Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to Zumi, Inc.' 's first quarter fiscal 2023 earnings conference hall. 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 includes comments concerning Zumi, Inc.' 's business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning the numbers of factors that could cause actual results to differ materially from the information that will be discussed is available in Zoom use filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Hello, everyone, and thank you 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 first quarter before handing the call to Chris, who will take you through the financials and some thoughts on the second quarter and rest of the year. For that, we'll open the call to your questions. As anticipated, the first quarter was challenging as we saw similar domestic trends to those experienced in the fourth quarter of last year. Operating performance was in line with our outlook and reflects a significant change the broader U.S. economy, and retail in particular, has undergone over the past 12 months. The continued effects of inflation weighing on consumer discretionary spending, combined with heightened promotional activity across the industry to clear excess inventory levels, our full price selling model has been under pressure. We're not pleased with our recent results. That said, we aren't discouraged either. Our team has navigated economic down cycles before, and while each cycle has some unique characteristics, the one constant is that they eventually turn positive, and Zooming has historically outperformed the market on the way up. We are confident that the connections we forge with our customers through our distinct brand, culture, and diverse and differentiated merchandise offering, featuring highly sought after, hard to find brands, and world-class service are as strong as ever. The year unfolding, as we anticipated thus far, we're staying the course with the plan we outlined on our Q4 call in March. This includes being diligent with our spending, focusing on the strategic investments that we believe will create significant long-term benefit for our customers, our business, and our shareholders, by managing carefully in the short term what we can control. Some of the long-term strategic investments we believe are important to push forward include continued investment in our people through best-in-class training and mentoring, In 2022, we were able to execute all three of our in-person national events that are focused on intense training, connection, and recognition. This has included the return of our January 100K event, celebrating the best of our sales teams and connecting them with our key brands. We've continued with this trend in 2023, executing our annual manager retreat just a few weeks ago, focusing on development and leadership. Optimizing trade area performance by ensuring that we have the right number of stores to serve our customers in each market and getting the right product in the right places to best serve customers as quickly as possible. Continuing to work with brands to increase speed and flexibility while increasing margins. Investing in innovative approaches generate human-to-human connections with our customers and engage with them in new ways that enhance the shopping experience. and continue our international expansion with a focus on Europe and Australia. We know that brands emerge locally and grow globally, and our international presence provides us the opportunity to better serve both our customers and our brand partners while we continue to optimize these operations with many of the initiatives we have proven across North America. We feel good about the progress we made internationally in the first quarter, with comparable sales in Europe and Australia increasing 12.8% and 8.7%, respectively. It was a tough quarter, but I continue to be confident that we have the right team and necessary experience to weather these turbulent times and emerge well-positioned to accelerate market share gains when conditions improve. With that, I'll turn the call to Chris, who will discuss the financials. Chris.

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our first quarter results. I'll then provide an update on our May sales trends before providing some perspective on how we're thinking about the full year. First quarter net sales were $182.9 million, down 17.1% from $220.7 million in the first quarter of 2022. Comparable sales were down 18.8% for the quarter. The decrease in sales was driven by a North America business offset by more favorable results for Europe and Australia. During the quarter, we continued to see softer sales, primarily driven by ongoing inflationary pressures on the consumer. Growth was also negatively impacted by 87 basis points related to unfavorable changes in foreign currency. From a regional perspective, North American net sales were $144 million, a decrease of 22.7% from 2022. Other international net sales, which consists of Europe and Australia, were $38.9 million, up 13.3% from last year. Excluding the impact of foreign currency translation, North American net sales decreased 22.4%, and other international net sales increased 17.1% compared with 2022. Comparable sales for North America were down 24.2%, and comparable sales for other international were up 12.2% for the quarter. From a category perspective, all categories were down in comparable sales from the prior year during the quarter, with men's being our most negative, followed by footwear, accessories, hard goods, and women's. Total dollars per transaction were up for the quarter, driven by an increase in average unit retail, partially offset by a decrease in units per transaction. First quarter gross profit was $49.4 million, compared to $72.4 million in the first quarter of last year. Gross profit as a percentage of sales was 27% for the quarter, compared with 32.8% in the first quarter of 2022. The 580 basis point decrease in gross margin was primarily driven by lower sales in the quarter, driving deleverage in our fixed costs. The key areas driving the change were as follows. Store occupancy costs deleveraged by 290 basis points on lower sales volumes. product margins decreased by 70 basis points, web shipping costs increased by 60 basis points, distribution center costs deleveraged by 50 basis points, buying and private label costs deleveraged by 40 basis points, and inventory shrinkage increased by 40 basis points. SG&A expense was $70.7 million, or 38.7% at sales in the first quarter, compared to $71.9 million, or 32.6% at sales in the year-ago period. The 610 basis point increase in SG&A expenses and percentage sales resulted from the following. 270 basis point increase due to both deleverage of store wages on lower sales, as well as increases in wage rates that could not be offset by hours reductions. 180 basis points due to a one-time German government subsidy received in the first quarter of fiscal 2022. 160 basis point increase due to deleverage of non-wage store operating costs. 90 basis point increase in non-store wages, 20 basis point increase in stock compensation expense, 20 basis point increase in annual incentive compensation, and a 20 basis point increase in other corporate costs. These increases were partially offset by a 150 basis point reduction due to the timing of our 100K event, which was held in the first quarter of last year, but not in the first quarter of fiscal 2023. Operating loss in the first quarter of 2023 was $21.4 million, or 11.7% of net sales, compared with operating profit of $0.5 million, or 0.2% of net sales last year. Net loss for the first quarter was $18.4 million, or 96 cents per share. This compares to a net loss of $0.4 million, or 2 cents per share for the first quarter of 2022. Our effective tax rate for the first quarter of 2023 was 12.6% benefit, compared with 134.2% provision for income taxes in the year-ago period, which was inflated primarily due to the allocation of income across entities and the exclusion of net losses in certain jurisdictions. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash incur remarkable securities of $155.3 million as of April 29, 2023, compared to $173.0 million as of April 30, 2022, This $17.7 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by capital expenditures of $27.5 million, offset by $11.2 million in cash provided by operating activities. As of April 29, 2023, we have no debt on the balance sheet and continue to maintain our full unused credit facility. We ended the quarter with $147.9 million in inventory, up 4.2% compared with compared with $141.9 million last year to end the first quarter. The inventory growth was driven by store count increases in our international business, while the inventory in North America is down 3% from the prior year. On a constant currency basis, our inventory levels were up 3.7% from last year. And while more aged compared to the same quarter in 2022, we are more current than we were to end the fourth quarter of 2022. Now to our fiscal May sales results. Net sales for the four-week period into May 27, 2023 decreased 12.8% compared to the four-week period into May 28, 2022. Comparable sales for the four-week period into May 27, 2023 were down 14.3% from the comparable period in the prior year. From a regional perspective, net sales for our North America business for the four weeks into May 27, 2023 decreased 17%. over the comparable period last year. Meanwhile, our other international business decreased 12.7% versus last year. Excluding the impact of foreign currency translation, North American net sales for our four weeks into May 27, 2023 decreased 16.7% from the prior year, while other international net sales increased 10.4% compared with 2022. Comparable sales for North America were down 17.5%, And comparable sales for other international were up 4.2% for the same four-week period compared to the prior year. From a category perspective, in fiscal May 2023, all categories were down in comparable sales from the prior year. Footwear was our most negative category, followed by hard goods, accessories, men's, and women's. Total dollars per transaction were up for fiscal May 2023, driven by an increase in average unit retail, partially offset by a decrease in units per transaction. With respect to our outlook for the second quarter of fiscal 2023, 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. Our May sales results were slightly better than our first quarter trends, but still well below year-ago levels as consumer demand remains under pressure from the continued impact of high inflation on discretionary spending. With that in mind, we are planning total sales in the second quarter to be between $187 million and $192 million. We expect that our second quarter 2023 product margins will be down between 50 basis points and 70 basis points from the second quarter of fiscal 2022 as we continue to work through a challenging sales environment. Consolidated operating loss as a percent of sales for the second quarter is expected to be between negative 7.7% and negative 9.2%. We anticipate loss per share will be between negative 63 cents and negative 73 cents. Similar to the first quarter, the decline in earnings is largely due to deleverage in the cost structure on lower sales base coupled with margin pressure. Our biggest areas of deleverage continue to be tied to fixed costs such as occupancy expense, base hours in our store that are driven by mall operating hours, and other corporate costs. As Rick said, the year is unfolding as we expected. and our view on the remainder of 2023 hasn't changed. As with our practice back in March, we are refraining from giving specific annual guidance due to the uncertainty and volatility in the macro environment, but do want to provide some context around how we currently believe the business will trend throughout the year. Sales results in fiscal 2022 became more challenged each quarter as the year progressed when compared to a more normalized historical sales trends. We believe we will continue to experience top line pressure particularly as we wrap up the first half. The quarterly comparisons become easier throughout the year, suggesting more opportunity in the back half of the year when compared to fiscal 2022 results. Product margins were down 50 basis points in fiscal 2022 after six consecutive years of growth. The majority of this year over year decrease was driven by our fourth quarter of 2022 product margins, which was impacted by increased discounting as we worked to right-size the inventory balance. For fiscal 2023, We believe that product margin will be tougher in the first half of the year as we work through aged inventory and the market remains promotional with retailers continuing to drive inventory in line with current sales trends. We believe that margins may stabilize and possibly expand in the back half of the year as inventories come in line and comparisons get easier. Our model is sensitive to sales fluctuations and we have seen deleverage as sales declined in fiscal 2022 and also the first quarter of 2023. While the opposite was true in 2021, when we experienced record sales and operating margin driven by meaningful leverage. We continue to diligently manage expenses as we navigate the current environment and our position to take advantage when conditions approve. We are currently planning our business, assuming an annual effective tax rate of approximately 50%. It is important to note that we expect our tax rate to fluctuate significantly from quarter to quarter based on the pre-tax results and distribution of income between different jurisdictions throughout the year. We are planning to open up to 23 new stores during the year, including approximately 8 stores in North America, 10 stores in Europe, and 5 stores in Australia. These openings are contingent upon finding the right locations with complementary economics. While that is our normal practice, challenging circumstances such as those we are currently experiencing may cause us to reduce our store openings if we are unable to negotiate deals that achieve our financial targets. We expect capital expenditures for the full 2023 fiscal year to be between $20 million and $22 million compared to $26 million in 2022. We expect that depreciation and amortization excluding non-cash lease expense will be approximately $23 million. We are currently projecting our share count for the full year to be approximately 19.5 million diluted shares. With that operator, we would like to open the call up for questions.