Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. first quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning 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 uncertainty. 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 Zumi's filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Hello, everyone, and thank you for joining us on the call today. With me is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the first quarter, then I'll share some thoughts on sales for the second quarter to date before handing the call to Chris, who will take you through the numbers. After that, we'll open up the call to your questions. As you saw from our earnings release issued earlier today, fiscal 2021 has gotten off to a historically strong start with sales of $279 million and EPS of $1.03, both of which by far exceeded our expectations. Given the impact that COVID had on our business a year ago, when our stores were closed for approximately 50% of the days available during the quarter, we anticipated that results would be up meaningfully compared with 2020. Despite a slower start to this year's first quarter, we still expected that sales would exceed Q1 2019 as some of the headwinds we faced in February abated and the economy benefited from government stimulus. That being said, we were not anticipating that sales would increase more than 30% over the same period two years ago, particularly because a portion of our global store fleet remains closed. Our performance amidst very challenging conditions last year, and more recently as the operating environment has improved, underscores our market-leading position. and the strength of our business model. The work that this organization has been doing to execute the long-term consumer-centric growth strategy that Zumi has been building and evolving since its inception put the company in a position to successfully navigate the pandemic and now capitalize on the uptick in demand we are seeing from an economic recovery being boosted by record stimulus. In addition to capturing a meaningful share of the increase in consumer spending, Our record first quarter profitability reflects a shift back to a more historical mix between our store and digital channels as customers becoming increasingly comfortable returning to in-person shopping. This is a very positive development given the enriched brand experience that can be achieved human to human and the importance of our stores to the one channel cost structure we've built as part of our differentiated approach to retail. Looking ahead, We feel good about our ability to continue to exceed both 2020 and 2019 sales levels over the course of the year. However, not by the same magnitude we did in the first quarter as we face tougher comparisons and the benefit from stimulus is likely to fade. The second quarter has started strongly with May total sales increasing 42% year over year and up 31% compared with May 2019. While the near term is difficult to predict as markets are recovering from the impact of the pandemic at different paces, the long-term outlook for Zoomies continues to brighten. As I said on our last call, what we expected to happen within the retail industry over several years in terms of consolidation of winners and losers in retail has significantly accelerated. Our performance over the last 12 months clearly demonstrates the competitive advantages of our model and underscore the strength of our brand, culture, and best-in-class teams that are working to serve the customer in each of the markets which we do business. Thanks to these cornerstones of our foundation, we move forward 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 Zoomies delivery, which takes our best-in-class sales teams 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 a customer can shop with us to get what they want when they want, how they want, and as fast as they want. We've morphed our business into a channel-less organization with inventory visibility from all touchpoints and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which sales originate. The work together has been significant, and the path ahead will require further focus to move even faster to serve our customer. Therefore, we remain steadfast in our commitment to continuing to invest in our future. We know that times of disease 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. With that, I'll turn the call to Chris to discuss the financials.

Thanks, Rick, and good afternoon, everyone. It has been a record start to fiscal 2021 with results that well exceeded our expectations. With our stores closed for approximately half of the quarter last year due to the pandemic, I'll provide comparisons to both the prior year and first quarter fiscal 2019 where appropriate. Following my review of our first quarter results, I'll provide an update on our second quarter to date sales trends before providing an updated perspective on how we are thinking about the full year. First quarter net sales were $279.1 million, up 102.6% from $137.8 million in the first quarter of 2020, and up 31.1% from the $212.9 million in the first quarter of 2019. Compared with the first quarter of 2019, the increase in sales was driven by the net addition of 15 stores, and comparable store sales growth of 34.2%. Our stores were open for approximately 94% of potential operating days during the first quarter of 2021, compared to 50% in the first quarter of 2020 and 100% in the first quarter of 2019. From a regional perspective, North American net sales were $248.7 million, an increase of 113.4% over 2020 and up 32.3% compared with the same period in 2019. Other international sales, which consists of Europe and Australia, were $30.4 million, up 43.2% from last year and up 21.7% from two years ago. Excluding the impact of foreign currency translation, North American net sales increased 112.6%, and other international net sales increased 29.1% compared with 2020. Both our European and Canadian operations had impactful COVID-related store closures during the first quarter of this year, and they were open for approximately 40% and 77% of the available operating days, respectively. From a category perspective, all categories were up in total sales from the prior year. with men's being our most positive, followed by accessories, hard goods, women's, and footwear. First quarter gross profit was $103.2 million compared to $23.7 million in the first quarter of last year and $66.5 million in the first quarter of 2019. Gross margin as a percentage of sales was 37% for the quarter compared to 17.2% in the first quarter of 2020 and 31.2% in the first quarter of 2019. The 1,980 basis point improvement from the first quarter of 2020 was largely due to 1,200 basis points of leverage in our occupancy costs, including the impact of the continuation of rent charges in 2020 while stores were closed. In addition, product margin increased 390 basis points, and we gained 340 basis points related to the leverage of fixed costs in fulfillment and distribution with a significantly higher level of sales. Gross margin improved 580 basis points from 2019, driven largely by product margin improvements, occupancy leverage, and reduction of shrink as a percentage of sales. SG&A expense was $68.9 million, or 24.7% of net sales in the first quarter, compared to $51.6 million, or 37.4% of net sales a year ago, and $65.5 million, or 30.7% of net sales two years ago. Compared to 2020, The 1,270 basis point decrease in SG&A expenses of the percentage sales resulted from meaningful leverage of our fixed costs on higher revenue base in 2021 compared to the prior year when we experienced significant store closures due to COVID-19. The most significant improvements were 620 basis points of leverage in our store wages, 520 basis points of leverage in our other store costs, 340 basis points of leverage in corporate costs, And these improvements were partially offset by 180 basis points related to governmental subsidies in the prior year that did not repeat in the first quarter of 2021, and 110 basis point increase in incentive compensation. Operating income in the first quarter of 2021 was $34.3 million, or 12.3% of net sales, compared with an operating loss in the prior year of $27.8 million, or 20.2% of net sales. In the first quarter of 2019, we had an operating profit of $1 million or 0.5% of net sales. During the quarter, we recognized flow through on incremental sales of 44% from the first quarter of 2020 and 50% from the first quarter of 2019. Net income for the first quarter was $26.4 million or $1.03 per share. This compares to a net loss of $21.1 million or 84 cents per share for the first quarter of 2020 and net income of $0.8 million or 3 cents per share for the first quarter of 2019. Our effective tax rate for the first quarter of 2021 was 25.7%, compared to 20.9% in the year-ago period. Turning to the balance sheet, the business ended the quarter in a very strong financial position. Cash and current marketable securities increased 84.3% to $400.4 million as of May 1st, 2021, compared to $217.2 million as of May 2nd, 2020. The increase in cash and current marketable securities was driven by cash generated through operations, partially offset by capital expenditures. As of May 1st, 2021, we had no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We end the quarter with $136.5 million in inventory, essentially flat with the end of both Q1 2020 and Q1 2019. On a constant currency basis, our inventory levels were down 3.2% from last year. Overall, the inventory on hand is healthy and selling at favorable margins. Now to our fiscal May sales results. Net sales for the four-week period into May 29, 2021 increased 42.4% compared to the four-week period into May 30, 2020. Compared to the four-week period into June 1, 2019, net sales increased 30.5%. From a regional perspective, net sales for our North America business for the four weeks into May 29, 2021 increased 45.9% over the comparable period last year and was up 27.9% compared to the four-week period into June 1, 2019. Meanwhile, our other international business increased 19.9% versus last year and increased 54.9% compared with the same period of 2019. From a category perspective, all categories were up in total sales from prior year with the exception of hard goods. Men's was our most positive category, followed by accessories, footwear, and women's. In terms of comparable sales for May, because we only had a portion of our stores open long enough to be included in the comp base last year, combined with the accelerated shift to online spending as a result of COVID-19, we are comparing May 2021 results to May 2019 results. For the four weeks into May 29th, 2021, comparable sales increased 32.9% compared with the four weeks into June 1st, 2019. Due to limited visibility in the business, we will not be providing specific guidance for the second quarter of 2021 or the fiscal year. That said, based on our first quarter performance in May results, we do want to give you a directional update on our expectations for the year. Concerning revenue, For the full year fiscal 2021, we have previously projected that we would exceed 2019 revenue levels. Given the significant growth from 2019 in the first quarter and the strong May results to begin the second quarter, we now believe that fiscal 2021 net sales will grow in the low to mid teens from fiscal 2019. 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. As previously discussed throughout the year, we'll be comparing our results not only in 2020 but also to 2019, anticipating a return to more normalized seasonality. Examining the high-level impacts by quarter from 2021 to 2020 and 2019 for the remainder of the year, we note that in the second quarter of 2021, we anticipate that the impacts of the stimulus will begin to wane. And as a result, growth rates will slow from the first quarter of 2021. However, with our May results and current trends in the business, we anticipate that we will see double digit sales growth from fiscal 2019 in the second quarter of this year, which translates to high single digit growth to low double digit growth from our record setting second quarter in fiscal 2020. 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 to fiscal 2019 despite the challenges of the pandemic. Considering the muted back to school season in the prior year due to much of the country employing remote learning and restrictions still in place during the 2020 holiday season, we are encouraged about the potential in 2021. We currently anticipate fiscal 2021 sales growth compared to 2020 to be in the low to mid single digits for our third and fourth quarters. Moving on to gross margin, 2021 gross margin is currently planned to grow year over year, driven by a reduction in shipping costs as web revenue normalizes with stores being open and leverage of occupancy costs on increased sales. Product margin improved by 70 basis points in 2020 versus 2019 to record levels and grew for the fifth year in a row. We are planning product margin in 2021 to improve over 2020 for the year. Fiscal 2021 SG&A costs are expected to increase slightly ahead of our sales growth from 2020 for several reasons related to the pandemic. The drivers of this include store wages and benefit 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 foregone in 2020 due to the pandemic, an increase in marketing events and other related 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 SC&A expenses grow much closer with overall sales. On a net basis, however, we're anticipating operating margins will be up year over year in fiscal 2021, reaching double digits as a percent of sales. We are currently planning our business, assuming an annual effective tax rate of approximately 26% in fiscal 2021, compared with 25.6% in fiscal 2020. We are planning earnings per share to increase meaningfully in fiscal 2021 compared with fiscal 2020, with a strong start to the year we just disclosed. Throughout the remainder of the year, we anticipate that more expenses will come back into the model as COVID restrictions are reduced, such as store payroll related to capacity and hours, travel, training, and other costs discussed above. With more moderate sales increases expected in future quarters, we are currently planning the majority of our 2021 EPS growth to be attributed to the first quarter of the year. As an example, we are anticipating our second quarter EPS will be down from the prior year when we had a record-setting second quarter and saw a surge in sales as stores reopened after the initial shutdowns, while we experienced minimized expenses due to the controls put in place to conserve cash resources. In the event our sales estimates exceed those outlined today, we would expect a strong flow-through on incremental sales. 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 with $9.1 million in fiscal 2020. The majority of our capital spending will be dedicated to new store openings and planned remodels. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $23 million in fiscal 2021 compared to $23.5 million in fiscal 2020. And we are currently projecting our share count for the full year to be approximately 25.8 million shares. Any share repurchases during the year will reduce our share count from this estimate. We are very proud of the effort of our teams and our financial results to start 2021. Our long-term strategies have allowed us to outperform the marketplace in a period of time that continued to be heavily impacted by the unusual events of the pandemic and enhanced economic stimulus. We believe our operating model is strong and that we continue to have good opportunities for top and bottom line growth in the future. As we look to the first quarter of 2022, we anticipate it will be challenging to replicate the results we experienced in the first quarter of 2021. However, we continue to make confidence in our ability to drive long-term value for our shareholders into the future. And with that operator, we'd like to open the call up for questions.