Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to Zoomies, Inc. Second 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 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 ZOMI's filings with the SEC. At this time, I would like to turn the call over to Mr. Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

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 second quarter, then I'll share some thoughts on sales for the third quarter to date before handing the call to Chris, who will take you through our financial results in more detail. After that, we'll open up the call to your questions. Our second quarter results reflect the strength of our business model. as we posted solid top line growth and better than expected profitability in the face of tougher comparisons. Reflecting back upon the second quarter of 2020, our stores are open for roughly 73% of potential operating days as a result of the pandemic. Despite those closures, our total sales in Q2 of 2020 increased 10% over 2019 due to our ability to capitalize on strong sales trends and pent-up demand for more significant closures in the first quarter of 2020. Therefore, we were pleased that our second quarter 2021 total sales grew 7% year-over-year and increased 18% on a two-year basis, all by driving strong full-price selling. On the expense side, spending returned to more normalized levels following last year's temporary cost-saving actions and government subsidies. resulting in diluted earnings per share of 94 cents, just 7 cents shy of last year's record $1.01, and up over 160% from the second quarter of 2019. Our teams once again did a terrific job adapting to the current environment to fulfill demand for our distinct merchandise offering. This year's results reflect the shift back to a more historical mix between our store and digital channels as our customers increasingly return to physical shopping. This is a very positive development given the enriched brand experience that can be achieved through human-to-human connections. Looking ahead, we feel good about our ability to continue to exceed 2020 sales levels over the second half of the year, even as we face tougher comparisons and more competition for discretionary spend. With the majority of school districts around the country resuming in-person learning, we've seen a more normalized start to the back-to-school season. which provide the business with good momentum to begin the third quarter. Q3 to date through Labor Day, total sales are up 23% year-over-year and up 7% compared with the same period of 2019. These results are despite continued challenges related to the pandemic across the business. With the recent uptick in COVID cases caused by the Delta variant has created some additional uncertainties about operating conditions and consumer behaviors in the near term. We are confident in the agility that our teams have shown throughout the pandemic and the financial strength of our business to weather any potential risk that lies ahead. The agility is based on our strong culture, brand, and best-in-class sales teams that help us drive incremental market share gains across the business. Key to our success has been and will continue to be our one-channel mentality and our proven ability to adapt to changing consumer needs. This includes ideas like our in-store fulfillment capabilities, including Zoomies delivery, which takes our best-in-class sales teams directly to our customers' doors. 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 build a business in which we partner with great brands to bring the diversity and uniqueness to our customers that allows them to individuate. We build a footprint that informs us of global trends and works with brands to emerge locally and grow globally to better serve our customer. We build an infrastructure in which the 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 touch points 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 the customer. Therefore, we remain steadfast in our commitment to investing in our future. We continually believe that times such as these create great opportunities. The right people, strategies, and resources in place, we are well positioned to emerge from this crisis a stronger brand than ever before and clear winner in the ongoing consolidation of retail. that, I'll turn the call to Chris to discuss the financials.

Chris. Thanks, Rick. Good afternoon, everyone. Given that our stores were closed for approximately 27% of the quarter last year due to the pandemic, I'll provide comparisons to both the prior year and the second quarter of fiscal 2019 where appropriate. Following my review of our second quarter results, I'll provide an update on third quarter day sales trends and our current perspective on the full year. Second quarter net sales were $268.7 million, up 7.3% from $250.4 million in the second quarter of 2020, and up 17.6% from $228.4 million in the second quarter of 2019. The year-over-year increase in sales was primarily driven by the reopening of stores, our ability to capitalize on current trends, and the continued impact of domestic economic stimulus on the business during the second quarter. Compared with the second quarter of 2019, we saw comparable sales growth of 16.6% and the net addition of 15 stores. Our stores were open for approximately 96% of the potential operating days during the second quarter of 2021, compared to 73% in the second quarter of 2020 and 100% in the second quarter of 2019. From a regional perspective, North American net sales were $237.5 million, an increase of 6.3% over 2020, and up 14.8% compared to the same period in 2019. Other international net sales, which consist of Europe and Australia, were $31.1 million, up 15.7 from last year, and up 45.1% from two years ago. Excluding the impact of foreign currency translation, North American net sales increased 5.8%, and other international net sales increased 7.6% compared with 2020. We experienced significant COVID-related store closures during the second quarter in Canada, Australia, and Europe, noting they were open for approximately 68%, 77%, and 88% of the available operating days, respectively. During the quarter, the men's category was our largest growth category, followed by accessories and footwear. Hard goods was the largest negative category, followed by women's. Second quarter gross profit was $105 million compared to $90.9 million in the second quarter of last year and $77.2 million in the second quarter of 2019. Gross margin as a percentage of sales was 39.1% for the quarter compared to 36.3% in the second quarter of 2020 and 33.8% in the second quarter of 2019. The 280 basis point improvement from the second quarter of 2020 was largely due to a 170 basis point decrease in web shipping costs related to a decrease in web sales from the second quarter last year when we had a higher rate of store closures driving customers online. A 100 basis point increase in product margin and a 70 basis point improvement in inventory shrinkage, partially offset by 60 basis point increase in distribution and inbound shipping costs. Gross margin improved 530 basis points from 2019, driven largely by product margin improvement of 270 basis points, occupancy leverage of 170 basis points, and a shrink improvement of 90 basis points. SG&A expense was $73 million, or 27.2% of net sales in the second quarter, compared to $57.7 million, or 23.1% of net sales a year ago, and $65.5 million, or 28.7% of net sales two years ago. Compared to 2020, the 410 basis point increase in SG&A expenses of percent of sales primarily reflects the benefit from temporary cost savings tied to the pandemic last year. The most significant changes include 150 basis points of deleverage in our store wages, 60 basis points of deleverage in corporate costs, 50 basis points of deleverage in annual incentive compensation, and 40 basis points due to a decrease in governmental subsidies. During the quarter, we also accrued a legal settlement resulting in 110 basis points negative impact. Operating income in the second quarter of 2021 was $32 million or 11.9% of net sales compared with $33.1 million or 13.2% of net sales last year. In the second quarter of 2019, we had an operating profit of $11.7 million or 5.1% of net sales. Net income for the second quarter was $24 million or $0.94 per diluted share. This compares to net income of $25.4 million or $1.01 per diluted share for the second quarter of 2020. A net income of $9 million or $0.36 per diluted share for the second quarter of 2019. Our effective tax rate for the second quarter of 2021 was 26.8% compared with 26% a year ago period and 30.7% two years ago. Turning to the balance sheet, the business ended the quarter in a very strong financial position. Cash and current marketable securities increased 37.7% to $412 million as of July 31st, 2021, compared to $299.1 million as of August 1st, 2020. The increase in cash and current marketable securities was driven by cash generated through operations, partially offset by capital expenditure. The company repurchased 200,000 shares during the quarter and an average cost of $44.21 per share and a total cost of $10.9 million. Year-to-date, as of September 7, 2021, the company has repurchased 700,000 shares at an average cost of $42.49 and a total cost of $31.4 million. As of July 31st, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the quarter with $149.4 million in inventory, up 17.9% from the second quarter of 2020 and down 1.1% compared to the second quarter of 2019. On a constant currency basis, our inventory levels were up 17.3% from last year. Overall, the inventory on hand is healthy and selling at a favorable margin. Now to our third quarter date results. Net sales for the 37-day period into September 6, 2021 increased 23.2% compared to the 37-day period into September 7, 2020, as we saw our customers go back to in-person learning in the majority of the regions in which we operate. Compared to the 37-day period into September 9, 2019, total net sales increased 6.7%. Our stores were open 98% of the available days during the period in 2021, compared to 91% in the same period last year. Total comparable sales for the 37-day period into September 6, 2021 increased 10.5% on a one-year basis and increased 5.4% compared with two years ago. From a regional perspective, net sales for our North America business for the 37-day period into September 6, 2021 increased 25.5% over the comparable period last year, and we're up 5.1% compared to the 37-day period into September 9, 2019. Meanwhile, other international business increased 2.3% versus last year and increased 28.8% compared with the same period of 2019. From a category perspective, men's was our most positive category, followed by accessories, footwear, and women's. Hard goods was our only negative category. Due to limited visibility in the business, we'll not be providing specific guidance for the third quarter of 2021 or the fiscal year, but do want to provide directional update on our expectations for the year. Concerning revenue, for the full fiscal 2021, We are projecting net sales to grow in the low to mid-teens from fiscal 2019. This translates to net sales growth from 2020 between the high teens to just over 20%. For the back half of the year, we continue to anticipate top-line growth on 2020 results that were above 2019 results. For the third and fourth quarters of fiscal 2021, we anticipate we'll grow sales in the mid to high single digits from fiscal 2020, absent significant COVID restrictions and lockdowns. For the third quarter specifically, this is a slowdown from what we have just reported quarter to date. However, we believe it is warranted as we had a slow start to back to school season in 2020 and saw continued strength through late September and October last year. This year, we've seen a more normalized cadence to back to school and do not anticipate that September and October will be as strong as they were in 2020. Moving on to gross margin. 2021 gross margin is currently planned to grow year over year, driven by leverage of occupancy costs on increased sales, a reduction in shipping costs as web revenue normalizes with stores being open, and improved product margins. While we anticipate improvements in gross margin in our third and fourth quarter, the year over year growth will be much more modest than our first two quarters. Fiscal 2021 SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons, many related to the pandemic. The drivers of the increase 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 incentive compensation and other discretionary accruals related to improved performance. Illegal settlement accrued during the second quarter. An increase in costs related to training and recognition events reduced significantly in 2020 due to the pandemic, an increase in marketing events and other related spending that were not possible with the 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 much closer with overall sales. On a net basis, however, we now anticipate 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 to 25.6% in 2020. We are planning diluted earnings per share to increase meaningfully in fiscal 2021 compared with fiscal 2020, primarily driven by a significant increase we achieved in the first quarter. As we saw in the second quarter, more expenses are coming 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. We are currently planning diluted EPS in the back half of the year to be flat to down modestly from the last six months of 2020. In the event our top line estimates exceed those outlined today, we would expect a strong flow through on incremental sales. We are planning to open 25 new stores in fiscal 2021, including approximately eight 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 $22 million and $24 million in fiscal 2021, compared with $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, excluding non-cash lease expense, will be approximately $22 million in fiscal 2021, compared with $23.5 million in fiscal 2020. We are currently projecting our diluted share count for the full year to be approximately 25.3 million shares. Any share repurchases made after those disclosed today will reduce our share count from this estimate. And with that, operator, we'd like to open the call up for questions.