year in a pretty good spot for inventory. We're really happy of how our teams have managed through a very challenging time with inventory in 2020. Our inventory went down slightly. As you know, it's been down much more meaningfully across the quarters. So we did have some catch-up in the fourth quarter. We were able to get back in stock in many of the areas that had been tougher over the year. We certainly have some areas of the business that are still more challenged from a supply chain perspective, and we're still chasing a little bit. You know, typically more of the labor-intense areas, so the areas like screenables, we've been able to get up to speed quicker. Hard goods and footwear were some that lagged, and I would say even still in footwear, we're still kind of chasing and trying to get where we want to be from an inventory perspective. So overall, though, as I mentioned in my prepared remarks, inventory ended the year super clean and was selling at a good margin heading into the year.

Thank you.

Thank you. Our next question comes from Jeff Van Sinderen with B. Riley. You may proceed with your question.

Thanks. I'm just wondering if you can speak a little bit more about the European business, including the digital component, and I guess what your overall outlook is for the European segment for FY21. Sure.

Yeah, I'll go ahead and take that, and I'll let Rick chime in if there's anything I missed. And Jeff, just to For everybody's benefit, I'll just give a little bit of the background on the Europe business to get the gist of your question. You know, Europe coming into Q4 of 2020 was one of our strongest areas operating. We called out both Europe and Australia as being really, really strong through the first nine months. Specifically, I think Europe performed pretty well through the first nine months because 50% of its sales were online heading into the pandemic. So as we closed stores, we still saw good growth in markets, both where we had stores as well as where we would digitally. Additionally, I think the teams throughout the year, based on the way we've been executing over the years, have been taking share. And they've executed at a really high level. Overall, we expect this to propel us long into the future here. Now, as we think about 2020, Q4 was extremely challenging. Our stores were closed early. 47% of the days across the quarter, including over the important holiday season. You know, beyond closures, we dealt with reduced hours and governmental stay-at-home orders and restricted or limited tourism. You know, a lot of resorts closed. And as you know, these are pretty important things to our business. And so Q4 was very challenged, where it's historically been our strongest quarter from a financial perspective. And so after being basically on budget through nine months, we did have our largest loss in a number of years. And now what does this mean to long term? Well, as we look forward, as I kind of started the answer here, we do really expect, we believe in the long term for Europe. I think to grow Europe to what it's taken today is a meaningful investment. I think we believe that investments put us in place, in a place to really capitalize on that market. We believe we're you know, the largest lifestyle retailer in our niche in Europe. And we think there's a lot of benefits to being a global retailer, both in how you serve brands and how you identify brands and all in service of the customer. So, you know, I think for 2021, we're not out of the woods. In the five weeks we reported, we talked about our stores were closed 70% of the possible days. So we're still seeing large percentage of closures over there. We're chasing it with web sales, but there is some deleverage in the overall model because of that. We do not have 100% fulfilled from stores there. And so, you know, as we turn to 2021, you know, our focus is to really drive our results stronger, although probably not turning to profitability. However, we believe that we can continue to make real progress. And we're, again, still excited about where we're at there. We continue to believe we're on path for profit there in that kind of 12 to 24-month timeframe. And that's really what we're focused on and our teams are focused on. I think we have a pretty good path to get there, you know, absent further, you know, COVID variations that were macroeconomic conditions that we're not aware of today.

And I just add to Chris's comments, Jeff, that, again, fourth quarter could have been a worse timing for having shut half your store base, obviously with November, December being the peak volume months for our business year, particularly when you combine it with the strength of our business in the snow hard goods arena where we're the leader in the European marketplace. So really unfortunate timing because we were on plan through the first three quarters of the year. But I think the team, as Chris said, just did a great job of working their way through it. And we remain, to be clear, bullish on it. In fact, I think that we're seeing some of the best real estate deals we've ever seen in our European marketplace. So as we said in our opening comments, we intend to add 12 new stores this year in Europe and really drive this business forward. And so we remain really positive on where we're at. I love the hard work of what our team's accomplished over this last year. And I'm very confident we're going to get fourth quarter back when we head into it around this. It's just hard to imagine. I'm crossing my fingers now, Jeff. It's hard to imagine that it could be any worse than it was this last year in terms of the closures and the closure of the resorts, the snow resorts, than it could possibly be in 2021. Fingers crossed.

Yeah, exactly. Okay, so just a follow-up. I know you gave quite a bit. maybe not guidance, but just kind of keeping in mind all of the puts and takes and your thoughts on FY21, which sounds like it's probably going to be a little bit of an odd recovery year in some ways. What's your latest thinking about overall operating margin longer term for the company versus the recent levels you've been hitting?

Yeah, appreciate that, Jeff, and I appreciate your sympathy for the challenges of 2021 because it is going to be a roller coaster just as 2020 was. So hopefully kind of the directional prepared remarks we gave help people sort of outline that. But, you know, I think as we think about long-term operating margin, what we've talked about, you know, probably as recently as three years ago was trying to drive to the higher single digits, and here we are. And so I think we're really proud of our teams. in their execution of that. I think it's come from multi-years of planning, of not just financial planning, but strategy and what do we need to do to make this happen and what are the investments we need to make in the business and how do we streamline our results and you can take something like in-store fulfillment. I think it's been a huge contributor to these levels of results, but it's taken us years to put it in place and refine it and drive it to where we are today. So I you know, as we look forward, we do believe this is a business we can drive into those, you know, low double digits operating profit levels. And I think we have a path to do it. I think we're focused on how we drive that. We've got, you know, different metrics for different areas of the business. So in, you know, North America, we're We're much more mature. There's not as much unit growth ahead of us. It is about kind of looking at a reasonable sales level of growth and saying, how do we grow earnings significantly ahead of that? And that's going to drive around optimization and leveraging and really pushing ourselves on how we look at the business here in North America. Internationally, we have a lot of growth ahead of us. We know Europe has a huge landscape for us, and we also have a lot of growth in Australia. In those markets, it probably looks like our historical U.S. market where we're adding a lot of units. We're going to continue to grow total trade area sales. Those units will not only pick up the four-wall brick-and-mortar sales, they're going to help drive the Omni experience and the whole experience within a trade area. So we'll see elevated growth on the top line, and we should see earnings flow through meaningfully ahead of that as we're using kind of both channels to leverage each other. So, you know, our focus is really there, and we think this is something we can drive operating profits into the double digits.

And I'd just add, you know, Jeff, again, tying back to the comments I made around how we're thinking about innovating for the businesses, And then being able to export, that will drive the sales and margin in the U.S. business. But we're also going to be able to export those tools and skills to the markets around the world as they gain the scale to be able to lever those advantages. And you need scale in the marketplace to be able to lever the kinds of tools we're putting in place. And we've done that, I think, really well. And as Chris said, we're doing it in Europe now. But as these new innovations come through, that will be the same process. So if you think about a three- to five-year window, I would look back at what we've achieved over the last three to five years and say our goal is to continue that process of long-term investments that are going to yield both improved sales and improved margins as we optimize around the consumer behavior and innovate to serve them better. So I think the last five years are a roadmap of what the future will be different initiatives But what we expect we can kind of roll out with new innovations, again, with the larger business, not only here in the U.S., but as Europe and Australia scale, those markets too.

Okay. Thanks, and good luck for the rest of Q1. Thanks, Jeff.

Thank you. Our next question comes from Jonathan Kopp. Lou Baird, you may proceed with your question.

Yeah, hi, thank you. Chris, maybe first just to clarify your commentary for the first quarter and second quarter compared to 2019. Are you implying that the first quarter could be up more compared to 2019 than the second quarter, which I think you set up modestly, so I just wanted to clarify that.

Yeah, I think as we look at the comparison, at least in Q1 and Q2, right, our commentary was that Q1, we believe, will regain the sales lost in 2020, and we would be ahead of 2019. And as we look at Q2, we think we'll be down in sales to Q2 2020 and up over 2019. Okay, thank you.

And then maybe a question on the hard goods category. Could you just comment? It seems like you might be drawing in new customers through that category, so I'm just curious what your data shows in terms of capturing a new customer base and then your ability to cross-sell them and keep them buying across the store or online different categories.

Yeah, John, I'll start, and I know Chris will be able to share some data with you on this too, but I do. If you look at the participation data in skateboarding, I mean, it's been pretty remarkable more than this last year, to be clear, over the last couple years. And I think one of the exciting things for us is that there's been a lot of women taking up skateboarding for the first time. So that's been a super exciting aspect of our business. And again, you'll see that in the participation data from the industry groups out there that publish it. So I think from that side, yes, we are. And And when we got on this skate trend really beginning in 19, in early 19, I think that January, February of 19, where it just kind of exploded across the globe, we looked at that and said we ought to own more share of that market because we've seen so much consolidation over the last decade in retail that that we ought to own a bigger share. And so I know Chris and our product team actually predicted that. We thought we would, through this multi-year skate cycle, we predicted we'd see a skate peak as a share of our business at a higher level than it ever has previously through the cycle, simply because we own more share in the market globally. And so I think, yes, we have seen new customers come in, particularly on the female side. We've also seen new customers because we are the destination now. we saw more of the – particularly assembled component skateboards than anyone in the world at this point. So I think we've benefited that. I'll let Chris share some of the data around that.

Yeah, absolutely. You know, I think, as Rick pointed out, this is a trend that's really run strong for us for two years. And, you know, like a lot of trends in our business, we definitely see ebbs and flows. The last skate cycle we saw was 2012 through 2015 – And it was pretty tough between then and what we saw happen in really the beginning of 19. As you guys know, we typically start to break out some of our category performance, specifically in our 10K here that will come out early next week. But normally we have some movements between categories, but we actually had a pretty seismic movement this year with, you know, men's apparel accessories and women's apparel stayed relatively constant year over year. But we saw hard goods, both the skate and snow side of the business, but primarily driven by skate, go from 13% of our business to 19% of our business. So if you look at that over a two-year stack, it's gone from 10% of our business to 19%. So I think you see really one of the higher levels of penetration we've ever seen. The offset to that was mostly in footwear. but this is, you know, a trend that we're really happy with. We're happy that we've got it, and we think it's something that can continue to propel us into 2021, albeit, you know, we think we've got good plans across all of our categories to drive into this next year.

And is that something, just given the nature of where you're selling, just any thoughts on why that hasn't translated, or is there some sort of pent-up higher level of demand that maybe supply isn't meeting today?

I think, again, these are, John, really trend-related issues. We've always seen movements in our business. You remember we had a huge footwear run. Really, when skate tailed off last time, we moved into a big footwear run. And so these are the trade-offs you see in our mix of our business and not unusual for us and I think Footwear achieved their near high at some point, and then it started on its way down here over the last couple of years. So these are just the normal cycles for us that you go through. And our mission is always to maintain our share of our customers' wallets. So as they move from Footwear, we recaptured those dollars in Skate. And by holding, as Chris said, the mix, relatively speaking, in the apparel categories and accessory groupings. So I just view this as that portfolio approach, John, both on how we think about covering all the lifestyle aspects where we offer our customer as well as the same concept with our portfolio approach to brand management and thinking about brands and new brands and how we're managing against that. So this is normal, I think, evolution and changes in our business where we see these kind of cycle changes. Chris said we had a big skate run from 12 to 15 and then saw it fall off and then negative years there and we've seen footwear come on and So these are just the normal cycles I think we see in our business. And so to be clear, though, we also are looking at footwear and say, how can we minimize the losses we run to? As Chris said, we have plans across all the departments to think about not only how do we drive volumes higher, but how do we minimize those that are running down so they don't diminish the gains we're running in other areas. So So I just view this as the normal portfolio management of our business that we tend to see play out on a multi-year basis, you know, consistently.

And just the last one for me, just given the unit growth plans in Europe, can you just comment on the return metrics that you're targeting there as you apply more capital to the unit growth? Thank you.

Yeah, I'll let Chris talk about how we think about unit growth economics and how And I'll talk just briefly again, as I said earlier, about the kind of environment in Europe today. And this is true on the real estate environment. This is true pretty much everywhere. We're seeing some of the best real estate markets in terms of economics for us that we've seen in a long, long, long time. And I would say that's true in the U.S., it's true in Canada, it's definitely true in Europe, it's definitely true in Australia. And that, as we talked about in our prepared comments, this is partly due to the consolidations taking place in retail and what that has meant for landlords. So it's a great time, I think, if you're a retailer, you've got the capital resources to expand, to take advantage of that globally. And before I let Chris talk about four-wall contributions, I'd like you to think even more broadly, and at some point we'll maybe be in a position to really share all this with all of you out there is, We really think about our performance again in Europe. We look at a country-by-country basis. What happens as we build out markets? Where are the tipping points on our investments? So it may not be about tipping to, I mean, we have a number of countries in Europe where we're very profitable in our business. And it's because we built out those markets, we're able to make those investments across multiple stores that we're recovering the markets. Now we can do some of our omni-channel programs as we have the scale in those countries to And then, of course, because of the store base, we see a significant growth in the web business at the same time. So we're going to be thinking more about this and thinking about the European business, and I think this will be one of the areas where we'll think about this from the trade area perspective of where are the tipping points and returns as we build out markets and drive more total volume and then able to lever markets with our Omni tools and programs on a country-by-country basis in Europe. So we're doing a lot of work around that now, making sure that we really have a deep understanding about where those tipping points occur in the investments, and we'll plan how we think about our future expansion in the market, the way we go about it between larger countries and smaller countries, and how we think about those economic tipping points in the market. Now, that said, to be clear, we still expect that stores are going to be four-wall profitable on their own basis, and they have to meet our economic thresholds for deals. That hasn't changed one bit. Everything else on the Omni model is on top of that in terms of generating returns. So I'll let Chris share how we think about the store economics.

Sure, and I'll just add to what Rick said. In Europe specifically, you know, and we have to take 2020 off the table just based on the fact that the stores have been closed. But if we look at multi-years here now in Europe, one of the things that's given us a lot of confidence is how our class of the stores have increased their performance over time. As you know, John, this was an acquisition for us in 2012. I would tell you from 2012 to 2015, we were doing a lot of testing, really trying to Test new markets, test markets where there's snow, markets where there's not snow, Germany, Switzerland, right? Really trying to dive out there and say, hey, do we work on high streets? Do we work just off high streets? Are we working in malls? All the things you'd expect for us in a new market and expansion mode. One of the beauties of this model is that we do have a very high web penetration. And so the web penetration can be a good guide for us in where our customer exists. And not only do we have web penetration where we have stores, we operate across 14 different languages all over Western Europe and into parts of Eastern Europe. So it allows us really good visibility to where stores might work. So as we transition kind of through the middle part of the last decade, we stopped talking about testing because we were actually more scientifically putting classes of stores into play. And I think what we saw from that as we looked back at our results pre-2020 was that each class of stores had gotten a little bit stronger as we educated ourselves on what was working and what wasn't working. And when we did put stores, say, in a mall format, what should we be doing? Or if we did put stores in a street format, what should we be doing? So we did see our classes get stronger and stronger. And what I expect after we anniversary and get past 2020 is we would expect to see those same groups of stores continue to get stronger just as we have here in North America. As we're looking at unit metrics, as Rick pointed out, we do look at them on a four wall. That being said, we know there's a lift from the overall trade area because everywhere we've opened stores, we've seen an increase in webs. But we look at, you know, can we get cash-on-cash payback in an 18- to 24-month period as we kind of net out, you know, maybe the TA and other things that we might get in a location, but we'd like to get a high rate of return on cash. And then we look at a very high level of internal rate of return over a three- and five-year window and say, okay, as we model these out, typically five to ten years out, you know, can we get to a very high internal rate of return hurdle that would warrant, you doing these stores. And in markets that we are established in, you know, where there's less risk, we might look at that a little differently than markets where they're newer to us and there's a higher risk threshold. And so, like I said, like, you know, I've said it before, I think Rick reiterated here today, we're really happy with the trajectory we've got there. We're getting to a tipping point where we've got an SG&A or a corporate load that's there to support these stores, and we think if we can continue to execute the way we have over the last few years, this is a market that will turn profitable for us.

In fact, just to finish Chris's thought there, John, we use the same metrics globally for four-ball returns on stores. So we don't change those metrics from what we've learned historically. We do hold ourselves to very high standards on cash-on-cash payback as well as internal rate of return thresholds.

Thank you. Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Mitch Hummets with Pivotal Research. You may proceed with your question.

Yeah, thanks for taking my questions. I think I've got three of them. So first on your inventory, I guess for the quarter, your product margins were up. I think you said, Chris, 20 bps. I would have thought maybe there would be a little bit. But then Ricky also made the comment about the ski season in Europe not really happening. So I'm wondering, was there any snow clearance that took place in the quarter that negatively impacted product margin that you now have an opportunity to lap in Q4 of 21 that could be an opportunity? Or am I reading too much into something?

Yeah, I'll go ahead and take a crack at it and let Rick jump in if there's anything to add. I'll tell you, as you look at Q4, it is really the tale of two tapes. I think we have here in the U.S. and Australia, we performed extremely well, both in terms of sales and in terms of product margin. In Canada and Europe, where we had pretty significant closures, specifically closures during the important holiday period and also having closures in Europe where snow is such an important part of Q4 and the resorts weren't open and tourism wasn't happening, they had an impact on the business and they had an impact on inventory. So I think you have kind of the two tapes being we saw a stronger product margin than the consolidated results before in the U.S. and Australia, and we saw a tougher product margin in Canada and Europe where we were closed.

And you're exactly right, Mitch. I mean, it was driven, as Chris said, by the store closures. And particularly in Europe, it was driven by the winter conditions. We don't want to own the carryover inventory. So the market got very promotional. We got out there, and I think we actually cleared. We did a good job of clearing inventory. It never is where you want it. Now, the U.S. is different. We blew through almost everything we owned in snow. here in the U.S. So we're super clean here in the U.S. But I know there's a number of strategies we have in place with our brand partners in Europe about dealing with the snow product and how we're thinking about next year. But we did, you're exactly right, we don't want to own the inventory. So we did move through it and we took the markdowns in Europe to move through it. Got it. Thanks.

And then on your digital business, Chris, it sounds like in terms of your 2021 gross margin outlook, you expect less shipping, so that would imply your digital percentage comes down. Can you just remind us, where did digital land in 2020 versus 2019 in terms of its penetration, and where do you think that ends up in 2021? And then I have one final question.

All right. I'm going to just kick this one off, Mitch, a little bit from my side, and this will be no surprise to you, as you've heard me say many times over the last few years, We do not think these are critical measures, particularly if you have a one-channel business model like we do, where you can lever costs at the operating and private level no matter where the sale is, whether it's a physical sale or a digital sale. So I just want to remind everyone that our goal is to empower our customer with choice at all consumer touch points. We let them choose how they want to interact with us. They get to pick their own preferred customer journey with us. then our job is to optimize our experience for the customer and our business matter around those journeys. And that's why we don't tend to focus much on the physical-digital mix of sales, and we just basically plan on following and evolving and innovating around the customer's behaviors to meet their needs on their journey. So that said, though, we're going to share the data, and I'll let Chris share the data.

Yeah, and I'll just kind of quantify for the year. So we did end up at about 26.4% in web penetration. compared to 16.6% last year. So that gives you kind of perspective of how much we grew. So the web was up 51%, 51.5%, compared to the prior year. And our store comp was down 4.1%, with total store sales down about 15.8%. So you do get a feeling of how we've moved across channels. I think to my expense comments, that type of growth in web has an impact on gross margin. Now, they're so integrated, I'm not so sure it has the same impact on operating profit. I actually think over time part of our ability to grow operating profit to the levels that we have is a function of our integrated fulfillment. So that's how we think about it.

Okay. I'm a little afraid to ask about digital, Rick, but thanks for giving the number.

Sorry, Mitch. Mitch, let me just fill out, because you had said 2021, and I didn't comment on that. So as we think to 2021, we're actually targeting between those two levels. So we think that web penetration will not be as high as it was in 2020 because we're going to open our stores and we're going to see people go back to stores. And I constantly remind people, I know you know this, but we have a customer that wants that physical experience. They want to get out. They were one of the last ones to pull into lockdown and one of the first ones out. So we expect web penetration to be lower than it was in 2020, but we continue to believe it will grow from the 2019 level. And that's how we're planning the business.

Got it. Hey, Mitch, I still love you, too, just so I can say that. I still love you, Mitch. I knew you were going to go with that response, though.

Last thing, just on footwear, and I know that you guys go through these cycles, and I can appreciate it about the business, and it's a portfolio management. You guys do a great job, but I am curious. One of your competitors reported this morning, and they talked about, I mean, they're sort of all footwear, and They kind of break out their footwear business into two buckets, fashion athletic, which is somewhat similar to yours, and then they have kind of a casual side. You guys don't really have much of a casual side to your footwear business, and they mentioned this morning that it's the casual piece that's doing better than the fashion athletic. I'm just wondering if that's a potential opportunity for you guys, if it fits with your customer. How do you think about that?

Yeah, you know, Mitch, we, again, don't get me wrong here. We are pushing hard to make sure our footwear business can perform at the best level it can perform at. Now, like everything with footwear, and particularly when we're talking about really a handful of brands that drive all of our footwear business across the globe these days, I mean, there really aren't many small brands left on the footwear business. So, I think part of the aspect where you have to understand about the discipline the big brand partners have is you do get locked into certain components of your business based upon your relationship with the major brand partners. And we are a good partner with Nike. We're a good partner with Vans. We're the key partner, I think, for our niche of retail with both of those guys outside of their own direct channel business. So it is a function of product availability in some cases, too, because we have a certain position that we're in with both of those major brand partners and all the major brand partners, for that matter. So we try to stay in our lane somewhat in that regard. But that said, you're going to continue to see us experiment. We'll be having new brands show up in our footwear business here over the next few months, and you're going to see us continue to push, experiment, on any place we believe we can push the business forward. So the general attitude doesn't change, which is we don't like running down in any department in our business. So we're going to push hard and look at new things. We'll optimize our existing portfolio of brands, working with our brand partners on it, and we'll do our best to minimize the loss through this cycle. Great. All right. Thanks again. Good luck. Thanks, Mitchell.

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

All right, well, thank you very much. As always, I really appreciate everyone's interest in Zoomies and what we're doing and where we're going. So, again, I want to thank all of our partners and our employees. What I think was just a really remarkable year. There are not many special retailers who can say they had their most profitable year ever. There aren't many non-essential retailers that can be saying that at this phase. So we're really proud of our teams. We're proud of our brand partners that are supporting us through this cycle. So thank you, everybody. And then we'll look forward to talking to everyone with first quarter results here in a few months. Thanks.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.