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.

Certainly. Ladies and gentlemen, if you do have a question at this time, please press star, then 1 on your touch-tone telephone. Again, if you do have questions, please press star, then 1. And our first question comes from Jeff Van Zanderen of B. Reilly. Your line is open.

Hi, this is Richard Magnuson for Jeff Van Sinderen. Thank you for taking our call. Given the higher fuel prices, are there any discernible trends that you've noticed in store traffic versus UPT and ADS that suggest that the consumer is buying more at one time and shopping less frequently?

You know, I can't talk. We'll look here. But I don't think I've seen the typical trends we see, Richard, in these scenarios is that is what happens. Weekends become a bit bigger. People consolidate trips. I haven't sensed that at this point in looking at sales. But I think that is an expectation we would have. As time progresses over these high gas prices, we'll see consumers consolidate trip, and we will expect to see, again, that would mean weekends a little bit better historically is how it's worked for us rather than weekdays.

Richard, I'd just add to that, kind of correlated to that. We are seeing a pickup in our own private label merchandise as we think about kind of what that tradeoff could be. We have seen a little bit of a spike there in the first quarter, which also indicates some of the pressures that the consumer might be under.

Oh, okay. And then can you speak more about how you have planned back-to-school merchandise receipt flow this year versus last year, and any other color that you can add on supply chain getting better or worse overall?

Sure. Yeah, I mean, I think what you saw from us here in this release is really kind of a relook at the back half of the year. I think one thing that we've seen over the last couple years is with the stimulus and outside spend and really actually our results coming into the pandemic in 17, 18, 19, is we've run really strong results. And I think that's a testament to the strategies we put in place and the way that we're speaking to the customer. And so we're really pleased with how we've performed. Obviously, when you run outsized results during the period of stimulus, you know, you might have more challenging results as you anniversary that. So I think we're seeing some of that, and then we're looking at kind of just where the consumer's at with the pressures on them, the inflationary pressures on them, the rising costs really across pretty much all areas of their ecosystem, as well as, you know, retail has probably over-indexed a little bit over the last couple years as people have been doing less travel and less experiential. So I think there's more competition for discretionary dollars. So We thought about a lot of that coming into the year, how we planned Q1. Obviously, the results of Q1 and now the first month of Q2 had us just sort of revisit how we're thinking about the year. As we think about back to school, to your question specifically, we have planned a little bit more of a decrease than what we had coming into the year. We're starting to think about that both in back to school and to holiday to plan inventory receipts a little bit lower in light of where the environment is. there's not going to be a major change in cadence year over year. We're still expecting the back-to-school season to flow in a similar cadence to what we've seen the last couple years. But I think overall, we're planning a little more conservatively just based on the backdrop of where our consumer is facing and what we're seeing in the marketplace. Obviously, one of the benefits of our business is we can adjust. We have really good relationships with our brand partners, and we continue to to work with them to navigate this environment. As you know, a large portion of what we do is screenables and quick moving. So I think we can, as we start to see differences or movement in trends, we'll be adjusting. But we are looking at the back half more conservatively as we've laid out in our guidance today.

And I would just add, Richard, that as you said in the comments, that I'm very confident that as we get into those peak windows, no matter what our performance is, I think on a relative basis, I feel good that it's going to be strong relative to our competitors.

Okay. And then lastly, what else can you tell us about the trends in European business and the outlook there? Sure.

Sure. Yeah, I mean, I think as we think about Europe overall, I think obviously we're very proud of how the Europe team's operating. This is a super challenging environment. You know, we had really strong hopes coming into this year about just the momentum we built there. And obviously with the war in Ukraine, we talked about in our March call, we did see a tick down on kind of their performance and it's been well documented here over the last couple of months. It's obviously... really impacted the cost structure and inflation structure over there, specifically around energy, but some of the same concerns we're having here. So I think as we think about kind of where we're at in the short term, the results remain positive, which we're really happy with. They had some closures last year. So that while positive results in Europe, they're not quite as high as we originally anticipated. I will say Q2 is off to a better start. It's still a little bit lower than what we were planning coming into the year. We stated on the call here just a few minutes ago that we did obtain a subsidy that helped offset some of the losses we had incurred across 2020 and 2021. in the amount of about $3.6 million. So that did help overall. But, you know, I think it is still a difficult operating environment, but one that I think our teams are really executing here. And that kind of gets me to thinking about the long term for Europe and where we're at. And I will tell you, we feel really confident in our position, just as we have in March and calls prior to that. And I think that that reasoning is really important. hinged on the fact that this is a good time to invest, given where the market's at. You're going to see us, as we've laid out in the call, open 14 stores in Europe this year. We'll open some new markets. We did open our first store in Norway, and we expect to continue to grow across Europe. I think it's aligned with our strategy. It's aligned with what we feel is right, and I think not only can this investment really help us capitalize on the European market, but I think we're one of the largest lifestyle retailers operating across Europe at this point. And I think we have a lot of room for growth. So we're excited about that. I think it means a lot for our customers there. And I think it helps us from a global perspective with how we're able to serve brands. And I think that's a big piece of what we're doing when you think about the idea of Brands emerge locally and they grow globally, and this platform that we're building of operations now in the US, Canada, Europe, and Australia, it really does help us identify those trends, work with those brands, move brands around the world when we see things that might be working. And I think, you know, that's something we're pretty excited about. So, you know, as we mentioned in March, you know, coming into 2022, we had built a plan that we thought would get us to break even or even slightly positive. Obviously, we had to rethink that a little bit just with the war and where things are at. We're not quite as optimistic, but again, we feel like we're really close to turning to that profitability level again. We feel like our teams are executing at a high level. The stores we've been opening over the last few years, despite the pandemic challenges, when they've been opened, have performed much better. And I think we're really kind of dialing in that formula. And I think this is a good growth opportunity for us in the future.

Thank you. I'll jump back in the queue.

And our next question comes from Corey Tarlow of Jefferies. Your line is open.

Hi, good afternoon and thank you for taking my questions. How are you thinking generally about the promotional environment and what are your expectations for the environment going forward?

I'll start, Corey, and then let Chris add his thoughts too. But again, as we've said here, we feel pretty darn good about our inventory position and we think we can as the direction Chris gave you in thinking about where product margin can be for this year, we feel obviously pretty good about where we're at. Now, there is one big caveat with that in this environment, depending on how much more difficult the broad macroeconomic environment is, our competitors own a lot more inventory. And it could If they drive down prices a lot, then we may have to react to it, but that is not our current plan. We feel we can manage through it well, and we gave you the direction kind of we're thinking about our own cadence at this stage of the game relative to product margin. Chris, I don't know if you had anything else to add.

No, I'd just add I think the product margin for us, we mentioned on the call, last year was our sixth year in a row of product margin gains, and as we've disclosed the last couple years, the Last year was 110 basis point increase. The year before that was 70 basis point increase. So we've made real substantial progress on some of our initiatives over the last few years, both during the pandemic and prior to the pandemic. So I just call out that there's a big benefit there. I mean, we were really happy with how our business performed in the first quarter. I think our teams really executed the plan in regards to where we were planning product margin. We did mention Product margin was down 20 basis points, but that's really more a factor of mix than anything else. As many of you know, our U.S. business runs at a higher product margin than our international entities, which is also an opportunity for us because our international teams as they gain scale and they continue to grow, we'll have more opportunity to grow product margin. And we're seeing that today in how they're executing. So I think Rick's totally right. We're going to kind of have to manage this to where the market's at. But again, our strategy has been pretty clean coming into this. So we'll see how the next few quarters play out.

And I just add, again, the comment Chris made earlier, Corey, that the fact that Again, we don't drive our private label to any particular target. Customers take us there, and they're telling us at this point that the private label is important to them, all of our collection of private label brands. So we're seeing that kick up, and so obviously we'll be following our customer there too in terms of which will be a good thing from a margin perspective for the business.

A question on the 2Q guide. What's embedded in the – EBIT margin improvement sequentially from 1Q.

Yeah, I mean, I think you have a few different things. Obviously, Q2 historically has been a little more of a profitable quarter than Q1 to start with. I think that's where you have to originally kind of think through. And then as we think through the second quarter, I think we've got kind of costs planned a little more appropriately for where they are. We don't have the event load. that we had in the first quarter. As you know, we did our 100K, which is our annual training and recognition event, as well as our manager's retreat in the first quarter, which is our two of our three annual events. We normally would have the first of those in January, so it would fall into the prior year, but just because of safety for our employees and where the pandemic was at, we moved into the first quarter. You're going to see some movement of costs like that that's played out into the second quarter. And, you know, I think overall that's going to tell the main story. I think when we think about the second quarter and where earnings is at, one of the things we're really proud of is just how that bridges from the pre-pandemic timeframe. And I think, again, that maybe speaks to your earlier question around product margin because we have seen really great product margin gains since 2019, as well as how we've tried to manage costs to offset some of the other areas where we've seen increases. So that's kind of how we've thought about Q2, and obviously we'll see how it plays out.

Very helpful. And then just lastly, what's your expectation around shipping and logistics costs as we move throughout the year?

Yeah, I'll go ahead and take a crack at this. And if Rick would like to add anything, this has been one of those we called out in our call. This is one of our bigger misses in Q1, where we just saw costs increase to the level that we were not anticipating. And I think, you know, as we move through the year, we're hoping there'll be some moderation of that, but also knowing that there's been a lot of supply chain challenges and, you know, and higher cost there. So, we factored that in as we moved into our guidance and how we kind of our high-level guidance for the, I should say, our detailed guidance for Q2 and our high-level guidance for the year that we are expecting there to be continued price pressure on the supply chain. Now, to manage that, we are working on some things and some initiatives internally that you know, can consolidate packaging and decrease some of those costs overall. And we're hopeful those will play out, but we've also factored in a higher cost here for the remainder of the year.

Understood. Thank you very much. Best of luck. Thank you.

Ladies and gentlemen, as a reminder, to ask a question, please press star, then one. Our next question comes from Mitch Comet of Seaport Research. Your line's open.

Uh, again, thanks for taking my questions. Um, Hey Chris, on the categories, I don't recall you seeing what the categories were for the quarter. Maybe I missed that, but I guess even more important than that, I'm curious how they stacked up versus 2019. I don't know if you have that.

Um, uh, versus 2019. Uh, well, let me, let me start with the quarter. Uh, we did see, um, we did see all categories down in the first quarter as you would expect. Um, You know, hard goods led the way, followed by our men's business, our women's business, our accessories business, and then footwear was our strongest negative. I don't have them compared to 2019 in front of me today. What I can tell you is that that's a little more of a mixed bag. We have some that are up and some that are down. But, you know, overall, we've seen, you know, in the short-term, categories down.

Yeah. I guess as a follow-up to that, the sum up, sum down, do you know if hard goods was down in the quarter versus 19, and does your guidance assume hard goods is down? Like your sales guidance now I think is up mid-singles on a three-year, if I did my math correctly. I'm wondering if hard goods was down in the quarter versus three years ago and if the guidance assumes hard goods is down versus three years ago.

Hard goods would not have been down versus three years ago. And I think the way we're thinking about hard goods, obviously, as you know, it had quite a run up until last year. And obviously last year, right about in Q2, it started to become more challenged. And 2021 was a pretty tough year for hard goods. I think if we look at that period of time, 18 into 2020, it went from 10% of the business in 18 to 19% of the business in 2020. So Last year, it was at 15% of the business. So you saw that, you know, you know, our strategy over the last, you know, 10, 20, 40 years has really been to just drive where those dollars are at. But as we came into 2022, we did expect, you know, hard goods to be down. Obviously, we expected the losses to moderate as we move through the year, just as they as we saw a pretty big drop-off during 2021. So as we look at Q3, Q4, we've already seen pretty large drop-offs in 2021. So our expectation is that we will continue to see in Q2, our goods drop. We may continue to see it in Q3 and Q4 as well, but certainly at a lower level than what we've experienced over the trailing three or four quarters.

Okay. And then, again, I'm kind of working through the math, but, again, it looks like on a three-year, you expect sales to be up mid-singles, EBIT to be up 16% or so, mid-teens call it, which I think gets me to kind of a 9% out margin for the year. I don't recall if you gave the margin rate for the year. I was hoping you'd kind of talk through. So I think you said in the past that long-term sustainable out margin is I think you said like in the low double-digit range. Can you talk about some of the headwinds that are in the margin this year that you think go away over time and if there's any way to kind of isolate their impact that they're having on the year?

Yeah, certainly. I think, you know, your math – pretty much right on from where we're thinking the year. And as we entered the year, we thought we had the opportunity to maintain double digits from where we're at. But obviously, with what we've seen now through the first quarter and the current trend, we are planning that really high, high single digit in operating profit dollar or operating as a percent of the overall sales. which again would be, as we look back at kind of where we've performed here, would be pretty high compared to where we were at pre-pandemic. And I think that's one thing I would just call out, even with the annual guidance that we put out there today, while a step backwards from last year, it continues to be our second highest sales in the history of the company and the second highest earnings in the history of the company. And As you know, these aren't always straight lines, but over time it's about driving forward. So I think, you know, as we look at kind of to your point of just, you know, where are we on this op margin, if it is at that 9%, we do continue to believe that that long-term we can drive that into the double digits and meaningful, uh, you know, above, uh, maybe even into the low teens. So like, where does that come from to your second question? Uh, I think there's, there's going to be continued, um, you know, I think we can continue to do margin expansion. And while, uh, in the short term, we've talked about that being a little more compressed. I think long-term we do have initiatives here that we think we could continue to drive here in North America. We believe internationally we have a lot of room to grow there. I think you're going to see continued leverage up and down the model as we do have a pretty heavy fixed cost business, which is why you see something like in 2021 when we over index in sales, you see a pretty strong flow through. And on the flip side here in 2022, as we see a little bit of a pullback in sales, you're seeing a bigger drop. on the bottom lines. But I think you'll see leverage and occupancy in some of those areas. We'll see some of the shipping costs moderate. Obviously, one of the other areas that has been impactful to us here in the short term has been labor. And so I think that we'll see that component. And then the other big piece of driver for us is on the international side. When we look at kind of where we are, not only we've spoken to product margin, but just on the overall earnings side. And you've got a good feel on kind of where the European business is, as we've stated on this call and other calls. This is a business that's losing money, you know, not tens of millions of dollars, but millions of dollars. And this will be another big driver for us as we prove that business out and we see that turn. We'll see a big benefit to our overall bottom line as that turns positive.

Great. Appreciate all that, Connor. Thanks.

You bet.

And I'm showing no further questions. I would now like to turn the call back to management for closing remarks.

All right. Thank you all very much for interest in Zoomies. Again, as we've said here, we feel great about where we're at. We have a bit of a tough time. Not a straight line, but as we all know, every time we go through the tougher times, we come out stronger and better at the other side. So, as always, we appreciate your interest in Zoomies, and we'll look forward to talk to you again in September. Thanks, everybody.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Have a good day.