Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies Incorporated first quarter fiscal 2022 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 Incorporated business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call are are not based on historical facts that are subject to risks 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 Zuni's filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

Hello, everyone, and thanks 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. Before I end the call to Chris, who will take you through the numbers and our outlook. After that, we'll open up the call to your questions. When we reported record Q1 results a year ago, and more recently, when we discussed our outlook for 2022 during our fourth quarter call in March, We outlined several reasons why the first quarter of 2022 would be down on a year-over-year basis. To reiterate, a year ago we achieved over 100% revenue growth compared with Q1 of 2020, and over 30% compared with pre-pandemic levels in Q1 of 2019, as our teams did an amazing job capturing a large share of the outsized consumer demand that was fueled by record domestic stimulus in early 2021. This was all contemplated when we provided guidance for Q1 sales to be between $215 million and $221 million. As you saw from our release, sales came at the high end of our range at $220.7 million, which represents a 21% decrease compared with Q1 last year, and increases of 60% and 4% over Q1 2020 and 2019, respectively. On top of the difficult sales comparison, the operating environment has become increasingly more challenging due to supply chain bottlenecks, higher logistics costs, a tight labor market, and high levels of inflation. These factors were also incorporated into our outlook, but some of the headwinds were stronger as the quarter unfolded, which combined with a shift in timing of certain expenses resulted in the EPS coming in two cents below our guidance range, a break even to 10 cents. While we're disappointed that our first quarter profitability fell short of our expectations, there are elements of our performance that highlight the underlying strength of our business and the progress we made capturing market share over the past several years. In particular, we experienced strong full-price selling across each of our geographic regions. And despite the tough compare in the U.S. from the stimulus yield spending a year ago, product margins were up domestically. to go along with the strong results across our international entities in Canada, Europe, and Australia. We believe this reflects the strength of our merchandise offering and deep customer connections. If you remove the impact that COVID had on our results, both positively and negatively over the past two years, and compare our performance to pre-pandemic levels, or look at the business over the past decade, you get a clear picture of the growth trajectory since recession of 2009 and 10. From 2011 to 2021, we grew sales at a 10-year compound annual growth rate of 8%. While during that same time period, we grew diluted earnings per share at a 10-year compound annual growth rate of 15%. This represents substantial progress towards our long-term strategy and meaningful shareholder value. Throughout Zooming's 40-year plus history, We've managed the business through multiple different fashion cycles, countless trend changes, and several economic boom and busts, and now a global pandemic. While economies of the world and the consumer categories we operate in are inherently volatile, our flexible business model and consumer-centric growth strategy rooted in strong brand and culture that we've been involving since the company's inception have allowed us to not just survive these periods of instability, but emerge from them even stronger. While the first quarter wasn't without its challenges, and comparisons remain elevated throughout the remainder of the year, we are confident that when the consumer comes out to shop during the peak periods of back-to-school and holiday, we will outperform the competition and extend our market-leading position. Our confidence is rooted in the strength of our teams and great brand partnerships we have forged that bring diversity and uniqueness to our customers that allow them to express themselves in a unique way. Our teams put a significant amount of effort into understanding our customers, not only today, but how they will continue to evolve and what will be important to future generations. This thinking is embedded in our culture and is reflected in who we hire and how we operate. In the past few months, we held both our annual 100K training and recognition event, as well as our manager retreat in person. These are both great cultural events where we're able to recognize our top performers and also bring our managers through a multi-year training format that allows them to be better teachers and better leaders. It is our belief that these events create momentum for our teams and motivate them as they return to their stores with renewed energy and enthusiasm for the Zoomies brand and cultural experience. Our carefully crafted model is built with the customer at the center, allowing them to control the what, when, and how of their shopping experience. Our channel is an organization with inventory visibility from all touch points and back-end capabilities allow us to create synergies regardless of the channel in which sales originate. Each of these distinct attributes will serve us well with today's varied and rapidly evolving shopping trends and logistically challenged environment. We know that times such as these create opportunities. With the right people, strategies, and resources in place, we will work to capture those opportunities from our strong competitive positions. With that, I'll turn the call to Chris to discuss the financials.

Thanks, Rick, and good afternoon, everyone. We're going to start with a review of our first quarter results. We'll then provide an update on our second quarter to date sales trends before providing some perspective on how we're thinking about the full year. First quarter net sales were $220.7 million, down 20.9% from $279.1 million in the first quarter of 2021, and up 3.6% from the pre-pandemic first quarter of 2019. Compared with the first quarter of 2021, the decrease in sales is driven by the significant benefits from the U.S. stimulus realized in early 2021, and to a lesser extent, the continued inflationary pressure on the consumer and increased competition for the discretionary dollar. These forces were partially offset by increased sales in each of our international geographies. From a regional perspective, North American net sales were $186.3 million, a decrease of 25.1% compared to 2021, and a decrease of 0.9% compared to the same period in 2019. Other international sales, which consist of Europe and Australia, were $34.4 million, up 13% from last year, and up 37.5% from the same period in 2019. Excluding the impact of foreign currency translation, first quarter North American net sales decreased 25%, and other international net sales increased 21.8% compared with 2021. First quarter gross profit was $72.4 million compared to $103.2 million in the first quarter of last year. And gross margin as a percentage of sales was 32.8% for the quarter compared to 37% in the first quarter of 2021 and 31.2% in the first quarter of 2019. As Rick highlighted, product margins were strong in all geographies on full price selling this quarter. But the sales mix shift away from our higher margin U.S. business overshadowed this impact as the company company level resulting in a mixed-driven decrease of 20 basis points. The 420 basis point decrease in gross margin was primarily driven by lower sales in the quarter, coupled with elevated expenses due to higher logistics and labor costs. Store occupancy costs deleveraged by 300 basis points on the lower sales volume. Web shipping costs increased by 80 basis points. Distribution center costs deleveraged by 70 basis points. and product margin decreased 20 basis points related to the mix as discussed. The decreases were partially offset by a 70 basis point improvement related to impairments of lease assets booked in the prior year first quarter that did not repeat this year. SG&A expense was $71.9 million or 32.6% of net sales in the first quarter compared to $68.9 million or 24.7% of net sales a year ago And $65.5 million or 30.7% of net sales in the pre-pandemic first quarter of 2019. The 790 basis point increase in SG&A expenses of percentage of sales resulted from the following. 400 basis points in our store wages tied to both deleverage on lower sales as well as our wage rate increase. 200 basis points related to non-wage store costs primarily impacted by lower sales levels and increased rate pressure. 180 basis points in training and events primarily raised the movement of our annual 100K event into the first quarter of 2022 and out of the fourth quarter of 2021, 130 basis points in corporate costs, and 110 basis points in non-store wages. These headwinds were partially offset by 150 basis point benefit related to a one-time 3.6 million government stimulus payment related to our European business and an 80 basis point decrease in incentive compensation. Operating income in the first quarter of 2022 was $0.5 million, or 0.2% of net sales, compared with operating income in the prior year of $34.3 million, or 12.3% of net sales. In the first quarter of 2019, we had an operating profit of $1 million, or 0.5% of net sales. Net loss for the first quarter was $0.4 million, or negative two cents per diluted share. This compares to net income of $26.4 million or $1.03 per diluted share for the first quarter of 2021 and net income of $0.8 million or $0.03 per share for the first quarter of 2019. Our effective tax rate for the first quarter of 2022 is 134.2% compared to 25.7% in the year-ago period. The tax rate in the quarter is inflated due primarily to the allocation of income across entities and the exclusion of net losses in certain jurisdictions. We expect our annual tax rate for the year to be approximately 26%. Looking at earnings in the first quarter compared to our guidance, we experienced a few deviations to what we laid out in March, including cost challenges around labor, shipping, and various other items worth $0.18, as well as timing of expenses that were previously planned later in the year worth $0.06. These issues were offset by a large one-time governmental subsidy payment in Europe worth $0.12 and a reduction of our incentive compensation expense. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $173 million as of April 30th, 2022, compared to $400.4 million as of May 1st, 2021. The $227 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $281.6 million and capital expenditures of $16.5 million. partially offset by cash generated through operations of $83.5 million. Over the past 12 months, the company repurchased 6.5 million shares at an average cost of $43.37 per share and a total cost of $281.6 million. Currently, we have no open share repurchase authorization. As of April 30, 2022, we had no debt on the balance sheet and continue to maintain our full unused credit facilities. We ended the quarter with $141.9 million in inventory, compared with $136.5 million last year, an increase of $5.4 million, or 3.9%. On a constant currency basis, our inventory levels were up 4.1%. Overall, the inventory on hand is healthy and selling at a favorable margin. Now to our fiscal May sales results. Net sales for the four-week period ended May 28, 2022 decreased 20.9% compared to the four-week period ended May 29, 2021. Compared to the four-week period ended June 1, 2019, net sales increased 3.3%. From a regional perspective, net sales for the North America business for the four weeks ended May 28, 2022 decreased 23.5% over the comparable period last year. Now we're down 2.2% compared to the four-week period ended June 1, 2019. Meanwhile, our other international business decreased 0.3% versus last year and increased 55.4% compared to the same period of 2019. Excluding the impact of foreign currency translation, North American net sales for the four weeks into May 28, 2022 decreased 23.2% from the prior year and decreased 2.5% from 2019, while international net sales increased 13.9% compared with 2021 and increased 62.8% compared with 2019. From a category perspective, in fiscal May 2022, all categories were down in total sales from the prior year. Men's was our most negative category, followed by hard goods, accessories, women's, and footwear. With respect to our outlook, I want to remind everyone that formally our guidance involves some inherent uncertainty and complexity in estimating sales, product margins, 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 potential future closures tied to the pandemic. With that in mind, we are currently expecting the total sales for the second quarter of fiscal 2022 will be between $232 million and $239 million with continued pressure on sales during the quarter as we anniversary the impact of domestic stimulus from 2021, the inflationary pressure on the consumer and the current environment, and the continued competition for the discretionary dollar. Consolidated operating profit as a percent of sales for the second quarter is expected to be between 5% and 6.5%, and we anticipate diluted earnings per share will be roughly $0.45 to $0.55. Included in our guidance is the addition of costs as we continue to reinstitute store hours for normal operations, bring back travel, and include the continued impact of some of the cost challenges we experienced in the first quarter. Now I want to give you a few updated thoughts on how we're looking at fiscal 2022. With the first quarter of 2022 behind us, we are more cautious in how we're looking at the full year and the potential impacts of the current operating environment, including the lingering impacts of the prior year stimulus, inflationary pressures, the continued pressure on consumer discretionary spending, and global unrest. Given these pressures, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in these events. We now anticipate that total sales will be down in the high single digits in 2022 as compared to 2021. This is inclusive of our second quarter guidance and anticipates further pressures in the back half of the year given the outsized inflation concerns in the market. 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. How we recognize the external challenges of driving margins with continued inflation and economic uncertainty entering 2022. Given this, we are closely managing inventory and remain flexible as demand fluctuates. We exited the first quarter of fiscal 2022 with a healthy inventory, which was up approximately 4% from both the first quarter of fiscal year 2021 and 2019. As such, we currently believe we can drive consolidated product margin to be roughly flat for the year, inclusive of the ongoing mixed challenges we experienced in the first quarter. We continue to manage costs across the business. However, with our current sales projections, we are anticipating 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 approximately 37% to 41% for fiscal 2022 on the drop in sales. The return to normal for items like mall hours, training and events, as well as the added cost pressures we are experiencing in the current operating environment. Deliverance per share for the full year is currently planned to decrease much less than operating profit as we're able to capitalize on our buyback program execute over the last year. We currently anticipate 2022 diluted earnings per share to be between $3.55 and $3.80 compared to $4.85 in 2021, $3 in 2020, and $2.62 in 2019. We are currently planning our business assuming an annual effective tax rate of approximately 26%. 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 the addition of new stores in 2022. We expect that depreciation and amortization, including non-cash lease expense, will be approximately $22 million, roughly flat to the prior year. And we are currently projecting our share count for the full year to be approximately 19.5 million diluted shares. And with that, operator, we'd like to open the call up for questions.