Zumiez Inc.

Good afternoon, ladies and gentlemen. Welcome to the Zoom News, Inc. third quarter fiscal 2021 earnings conference call. At this time, all participants are on a listen-only mode. We will conduct a question and answer session towards the end of the conference. Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference call includes comments concerning Zoom News, 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 wisdom and certainty. Actual results may differ materially. Additional information concerning a number of factors that could cause additional, excuse me, actual results to differ materially from the information discussed is available in Zoom e-files with the SPC. At this time, I would like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Bush, you may begin.

Thank you. And hello, everyone, and thanks 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 third quarter. Then I'll share some thoughts on sales for the fourth quarter 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. As you saw from our earnings release issued earlier today, our third quarter was a historic one. we've adeptly navigated multiple external headwinds over the past 18 months, starting with the pandemic in early 2020, continued global supply chain disruptions, labor shortages, inflation, and in some cases, closures due to COVID. Despite these challenges, this quarter, we grew net income 5.4% over Q3 of 2020, and a remarkable 60% over the third quarter of 2019 pre-pandemic levels. In fact, we've now generated More income in the first nine months of 2021 than in any full-year period in the company's history, and we still have the important holiday season ahead of us. Looking at the underlying drivers of the record earnings quarter, net sales were up 7% and 10% on a one- and two-year basis, respectively. The majority of school districts around the country resuming in-person learning this year Back to School is highlighted by strong, full-price selling, reflecting pent-up demand, and our ability to serve the customer through our integrated model however they want to interact with us. The increase in sales combined with product margin growth offset an uptick in SG&A expenses as we saw an expansion of store hours, an increase in marketing, and the completion of our first national store manager in-person event in 18 months in North America. Looking ahead, the fourth quarter started well despite numerous challenges, underscoring our ability to capitalize on strong consumer demand and expand our market share. Fourth quarter date through Tuesday, November 30th, total sales are up 11.5% year-over-year and up 8.6% compared to the same period of 2019. Our performance over the Black Friday weekend bodes well for the remainder of this holiday season. While we continue to experience global supply chain challenges, labor shortages, inflation, closures tied to COVID, and now risks associated with the new Omicron variant, we are confident that our investments in people, sourcing, and fulfillment will allow us to serve our customers with a distinct merchandise offering, great service, and seamless shopping experiences that are the pillars of Zumi's long-term success. As we like to say, periods of significant change create opportunities. and companies that have the right people, strategies, and resources in place can take advantage at times like this to advance their brand and business. While Zumi isn't fully resistant to all the challenges that are plaguing the industry, we believe the current environment will accelerate further consolidation globally and that our adaptability and focus on our customer will lead to further wallet and mindshare gains. We believe this is evident domestically and also internationally. where we continue to win share in Europe and Australia, despite being hit with closures in both regions throughout the year and the current closures in Australia during the important lead-up to holiday in Austria, in the lead-up to holiday. While we're tactically adaptable, our overarching consumer-centric strategy rooted in strong brand and culture will remain constant. We'll build a business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate, We're building infrastructures for which customers 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. Each of these distinct attributes will serve us well in today's hybrid shopping model in logistically challenged environments. Our unique position in the marketplace leaves us well-positioned to capitalize on consumer demand and expand our market share over the near and long term. To close, I want to thank the entire Zoomies team for their hard work and dedication to upholding the cultural values that are directly tied to our strong third quarter and positive start to the fourth quarter. Despite the fantastic financial results, these are not easy times to operate in, and our teams continue to work relentlessly in service of our customers. With that, I'll turn the call to Chris to discuss the financials.

Thanks, Rick. Good afternoon, everyone. Similar to last quarter, I'll provide comparison to both prior year and the third quarter of fiscal 2019 where appropriate, given the impact of the pandemic on the year-ago period. Following my review of the third quarter results, I'll provide an update on the fourth quarter to state sales trends and our current perspective on the full year. Third quarter net sales were $289.5 million, up 6.8% from $271 million in the third quarter of 2020, and up 9.6% from $264 million in the third quarter of 2019. The year-over-year increase in sales was primarily driven by our ability to capitalize on current trends, the reopening of stores compared to short-term store closures related to COVID-19 pandemic in the prior year, and a more normalized back-to-school season in our U.S. business. Our stores were open approximately 99% of the potential operating days during the third quarter of 2021 compared to approximately 95% of the third quarter of 2020 and 100% of the third quarter of 2019. From a regional perspective, North America net sales were $257.5 million, an increase of 7.1% over 2020 and up 8% compared to the same period in 2019. Other international net sales, which consist of Europe and Australia, were $32 million, up 4.5% from last year and up 25.2% from two years ago. Excluding the impact of foreign currency translation, North American net sales increased 6.8%, and other international net sales increased 5% compared with 2020. We continue to experience temporary COVID-related store closures during the third quarter in Australia, noting they are open for approximately 42% of the available operating days. During the quarter, the men's category was our largest growth category, followed by footwear and accessories. Hard goods was the largest negative category, followed by women's. Third quarter gross profit was $114.7 million, compared to $105.8 million in the third quarter of last year, and $94.6 million in the third quarter of 2019. Gross margin as a percent of sales was 39.6% for the quarter, compared with 39% in the third quarter of 2020, and 35.8% in the third quarter of 2019. The 60 basis point improvement from the third quarter of 2020 was largely due to 60 basis point decrease in web shipping, a 60 basis point decrease in impairment losses related to operating lease right of use assets, and a 50 basis point increase in product margin. These increases were partially offset by 110 basis point increase in inventory shrinkage after historically low results in 2020 with stores closed. Gross margin improved 380 basis points from 2019, driven largely by product margin improvements of 220 basis points, occupancy leverage of 120 basis points, and a shrink improvement of 40 basis points. SG&A expense was $74.8 million, or 25.8% of net sales in the third quarter, compared to $67.9 million, or 25% of net sales a year ago, and $70.3 million, or 26.6% of net sales two years ago. Compared to 2020, the increase in SG&A expenses as a percent of net sales was primarily driven by 80 basis points of increased store payroll, as many stores increased operating hours from the pandemic-related reductions in the prior year, 50 basis points due to corporate costs consisting primarily of increased travel, training, and marketing, and 30 basis points due to the decrease in governmental subsidies. These increases were partially offset by a 40 basis point decrease in annual incentive compensation and 30 basis points due to the leverage of our non-wage store costs. Operating income in the third quarter of 2021 was $39.8 million. or 13.8% of net sales compared with $37.9 million or 14% net sales last year. In the third quarter of 2019, we had operating profit of $24.3 million or 9.2% of net sales. Net income for the third quarter was $30.7 million or $1.25 per diluted share. This compares with net income of $29.1 million or $1.16 per diluted share for the third quarter of 2020 and net income of $19.2 million or 75 cents for diluted share for the third quarter of 2019. Our effective tax rate for the third quarter of 2021 was 25.5%, compared with 24.7% a year ago period and 25% 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 6.9% to $338.1 million as of October 30th, 2021, compared to $316.2 million as of October 31st, 2020, The increase in cash in current marketable securities was driven by cash generated through operations, partially offset by share repurchases and capital expenditures. The company repurchased 2.2 million shares during the quarter, an average cost of $41 per share, and a total cost of $91.6 million. Fourth quarter to date through Tuesday, November 30th, the company has repurchased an additional 0.4 million shares and an average cost of $47.91 per share, and a total cost of $17.5 million. This brings our total year-to-date stock repurchases to 2.8 million shares, an average cost of $42.16 per share, and a total cost of $120 million. We have $68.8 million remaining on the current share repurchase authorization. As of October 30th, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit facilities. We ended the quarter with $175.1 million in inventory. up 8.8% from the third quarter of 2020, and down 4.5% compared with the third quarter of 2019. On a constant currency basis, our inventory levels were up 8.4% from last year. We continue to be happy with our current inventory position in light of the current sales trends and operating environment. As Rick mentioned, we are not immune to the global supply chain challenges facing the industry over the last 18 months, but continue to work closely with our brands and suppliers to navigate the challenges that are facing all of us. Overall, the inventory on hand is healthy and selling at a favorable margin. Now to our fourth quarter to date results. Fourth quarter to date sales through Tuesday, November 30th increased 11.5% compared to the same period in the prior year into December 1st, 2020. Compared to the same period two years ago into December 3rd, 2019, total net sales increased 8.6%. Our stores were open approximately 99% of the available days during the period in 2021 compared to approximately 97% in the same period last year, with our current closures almost exclusively occurring in Europe. We continue to monitor the situation in Europe with closures closely, and at this time we're planning these stores to be open ahead of holiday. From a regional perspective, net sales for our North America business for the 31-day period into November 30th, 2021 increased 7.5% over the comparable period last year, and we're up 8.3% compared to the 31-day period in December 3, 2019. Meanwhile, our other international business increased 39% versus last year and increased 10.3% compared with the same period of 2019, as we continue to see closures in the current year, however less frequent than in 2020. From a category perspective, men's was our most positive category. followed by footwear, women's, and accessories. Hard goods was our only negative category. Due to the limited visibility in the business, we will not be providing specific guidance for the fourth quarter of 2021 or fiscal year 2022, but do want to provide directional update on our expectations for the year. This update assumes the current store closures in Austria, which are expected to reopen by mid-December, but does not include any other closures or significant impacts of current or future COVID variants. Concerning revenue, for the full year fiscal 2021, we are projecting net sales to grow in the mid-teens from fiscal 2019. This translates to net sales growth from 2020 to just over 20%. For the fourth quarter, we anticipate sales growth from the prior year in the high single digits. Moving to gross margin, 2021 gross margin is currently planned to grow substantially year-over-year, driven by leveraged occupancy costs, On increased sales, a reduction in shipping costs as web revenue normalizes with stores being open, and improved product margins. We do anticipate gross margin growth in the fourth quarter, but more modest than the year-over-year growth experienced in the third quarter of this year. Fiscal 2021 SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons discussed on our Q2 2021 earnings call. many related to pandemic. As a reminder, the drivers of the SG&A increase include store wages and benefits increase with expanded mall hours from reductions in 2020 due to the pandemic, government subsidies received in 2020 not anticipated to repeat in fiscal 2021 at the same level, an increase in incentive compensation and other discretionary accruals related to improved performance, a legal settlement accrued during the second quarter, an increase in costs related to training and recognition events that were reduced significantly in 2020 due to the pandemic, an increase in marketing events and other related spending that were not possible through restrictions of 2020, and 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 SGA expenses grow in line with overall sales. On a net basis, however, we anticipate operating margins will be up year over year in fiscal 2021, reaching low teens as a percent of sales. We are currently planning our business, assuming an annual effective tax rate of approximately 25% 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, driven primarily by significant increase we achieved in the first quarter, And to a lesser extent, our earnings in the back half and the impact of our stock buyback executed during the year. For the fourth quarter of 2021, we anticipate that EPS growth will be in the mid to high single digits as a percentage over the prior year, inclusive of the impact of stock repurchase previously discussed. We are planning to open 23 new stores in fiscal 2021, including approximately seven stores in North America, 12 stores in Europe, and four stores in Australia. We are planning to close approximately five to six stores during the year. Capital expenditures are planned to be between $19 million and $21 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 the 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 weighted average diluted share count for the full year to be approximately 24.8 million shares. Given the repurchases over the past quarter, we expect the weighted average diluted share count for the fourth quarter of 2021 to be approximately 23 million shares. Any further share repurchases would reduce these amounts. With that, operator, we'd like to open the call up for questions.