Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. Second 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, Inc.' 's business outlook and contains forward-looking statements. These FOIL statements and all other statements that may be made on this call are not based on historical facts and are subject to risks and uncertainties. Additional information concerning a number of factors that 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 would like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, the conference is yours.

Hello, and thank you everyone for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the second quarter and back to school. Before I hand the call over to Chris, who will take you through our financial results and outlook in more detail. After that, we'll open the call to your questions. Reflecting back on this time last year, the U.S. portion of our business was benefiting from several very strong tailwinds. The U.S. consumer was primed to spend with a wallet fortified by another round of government stimulus and further enabled by local economies more broadly reopening after many months of closure. Zoom Eats, fresh off a record first quarter in 2021, posted the best second quarter in the company's history as we captured our fair share of that outsized demand. Over the past 12 months, those tailwinds have dissipated. Headwinds have materialized and then intensified, particularly in our U.S. business. On top of the difficult sales comparison a year ago, the operating environment has become increasingly more challenging due to lingering supply chain disruptions, higher district costs, a tight labor market, negative foreign currency exchange impacts, and most acutely, high levels of inflation leading to intense competition for declining discretionary dollars. While each of these factors was incorporated into our outlook for this quarter and thoughts on the year, inflationary pressure on the consumer intensified as the quarter unfolded. Beyond the macroeconomic factors, we have also continued to feel the pressure of skate hard goods declines on the business as well, a push to more value-added offerings away from our higher price point branded product. The combination of these factors led to our sales coming in $12 million beneath the bottom of our expected range. This sales shortfall, coupled with inflationary cost pressures, were only partially offset by other savings during the quarter and resulted in earnings well below our stated range. We're disappointed that our recent performance fell short of expectations. As we mentioned last quarter, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in the macroeconomic environment. We're actively adjusting our merchandise assortments and managing expenses in order to better position ourselves for the current operating environment. While comparisons do begin to moderate in the back half of the year, based on recent trends, we believe it is prudent to adopt a more cautious view on the remainder of 2022 that accounts for the increased pressure we've seen on the consumer. Despite the challenges with our business, there were bright spots on the quarter. including fast times in Australia performing exceptionally well to our plan, product margins remaining strong. While they were down slightly from the prior year, we have not given back the vast majority of gains we've made over the past few years, and our teams are able to mitigate the challenging operating environment, as well as the negative country and product mix impacts. Inventory was managed very well, with an overall foreign exchange adjusted increase of only 4.4%, And substantial work was completed in our long-term initiatives, including the opening of 34 new stores across our business since this same time last year. While the current environment has caused a near-term pause in our quarterly sales growth, our focus remains on creating long-term shareholder value. Zumi's four-decade history of adept management through multiple business and fashion cycles, coupled with our strong balance sheet, gives me confidence that this slowdown is temporary. We've been through recessionary cycles before, and our experience has been that we lead into them, given the discretionary nature of our business and the impact of tough economic times on our customer base. 2008, 2009, we saw annual comparable sales down 6.5% and 10%, respectively, only to be followed by comparable sales increases of 11.9%, 8.7%, and 5% over 2010, 2011, and 2012, respectively. Our customer-centric strategy and strong brand and culture are driving force towards sustainable growth over time. Our brand partnerships that enable unique self-expression for our customers, our enviable footprint that informs us of global trends, our channel-less organization that allows us to create synergies across sales channels, and our business model that gives our customers full control of their shopping experience will continue to differentiate Zoomies in this challenging environment. That differentiation will allow us to capture new opportunities and emerge as an even stronger competitor when these market forces subside. 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 second quarter results. I'll then provide an update on our third quarter to date sales trends before providing some perspective on how we're thinking about the full year. Second quarter net sales were $220 million, down 18.1% from $268.7 million in the second quarter of 2021, and down 3.7% from $228.4 million in the second quarter of 2019. Excluding the impact of foreign currency translation, net sales were down 16.4% compared with the prior year, and down 3% compared to 2019. The year-over-year decrease in sales was primarily driven by the benefits from domestic stimulus in the prior year, as well as increased macroeconomic headwinds as inflation weighed on consumer discretionary spending during the current year quarter. From a regional perspective, North American net sales were $189.9 million, a decrease of 20.1% from 2021 and down 8.2% compared with the same period in 2019. Other international net sales, which consists of Europe and Australia, were $30.1 million, down 3.4% from last year, and up 40.2% from pre-pandemic levels in 2019. Excluding the impact of foreign currency translation, North America net sales decreased 19.8%, and other international net sales increased 10% compared with 2021. From a category perspective, all categories were down in total sales from the prior year during the quarter. with men's being our most negative, followed by hard goods, accessories, women's, and footwear. Second quarter gross profit was $75.1 million compared to $105 million in the second quarter of last year and $77.2 million in the second quarter of 2019. Gross margin as a percentage of sales was 34.1% for the quarter compared to 39.1% in the second quarter of 2021 and 33.8% in the second quarter of 2019. While product margins were strong in most geographies on full price selling this quarter, the sales mix shift away from our higher margin U.S. business overshadowed this impact at the company level, resulting in a mix-driven decrease of 17 basis points. The 500 basis point decrease in gross margin was primarily driven by lower sales in the quarter, driving deleverage in our fixed costs, as well as rate increases in several areas. Store occupancy costs deleveraged by 220 basis points on lower sales volumes. Shrink increased by 120 basis points as we saw a return to more normalized pre-pandemic levels. Web shipping costs increased by 80 basis points, and distribution center costs deleveraged by 70 basis points. SG&A expense was $70.1 million, or 31.8% of net sales in the second quarter, compared to $73 million, or 27.2% of net sales a year ago. and $65.5 million or 28.7% of net sales in 2019. Compared to 2021, the 460 basis point increase in SG&A expense as a percent of net sales resulted from the following. 290 basis points in our store wages tied to both deleverage on lower sales as well as wage rate increases. 90 basis points related to other store operating costs primarily impacted by lower sales levels. 90 basis points in corporate costs and 90 basis points in non-store wages. These increases were partially offset by a 110 basis point decrease in legal costs due to a settlement recorded in the second quarter of 2021. Operating income in the second quarter of 2022 was $5 million, or 2.3% of net sales, compared to $32 million, or 11.9% of net sales last year. In the second quarter of 2019, we had an operating profit of $11.7 million, or 5.1% of net sales. Net income for the second quarter was $3.1 million, or $0.16 per diluted share. This compares to net income of $24 million, or $0.94 per diluted share for the second quarter of 2021, and net income of $9 million, or $0.36 per diluted share for the second quarter of 2019. Our effective tax rate for the second quarter of 2022 is 44.7%, compared with 26.8% in the year-ago period and 30.7% in 2019. 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 31%. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $166.2 million as of July 30th, 2022, compared to $412 million as of July 31st, 2021. The $245.8 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $271.2 million, resulting in a reduction in shares outstanding over the last year of 23.6%. We also had capital expenditures of $20.6 million, partially offset by cash generated through operations of $58.7 million. As of July 30, 2022, we had no debt on the balance sheet. and continue to maintain our full unused credit lines. We ended the quarter with $151.1 million in inventory, up 1.1% compared with $149.4 million last year. On a constant currency basis, our inventory levels were up 4% from last year. Second quarter 2022 inventory was flat to our second quarter 2019 inventory. Overall, the inventory on hand is healthy and selling at a favorable margin. Now to our third quarter to date results. Net sales for the 37 day period into September 5th, 2022 decreased 18.1% compared to the same 37 day period in the prior year into September 6th, 2021. Compared to the 37 day period into September 9th, 2019, net sales decreased 12.6%. Comparable sales for the 37 day period in September 5th, 2022 were down 19.7% for the comparable period in the prior year, and decreased 15.3% from the comparable period in 2019. From a regional perspective, net sales for our North America business for the 37-day period into September 5th, 2022 decreased 19.5% over the comparable period last year, and we're down 15.4% compared to the 37-day period into September 9th, 2019. Meanwhile, our other international business decreased 2.7% versus last year, and increased 25.1% compared with the same period of 2019. Excluding the impact of foreign currency translation, North America net sales decreased 19.4%, and other international net sales increased 11.9% compared with 2021. From a category perspective, all categories were down for the third quarter to date. Men's was our largest negative category, followed by hard goods, women's, accessories, and footwear. With respect to our outlook, 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. With that in mind, we are currently expecting that total sales for the third quarter of fiscal 22 will be between $220 million and $228 million. Consolidated operating profit as a percent of sales for the third quarter is expected to be between 0.5% and 2.5%, And we anticipate diluted earnings per share will be roughly $0.03 to $0.18. Now I want to give you a few updated thoughts on how we're looking at fiscal 2022. With the first half 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 inflationary pressures on the consumer discretionary spending. While comparisons do begin to moderate in the back half of the year, based on recent trends, we believe it's prudent to adopt a more cautious view on the remainder of 2022 that balances the headwinds we are facing. We now anticipate total sales will be down in the 18% to 19% range in 2022 as compared to 2021. This is inclusive of our third quarter guidance and anticipates further pressure in the fourth quarter given the outsized inflation concerns in the current market and current trend lines. In fiscal 2021, we achieved peak product margins once again, representing our sixth year in a row of product margin expansion. As we have moved through the first half of the year, we have closely managed inventory and seen only a slight decline in product margin despite inflationary pressures and mixed pressures between categories and across countries. We currently believe we will continue to see some product margin erosion in the third and fourth quarter and are planning the back half to be down slightly to the prior year. We continue to manage costs across the business. However, with our current sales projections, we are anticipating deleverage across our fixed costs of the business. We currently anticipate year-over-year operating profit dollars will be down approximately 73% to 77% for fiscal 2022 on the drop in sales, inflationary cost pressures, and the return to normal for items like mall hours and training and events. Diluted earnings per share for the full year is currently planned to decrease less than operating profit, related to the share repurchases earlier in the year. We currently anticipate 2022 diluted earnings per share to be between $1.30 and $1.55. We are currently planning our business, assuming an annual effective tax rate of approximately 31%. We are planning to open approximately 35 new stores during the year, including approximately 16 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 $29 million and $31 million, compared to $16 million in 2021, with the majority of the increase tied to the addition of stores in 2022. And we expect that depreciation and amortization excluding non-cash lease expense will be approximately $21.5 million, down slightly from the prior year. We are currently projecting our share count for the full year to be approximately 19.5 million diluted shares. With that operator, we'd like to open the call up for questions.