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.