Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. Fourth 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 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 Zumi's filings with the SEC. At this time, I will 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 over to Chris, we'll take you through the financials and some thoughts on the coming year. After that, we'll open up the call to your questions. When we announced in early January that total sales for the combined November and December period increased 9%, fueled by another strong holiday season, we indicated that we expected trends to slow over the remaining month of the fourth quarter. This was due to several factors, including a tough comparison for stimulus-fueled spending in January of 2021, store traffic likely being impacted this year by the fast-spreading Omicron COVID variant, and the fact that we started to see some sales patterns that resembled pre-pandemic seasons with volume focused around peak periods. We're also cognizant of other potential issues, such as inventory shortages from global supply chain disruptions and added pressure on the consumer spending from rising inflation. As you saw from earnings release issued earlier today, our full fourth quarter results fell short of our expectations as these headwinds combined to create a more challenging finish to what was overall a pretty phenomenal fiscal year. Overall net sales increased 4.6% year-over-year for 2020, for the fourth quarter to a record 346.7 million, and diluted earnings per share reached $1.70, which was also a quarterly record. While the prior year stimulus payments and current market conditions made it difficult to lap last year's January, our performance to close out the fourth quarter does not diminish the incredible year we delivered and the tremendous shareholder value created through record growth and earnings, coupled with the repurchase of 4.6 million shares or 18% of our common stock from the start of fiscal 2021. For 2021, total sales were up 19.5% and 14.5% compared to 2020 and 2019 respectively, and we achieved record diluted earnings per share of $4.85 compared to $3 last year and $2.62 two years ago. In fact, This brings the last five years compound annual growth in diluted earnings per share to over 36%. This result has a direct correlation to the tremendous work of our teams and the strong culture and brand foundation we have built over the past 40 plus years. Looking back on the year, there were a number of positive catalysts. We started the year with a historic stimulus-fueled first and second quarter. and were then able to capitalize on an outsized back-to-school season as majority of school districts around the country resumed in-person learning this year, and finally experienced a growth in the fourth quarter I spoke to. Throughout the year, we saw strong full-price selling, reflecting pent-up demand and our ability to serve the customer with distinct merchandise through an integrated model, however they choose to interact with us. Overall, 2021 was an incredible year for Zoomies, one where our success was directly attributed to the execution of our long-term consumer-centric growth strategy that the company has been building and evolving since our inception. This strategy requires significant agility in navigating the trend cycles and speed desired by our customer. Despite numerous challenges, including global supply chain disruption and labor shortages, inflation, and closures tied to COVID, We again proved our ability to adapt and capitalize on strong consumer demand and expand our market share this year. Looking ahead, we remain confident in our ability to execute over the long term to serve our customer and drive total shareholder return. As we enter 2022, we anticipate our results will be challenged domestically in the first half. As we anniversary the impact of domestic stimulus that allowed us to have record results in the first and second quarter of 2021, when our business model again proved very efficient at grabbing extra discretionary spending. Internationally, we expect 2022 will have some benefit as the businesses we built in Canada, Europe, and Australia capitalize on the market opportunities that emerged as those economies reopened more fully. Although more recently, we are concerned about the potential impacts of the ongoing conflict in Ukraine. Remember, we've built our strategy and manage our company not toward quarter-to-quarter results, but the long-term financial results and overall shareholder value. Our overarching consumer-centric approach rooted in strong brand and culture will remain constant. We build our business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate. We build an infrastructure in which the 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. We're internationally diversified, allowing us to capture global as well as domestic growth, and work with brands that emerge locally and help them grow globally. While much remains uncertain in the macro environment with the continued supply chain challenges, inflation, the ongoing pandemic, and the conflict in Ukraine, we remain confident in this strategy that has been the key to our success. 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 and throughout the pandemic. We have come so far since the period of widespread closures in early 2020 and have emerged from the last two years a much stronger company. We're proud of our achievements to date and excited for the future as we continue to execute on our winning strategy. With that, I'll turn the call 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 2021 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 $346.7 million, up 4.6% from $331.5 million in the fourth quarter of 2020, and up 5.5% from $328.8 million in the fourth 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 the short-term store closures related to the COVID-19 pandemic in the prior year, and a more normalized holiday season in our U.S. business. Our stores were open for approximately 99% of the potential operating days during the fourth quarter of 2021, compared to approximately 94% of the fourth quarter of 2020 and 100% in the fourth quarter of 2019. From a regional perspective, North American net sales were $287 million, an increase of 0.6% over 2020 and up 2.2% compared with the same period in 2019. Other international net sales, which consist of Europe and Australia, were $59.6 million, up 28.8% from last year and up 24.6% from two years ago. Excluding the impact of foreign currency translation, North American net sales increased 0.6%, and other international net sales increased 36.9% compared with 2020. We continue to experience temporary COVID-related closures in Europe, which was open for approximately 94% of the potential operating days during the fourth quarter of this year. During the quarter, the men's category was our largest growth category, followed by footwear, accessories, and women's. Hard goods was our only negative category for the quarter. Fourth quarter gross profit was $133.9 million compared to $129.6 million in the fourth quarter last year, and gross margin was 38.6% compared to 39.1% a year ago. The 50 basis point decrease in gross margin was primarily driven by 40 basis points of increased costs related to inventory shrinkage and obsolescence, 30 basis points of deleverage in our occupancy costs, and 20 basis points of deleverage in our distribution and fulfillment costs, They were all partially offset by 40 basis point increase in product margins. SG&A expense was $82.2 million, or 23.7% of net sales in the fourth quarter, compared to $75.8 million, or 22.9% of net sales a year ago, and $79.5 million, or 24.1% of net sales two years ago. Compared to 2020, the increase in SG&A expense as a percent of net sales was primarily driven by 90 basis points increase in store wages as we saw a continued expansion of mall hours in 2021, and also a higher rate tied to wage inflation. Operating income in the fourth quarter of 2021 was $51.7 million or 14.9% net sales compared to $53.8 million or 16.2% net sales last year. In the fourth quarter of 2019, we had an operating profit of $48.9 million or 14.9% net sales. Net income in the fourth quarter was $38.2 million or $1.70 per diluted share compared to net income of $42.8 million or $1.68 per diluted share in the fourth quarter of 2020, and net income of $37.9 million, or $1.48 per diluted share in the fourth quarter of 2019. Our effective tax rate for the fourth quarter of 2021 was 25.1%, compared with 23.7% in the year-ago period and 24.8% two years ago. Looking at our full year results, net sales for 2021 were $1.18 billion, an increase of $193.2 million, or 19.5%, from $990.7 million for 2020, and up 14.5% from $1.03 billion in 2019. The year-over-year increase in sales was primarily driven by the reopening of our stores compared to the widespread short-term store closures related to COVID-19 pandemic in the prior year. our ability to capitalize on current trends, and the impact of domestic economic stimulus on the business during the year. For the year, our stores were open approximately 97% of the possible days compared to approximately 78% of the possible days during fiscal 2020. From a regional perspective, North American net sales were $1.03 billion, an increase of 19.1% over 2020 and up 12.7% compared to the same period in 2019. Other international net sales, which consist of Europe and Australia, were $153.2 million, up 22.5% from last year and up 27.8% from two years ago. Excluding the impact of foreign currency translation, North American net sales increased 18.7%, and other international net sales increased 21.4% compared with 2020. While not as significant as in fiscal 2020, we continue to experience temporary COVID-19 related store closures outside the United States in fiscal 2021. For the year, our Canadian, European, and Australian stores were open for approximately 86%, 81%, and 79% respectively of the potential operating days in fiscal 2021. 2021 gross margin was 38.6% compared with 35.3% in 2020, and 35.4% in 2019. The 330 basis point increase versus 2020 was driven by meaningful leverage in our fixed cost structure compared to the period of COVID-19 related closures in the prior year. The increase was primarily driven by 140 basis points of leverage in our store occupancy costs when compared to the prior year, which include the continuation of rent charges without associated sales during COVID-19 related closures in fiscal 2020. In addition, there was 110 basis point increase in product margin and 100 basis point decrease in web fulfillment and web shipping costs as the volume shifted back to physical stores with fewer store closures in the current year. Annual SG&A expense was $298.9 million, or 25.3% of net sales, compared with $253.1 million, or 25.5% net sales in 2020, and $280.8 million, or 27.1% net sales in 2019. The 20 basis point year-over-year decrease was primarily driven by 90 basis points of leverage of non-wage store operating costs partially offset by 50 basis point unfavorable impact related to fewer government subsidies received in fiscal 2021. Operating income in 2021 was $157.8 million or 13.3% of net sales compared with $96.9 million or 9.8% of net sales last year In 2019, we had operating profit at $85.8 million, or 8.3% of net sales. Full year net income was $119.3 million, or $4.85 per diluted share, up from $76.2 million, or 3 cents per diluted share in 2020, and $66.9 million, or $2.62 per diluted share in 2019. Our effective income tax rate for 2021 was 25.7%, compared to 25.6% for 2020 and 26.5% for 2019. Turning to the balance sheet, the business ended fiscal 2021 in a very strong financial position, even as we accelerated our share repurchase activity late in the year. Cash and current marketable securities as of January 29, 2022 were $294.5 million, compared to $375.5 million as of January 30, 2021. The change in cash and current marketable securities was driven primarily by share repurchases of $193.8 million and capital expenditures of $15.8 million, partially offset by cash generated through operations of $135 million. During 2021, the company repurchased 4.6 million shares at an average cost of $43.30 per share and a total cost of $198.4 million. We had $83.3 million remaining on the current share repurchase authorization as of the end of the fiscal year. First quarter to date as of March 5th, 2022, the company had repurchased an additional 1.2 million shares of stock at an average price of $44.47 and a total cost of $54.3 million. As of that date, we had $29 million remaining on the current share repurchase authorization. As of January 29th, 2022, we had no debt on the balance sheet and continued to maintain our full unused credit facilities. We ended the year with $128.7 million in inventory compared with $134.4 million last year, a decrease of $5.6 million or 4.2%. On a constant currency base, our inventory levels were down 2.1%. Overall, the inventory on hand is healthy and selling at a favorable margin. Given supply chain issues and lower than expected inventory at fiscal year end 2021, we anticipate that inventory will grow in excess of sales in fiscal 2022. Now to our fiscal first quarter to date sales results. Total first quarter to date sales for the 35 days ended March 5th, 2022 decreased 1.9% compared with the 35 day period ended March 6th, 2021. Our stores were open for 100% of the available days during the period in 2022, compared to approximately 93% in the same period last year. From a regional perspective, total sales for our North America business for the 35-day period into March 5th, 2022 decreased 5.3% over the comparable period last year. Meanwhile, other international business total sales increased 17.9% versus last year. From a category perspective, footwear was our most positive category, followed by women's and accessories. hard goods was our largest negative category, followed by men's. With respect to our outlook, while we refrain from giving specific guidance for most of 2020 and all of 2021 due to limited visibility, we have decided to provide specific guidance for the first quarter of 2022 and some annual thoughts. We have made this decision based on the slow starts of the quarter, tough comparisons to prior year, and the many moving parts affecting near-term sales and margins. I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin, and earnings growth, given the variety of internal and external factors that impact our performance. Furthermore, while our guidance does include the negative impact in 2022 as we anniversary the 2021 domestic stimulus, it does not include any new closures tied to the pandemic over the last two years or a larger impact of the conflicts in the Ukraine and Eastern Europe. With that in mind, we are currently expecting total sales for the first quarter will be between $215 million and $221 million, and they will see continued pressure on sales during the second quarter as we anniversary the impact of domestic stimulus from 2021. Consolidated operating profit as a percent of sales for the first quarter is expected to be between break-even to positive 1.5%, and we anticipate diluted earnings per share will be roughly break-even to 10 cents. Included in our guidance is the addition of costs as we continue to re-institute store hours for normal operations and bring back travel and our events, including our 2021 100K event that normally occurs in January but was moved out to Q1 for our employees' safety. Now I want to give you a few updated thoughts on how we're looking at 2022. And looking at the annual picture, we had mixed thoughts as we exited 2021 just one month ago, assuming modest 2022 sales increases and double-digit growth in earnings per share tied to the buyback. Now, with the first five weeks of 2022 behind us, we are more cautious in how we are looking at the full year and the potential impacts of the current operating environment. After lapping the impact of the January 2021 stimulus payments, we are now expecting the first half of the year to be much tougher as we anniversary the larger March 2021 economic stimulus. In addition, since the start of Russia's invasion of Ukraine 14 days ago, we have experienced a noticeable change in consumer spending and expect the conflict impact on global inflation will be an added headwind in the near term. For the back half of the year, we are more optimistic the trends will improve as our customer shops during the important back to school and holiday seasons. As always, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in these events. For sales, we anticipate that total sales will be down in the low single digit levels in 2022 as compared to 2021. This is inclusive of our Q1 guidance and anticipates our domestic business remains challenged heading into the second quarter before we return to normal during the peak selling seasons. Internationally, we are planning strong growth across Canada, Europe, and Australia as we continue to capitalize on more normalized operations, albeit we are anticipating some near-term softness in Europe due to the ongoing situation in Ukraine. In fiscal 2021, we achieved peak product margins once again, representing our sixth year in a row of product margin expansion. We are currently working on initiatives to continue driving product margins domestically and internationally. However, we recognize the external challenges of driving margins with continued inflation and economic uncertainty entering 2022. With that, we are planning consolidated product margin to be roughly flat. We continue to manage costs across the business. However, with our current sales projections and returning to more normalized operations, we are projecting some deleverage domestically, while our international entities show leverage as they capitalize on continued market share gains and more normalized operations. We currently anticipate year-over-year operating profit dollars will be down in the mid-teens for fiscal 2022. Diluted earnings per share for the full year is currently planned to increase in the mid-single digits as we were able to capitalize on our buyback program executed over the last year. We are currently planning our business, assuming an annual effective tax rate of approximately 25%. We are planning to open approximately 34 new stores during the year, including approximately 15 stores in North America, 14 stores in Europe, and five stores in Australia. We expect capital expenditures for the full 2022 fiscal year to be between $30 million and $32 million, compared to $16 million in 2021, with the majority of the increase tied to addition of stores in 2022. We expect the depreciation and amortization, excluding non-cash lease expenses, will be approximately $22 million, down slightly to the prior year. And we are currently projecting our share count for the full year to be approximately 19.6 million diluted shares. Any share repurchases beyond our current repurchase plan will reduce our share count from this estimate. And with that, operator, we would like to open the call up for questions.