Zumiez Inc.

Good afternoon, ladies and gentlemen. Welcome to the Zoomies, Inc. third quarter fiscal 2023 earnings conference call. At this time, all participants are on a listen-only mode. We will conduct a question and answer session toward the end of this conference. Before we begin, I'd like to remind everyone in 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 that are not based on historical facts 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 today is available in Zumi's filing in the SEC. At this time, I'd like to 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 third quarter and the start to the holiday season. Beforehand, I need to call over to Chris, who will take you through the financials and some thoughts on the rest of the year. After that, we'll open the call to your questions. Our performance in the third quarter came in slightly ahead of our expectations as the year-over-year sales trends continued to improve compared with the first and second quarters. Given that the operating environment remained challenging, particularly in the U.S., causing our customers to be more selective about when and where they spend their money, we were encouraged by our results during the key weeks of the back-to-school selling season. At the same time, we were not surprised that our sales trends pulled back somewhat during the second half of Q3 as we moved beyond the peak back-to-school season. The industry has been volatile all year, marked by muted peaks and deeper valleys as inflationary impacts continue to weigh on discretionary spending, combined with increased competition for wallet share from spending on services and experiences. High promotional activity to clear elevated inventory levels across our retail sector has added to the headwinds pressuring our full price selling model. In response to this backdrop, we've continued to adjust our merchandise mix and brand assortments to bring newness to our offering as well as more value through private label brands to support our diverse customer base. These adjustments speak to the strength of our model and our ability to adjust both across departments and from branded to private-level products to meet customer demand, all while ensuring we are providing our customer with the world-class service and differentiated shopping experience they expect when visiting Zoomies. To recap our improving trend line, sales were down 70% in Q1, down 12% in Q2, down 9% in Q3, and our recovery has picked up pace thus far in Q4. Through this past Tuesday, fourth quarter date sales are down 4.6% to the prior year. The sales of the Black Friday Cyber Monday period down 1.4% against the same period last year. We're encouraged by the sequential improvement we continue to see in the business. While we are not where we want to be from a results perspective, our current momentum gives us confidence in delivering continued improvement in the fourth quarter and positioning ourselves for growth in 2024. With consistent expense discipline and our lean integrated operating structure, the business can generate leverage and meaningful operating margin expansion, even on modest top-line growth. This will allow us to drive enhanced profitability and continue investing in the strategic priorities that we believe will create significant long-term benefit for our customers, our business, and our shareholders. We've discussed some of these key strategic priorities on our previous calls, including continue investment in our people through best-in-class training and mentoring, optimize our performance by trade area, working with our brands to increase speed, flexibility, and margins, as well as continuing our international expansion driving sales and earnings growth while better serving our brands and customers as trends emerge locally and grow globally. We also understand that in difficult times like these, it is important to balance investments with the tactical adjustments necessary to drive our recovery, including identifying and amplifying emerging brands and trends to build sales, driving promotions where necessary, strong inventory management, and maintaining our strong balance sheet position. It is in these times that we're leaning heavily into the strong brand and culture that have been critical to Zumi's success from the beginning. We live that culture every day through the outstanding people that are part of our company I'd like to thank everyone in our organization for the continued hard work and dedication, especially during the busy holiday season. The foundation of our unique culture and your efforts and commitment to our customers is what set Zoomies apart from the competition for over 45 years. 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 third quarter results. I'll then provide an update on our fourth quarter to date sales trends before providing some perspective on how we're thinking about the full year. Third quarter net sales were $216.3 million, down 8.9% from $237.6 million in the third quarter of 2022. Comparable sales were down 9.2% for the quarter. The decrease in sales was primarily driven by North America and Australia business, offset by more favorable results in Europe. During the quarter, we continue to see softer sales, primarily driven by ongoing inflationary pressures on the consumer, a shift in spending to travel and experiences, and softer demand for full-price key styles and trends in North America. From a regional perspective, North American net sales were $181.6 million, a decrease of 12% from 2022. Other international net sales, which consist of Europe and Australia, were $34.8 million, up 11.1% from last year. Excluding the impact of foreign currency translation, North American net sales decreased 11.9%, and other international net sales increased 5.2% compared to 2022. Comparable sales for North America were down 10.7%. Comparable sales for other international were down 0.3% for the quarter. From a category perspective, all categories were down in comparable sales from the prior year during the quarter, with footwear being our most negative, followed by women's, accessories, hard goods, and our best performing category, men's. The men's category was down only low single digits in comparable sales during the quarter, reflecting the continued positive brand and fashion trends we talked about on our Q2 call as we were heading into the back-to-school season. We are excited to see some of the newer brands resonating with customers and will look to build on these trends in the holiday season. Net sales included a decrease in transactions and an increase in dollars per transaction. Dollars per transaction were up for the quarter, driven by an increase in average unit retail and an increase in units per transaction. Third quarter gross profit was $73.2 million, compared to $82 million in the third quarter of last year. Gross profit as a percentage of sales was 33.8% for the quarter, compared with 34.5% in the third quarter of 2022. The 70 basis point decrease in gross margin was primarily driven by lower sales in the quarter, causing deleverage in our fixed costs. The key areas driving the change were as follows. store occupancy costs deleveraged by 120 basis points on lower sales volumes, product margins decreased by 50 basis points, 20 basis points decreased related to web fulfillment costs, and a 10 basis point decrease related to deleverage in our buying group. These negative impacts to gross margin were partially offset by a benefit of 70 basis points in web shipping costs, 50 basis points improvement in distribution center costs, and a 20 basis point reduction in inventory shrinkage. SG&A expense was $73.4 million, or 33.9% net sales in the third quarter, compared to $71.5 million, or 30.1% of net sales a year ago. The 380 basis point increase in SG&A expenses as a percent of net sales was driven by the following. 160 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. 110 basis points of deleverage in non-store wages. 80 basis points of deleverage in non-wage store operating costs, and 30 basis points of deleverage in our other corporate costs. Operating loss in the third quarter of 2023 was $0.2 million, or 0.1% of net sales, compared with operating profit of $10.4 million, or 4.4% of net sales last year. Net loss in the third quarter was $2.2 million, or 12 cents per diluted share. This compares to net income of $6.9 million or $0.36 per diluted share for the third quarter of 2022. We will have a modest tax expense in the quarter despite our pre-tax operating loss due to the distribution of pre-tax income across our different tax jurisdictions. This compares to a more normalized effective tax rate of 27.9% in the third quarter last year. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $135.8 million as of October 28, 2023, compared to $141.1 million as of October 29, 2022. The $5.3 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by capital expenditures, partially offset by cash flow from operations. As of October 28, 2023, we have no debt on the balance sheet. We ended the quarter with $175.9 million in inventory. down 0.7% compared with $177.2 million last year. On a constant currency basis, our inventory levels were down 2.3% from last year. This includes high single-digit inventory declines in the North America business, our most challenged market. Now to our fourth quarter-to-date results. Total sales for the 31-day period ended November 28, 2023 decreased 4.6% compared to the same 31-day period in the prior year, ended November 29, 2022. Comparable sales for the 31-day period ended November 28, 2023, were down 6% from the comparable period in the prior year. From a regional perspective, net sales for our North America business for the 31-day period ended November 28, 2023, decreased 7.3% over the same period last year, with comparable sales over the period down 6.8%. Meanwhile, our other international business increased 6.2% versus last year, with comparable sales over the same period decreasing 3.2%. Excluding the impact of foreign currency translation, North American net sales decreased 7.2%, and other international net sales increased 1.5% compared with 2022. From a category perspective, the men's category had positive comparable sales fourth quarter to date, while all other categories were down in comparable sales from the prior year. Hard goods was our most negative category, followed by women's, accessories, and footwear. We are excited about the trends that are emerging in both the men's and footwear categories. Men's was positive, low single digits, quarter to date, while footwear was down low single digits after being our most negative category during the third quarter. The quarter to date comparable sales decline was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction were up, driven by an increase in units per transaction, partially offset by a modest decrease in average unit retail. 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. Our fourth quarter to date results have continued to show incremental progress to the trends experienced in the first three quarters of the year. but are still trending below prior year 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 for the fourth quarter to be between $275 million and $281 million, including the 53rd week. We expect that our fourth quarter 2023 product margins will be down roughly 110 basis points from the fourth quarter of fiscal 2022 due to both geographic sales mix across our businesses as well as promotional cadence to move through inventory. Consolidated operating profit as a percent of sales for the fourth quarter is expected to be between 1.5% and 2.5%, resulted in diluted earnings per share of roughly $0.24 to $0.34 for the quarter. As a reminder, our guidance is inclusive of the 53rd week, which is a benefit to sales and earnings in the fourth quarter of fiscal 2023, and a detriment to sales and earnings growth rates in fiscal 2024. Now I want to give you a few updated thoughts on how fourth quarter guidance rolls into our full year fiscal 2023 results. Inclusive of our fourth quarter guidance, we anticipate that total sales will be down in the 8.7% to 9.3% range in fiscal 2023 compared to 2022. Product margins were down 50 basis points in fiscal 2022 after six consecutive years of growth. Through the first nine months of 2023, product margins were down 60 basis points from the prior year. A portion of this year-to-date decrease has been driven by our international businesses, which have lower product margins, increasing as a percentage of total sales. Inclusive of our fourth quarter guidance, we now expect annual product margins to be down approximately 85 basis points due to both the geographic sales mix across our businesses as well as promotional cadence to move through inventory. Our model is sensitive to sales fluctuations. We have seen deleverage in sales declines across fiscal 2022 and into 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 are positioned to take advantage when conditions improve. For fiscal 2023, we currently anticipate that operating margin will be between negative 2.9% and negative 3.2%, and our loss per share will be roughly $1.16 to $1.26. We currently expect that our pre-tax earnings for the year will be negative, and that we will have modest tax expense due to the distribution of earnings across our different tax jurisdictions. It is important to note that the income levels With income levels down at our current guidance levels, changes in the jurisdictional income mix can cause our effective tax rate to fluctuate significantly. We are planning to open 19 new stores during the year, including 5 stores in North America, 10 stores in Europe, and 4 stores in Australia. We expect capital expenditures for the full 2023 fiscal year to be between $20 million and $21 million, compared to $26 million in 2022. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $22 million. We are currently projecting our share count for the full year to be approximately 19.3 million shares. And with that, operator, we'd like to open the call for your questions.