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Operator
Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. First Quarter Fiscal 2024 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. Business Outlook 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 risk 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 Zumi's filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?
Rick Brooks
Hello, and thank you everyone for joining us on today's call. With me today is Chris Work, our Chief Financial Officer. I'll begin with a few remarks about our first quarter performance before touching on our strategic priorities for 2024. Chris will then take you through the financials and our outlook for the balance of the year. After that, we'll open the call to your questions. Our first quarter performance represented an encouraging start to 2024. While total sales of $177 million were down 3% from the same quarter last year, both sales and earnings per share were above the high end of our guidance range, showing continued improvement in year-over-year trends and demonstrating our progress in positioning the business for growth. First quarter top line results were driven by North America as comparable sales for the region inflected positive. This performance was led by our men's business, which was up year over year for the second consecutive quarter after accelerating from its positive finish to fiscal 2023. Our women's business also contributed to sales performance, turning positive for the quarter. As expected, hard goods remained under pressure, giving back some of quarter four's improvement as we exited the snow season. Overall, we experienced increases in both average unit retail and units per transaction for the first three months of fiscal 24, which is offset by decline in transactions. Meanwhile, merchandise margins were higher than a year ago and ahead of quarterly guidance as our heightened focus on driving full price selling in Europe fueled our consolidated core product margin growth. This helped drive the overall improvement on our bottom line results despite our sales decline, to a loss of 86 cents per share compared to a loss of 96 cents per share last year. This is meaningfully better than our guidance of a loss of $1.09 to $1.19 per share. Our first quarter results are further indication that we're progressing towards positive comparable sales and improved profitability. That said, we recognize that we still have a considerable amount of work ahead of us to achieve both the levels of top line revenue and bottom line profitability that we expect from the business. As we continue to navigate a challenging retail environment, we stay focused on the items within our control to grow sales and drive the business back to its historical operating performance and beyond. As shared on our fourth quarter call in March, our focus continues to be the following strategies. First, we're concentrating on reinvigorating our top line through investments to ensure we continue to win with consumers. Some of these initiatives include infusing our product sortments with fresh offerings, We launched over 100 brands in 2022 and over 150 brands in 2023 with plans to launch similar levels in 2024. We're already seeing our newly launched brands in the past couple of years accounting for a larger portion of current sales than we've seen historically, indicating they're resonating well with our customers. We're also expanding our private label brand portfolio this year. Private label represented approximately 23% of sales in 2023, up from 18% in 2022 and 13% in 2021. This growth showcases our team's ability to capitalize on both trend and value-conscious consumers, providing another avenue for growth. And we're maintaining our best-in-class service in stores and online with continued investment in training and technology. Combined, these efforts aim to enhance our customer relationships and engage with them in more personalized and relevant ways. Along with these new top-line initiatives, we are enhancing our focus on profitability, both in Europe and in North America. In Europe, our plan involves a pivot from our growth strategy. We have slowed store expansion this year, and instead we'll focus on enhancing the productivity of nearly 90 stores across nine countries and our pan-European web business that currently serve the European market. With a focus on full price selling for our existing footprint, we believe we can unlock the potential for the business and create value as we work through what has been a difficult cycle in Europe. There is no doubt that trends emerge locally and grow globally, and our current penetration of the relevant markets is a significant advantage to Zoomies over the long term. Overall, we believe we can achieve profitability in Europe with this new focus as we have done in other international markets like Canada and Australia. Beyond Europe, we're focused on profitability in other markets as well, In 2023, we closed 18 underperforming North American stores and expect to close an additional 20 to 25 locations in 2024. As a result, we decreased field and corporate staffing levels to align with the reduced store count. We're also further optimizing store labor through several initiatives, including adjustments to staffing models at lower volume stores. We've made structural changes to reduce shipping and logistics costs company-wide. reduce discount selling compared with last year's elevated levels, and continue to implement other cost-saving opportunities in many areas throughout the organization. What will not be able to improve earnings on negative sales results over the long term is a combination of these initiatives that helped us reduce the loss per share in the first quarter despite the sales decline. Overall, these adjustments in our operating strategy, combined with our strong balance sheet, with more than $145 million in cash, positioned us well to navigate the current environment and emerge a stronger and more profitable company. Before I turn the call over to Chris, I just would like to thank each of our team members for their hard work and dedication. Your collective efforts were the key to our continued progress this quarter, and I'm truly appreciative of all you do. I look forward to further advancing our strategic objectives in the year ahead as we work toward delivering greater value for our shareholders. that, I'll turn the call to Chris to discuss the financials.
Chris
Thanks, Rick. 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 and some perspective on how we're thinking about the full year. First quarter net sales were $177.4 million, down 3% from $182.9 million in the first quarter of 2023. Comparable sales were down 2.4% for the quarter. As Rick mentioned, our North America business comparable sales were up year over year, marking the first time we've seen growth in the region since 2021. This was offset by a decline in international sales as we put greater emphasis on full-price selling in Europe, which benefited margins but pressured our top-line revenue. From a regional perspective, North American net sales were $142.7 million, a decrease of 0.9% from 2023. Other international net sales, which consists of Europe and Australia, were $34.7 million, down 10.8% from last year. Excluding the impact of foreign currency translation, North American net sales decreased 0.9%, and other international net sales decreased 10.6% year over year. Comparable sales for North America were up 0.3%, and comparable sales for other international were down 13% for the quarter. From a category perspective, men's was our largest positive comping category, followed by women's. Hard goods was our largest negative comping category, followed by accessories and footwear. The consolidated decrease in comparable sales was driven by a decrease in transactions, partially offset by 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. First quarter gross profit was $51.9 million, compared to $49.4 million in the first quarter of last year. Gross profit as a percentage of sales is 29.3% for the quarter, compared with 27% in the first quarter of 2023. The 230 basis point increase in gross margin was primarily driven by an improvement of 70 basis points in product margin, 70 basis points of leverage in shipping costs, 20 basis points of leverage in distribution center costs, 20 basis points of leverage in store occupancy costs, and a benefit of 60 basis points related to a mixed shift away from service and related shipping revenue in the prior year's results, which carried a negative margin during the prior year quarter. SG&A expense was $72.1 million, or 40.6% of net sales in the first quarter, compared to $70.7 million, or 38.7% of net sales a year ago. The 190 basis point increase in SG&A expenses as a percent of net sales resulted from the following. 60 basis points increase in annual incentive compensation, 50 basis points due to timing of employee training that is expected to be a benefit in the second quarter, 50 basis points due to non-store wages, and 40 basis points due to store wages tied to both deleverage on lower sales as well as wage rate increases. Operating loss in the first quarter of 2024 was $20.2 million, or 11.4% of net sales. compared with operating loss of $21.4 million, or 11.7% net sales last year. Net loss for the first quarter was $16.8 million, or 86 cents per share. This compares to a net loss of $18.4 million, or 96 cents per share for the first quarter of 2023. Our effective tax rate for the first quarter of 2024 was a 14.4% benefit, compared with a 12.6% benefit in the year-ago period. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $146.6 million as of May 4, 2024, compared to $155.3 million as of April 29, 2023. The $8.7 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by capital expenditures of $17.5 million over offset by $9.1 million in cash provided by operating activities. As of May 4, 2024, we have no debt on the balance sheet. On June 5, 2024, the Board approved the repurchase of up to $25 million of common stock. The repurchase program is expected to continue through June 30, 2025, unless the time period is extended or shortened by our Board of Directors. We ended the quarter with $146.8 million in inventory. down 0.7% compared with $147.9 million last year. On a constant currency basis, our inventory levels were down 0.1% from last year. Given the sales backdrop, we are happy with our ending inventory balance for the first quarter, and I expect to continue to bring in newness as we move into the important back-to-school season and throughout 2024. Now to our fiscal May sales results. Net sales for the four-week period into June 1, 2024 increased 1.8%, compared to the four-week period ended May 27, 2023. Comparable sales for the four-week period ended June 1, 2024 were down 0.2% from a comparable period in the prior year. From a regional perspective, net sales for our North America business for the four weeks ended June 1, 2024 increased 2.5% compared to the four-week period ended May 27, 2023, while our other international business decreased 1.1%. Excluding the impact of foreign currency translation, North America net sales for the four weeks into June 1st, 2024 increased 2.6% from the prior year, while other international net sales decreased 0.4% compared with 2023. Comparable sales for North America increased 1.5% for the four-week period into June 1st, 2024 compared to the same weeks in the prior year, while comparable sales for our international business declined 7.3%. From a category perspective in Fiscal May 2024, men's was our largest positive comparable sales growth category, followed by women's. The accessory category was our largest decline in comparable sales, followed by hard goods and footwear. The comparable sales decrease was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased for the four-week period due to an increase in average unit retail and an increase 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. We are anticipating total sales for the second quarter to be between $199 million and $204 million, or a 2.5% to 5% sales increase. The second quarter will benefit from the calendar shift, which will pull one week of heavier back to school volume into the second quarter and out of the third quarter. Adjusting for this shift, we are estimating second quarter sales to be negative low single digits to flat for the quarter when compared to the same weeks in the prior year. We expect our second quarter 2024 product margins will be slightly positive. Consolidated operating loss as a percent of sales for the second quarter is expected to be between negative 4.5% and negative 3%, and we anticipate our loss per share will be between negative 30 cents and negative 40 cents compared to a loss of negative 44 cents in the prior year. As we consider the full year outlook, we still believe there to be uncertainty and volatility in the macro environment. Given this, we will refrain from giving specific financial guidance but do want to share our expectations for the year that are unchanged from our March release earlier this year. We have experienced several negative sales trends over the past two years, driven by the pandemic, inflation, competition for the discretionary dollar, negative brand trends, and general global instability. Given the magnitude of the multi-year decline, we believe that we're beginning to see the impact of those negative business trends moderate, and our current results are showing that new trends are taking hold. This includes our men's category being positive across the last two quarters and our women's category turning positive in the first quarter. At this time, we believe we can build upon these trends throughout 2024 and see total sales growth for the full year. After two years of difficult performance and product margin, we believe that with a more stable sales environment, we will grow product margin in 2024. With sales growth in 2024, we anticipate that we'll leverage SG&A costs year over year beyond the benefit we will receive of moving past the $41.1 million goodwill impairment charge we recorded in the fourth quarter of 2023. With the previously mentioned assumptions, we believe we will return to positive operating margins for the full year. While effective tax rates are likely to fluctuate significantly by quarter, We anticipate that our full year effective tax rate will be roughly 47% in fiscal 2024. We are planning to open 10 new stores during the year, including three in North America, three in Europe and four stores in Australia. This is down from 19 stores in 2023 and 32 stores in 2022 as we focus on optimizing our current footprint. We are planning to close approximately 20 to 25 stores in fiscal 2024 with most of our closures in North America. The number of closures could go up or down depending on the operating results in each location, as well as our ability to work with our landlord partners. We expect our capital expenditures for 2024 to be between $14 million and $16 million compared to $20.4 million in fiscal 2023 and $25.6 million in fiscal 2022. The reduction is primarily due to fewer planned store openings. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $23 million and consistent with the prior year. We are currently projecting our diluted share count for the full year to be approximately 19.8 million shares. Any shares repurchased during the year will reduce the share count from this estimate. And with that, operator, we would like to open the call up for your questions.
Operator
As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Again, that's star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mitch Cummets of Seaport.
Mitch
Yes, thanks for taking my questions. Rick, on the strength of the men's business, and now you're seeing some positives on women's, is it largely brand related or is it tied to any particular categories? Can you just maybe provide a little bit more color on what's happening in apparel to where you're seeing the improvement there?
Rick Brooks
Sure, Mitch. I'm glad to do that. And I'm going to tell you, it's really the same for both. Men's and women's are really two things driving The improvement in our business, it's the performance of our private label relative to trend. I think our teams have just done just a really good job there. Our private label performed well actually for a couple of years in a row now, and it continues to resonate. I believe that what we're doing is really taking share, particularly in the Bobbins business in the market. So I think that's been really strong. And the second thing in apparel is new brands. It's the freshness of the offering that we're offering with new and emerging brands in the market. It's both those things for both men's and women, Mitch, is what really is driving the business, is newness and being on the trend cycles. And it's really been, that's where we're really seeing the traction.
Mitch
And then on the new brand side of it, if I recall correctly, several years ago, you had sort of a trio of brands that really emerged to become pretty powerful on the apparel side. Like, how does this stack up to that? Do you see sort of the same trajectory, but we're just early innings? Or is there any sort of, you know, takeaways from that that might inform you as to kind of what's happening here?
Rick Brooks
Sure, Mitch. And I'll kind of take it away more broadly because the last few years have been pretty crazy about how we want to look at them. But typically what we've seen historically is we've seen ourselves concentrate volume in the top 10 and top 20 brands. And then de-concentrate as new brands come up and we lose volume from the ones that are trending down. And then what we find is which of those new brands become the next big brands. And then we re-concentrate volume back in the top 10 and top 20 vendor base. So for me, this is consistent with that historical pattern now where we, you know, we really had a dearth of new brands during the pandemic. I think that was definitely, as Chris said, there's a myriad of things over the last few years that made our business tough. That is another one of them that I'd say was a challenge coming out of the pandemic. We just didn't have that pool of new brands, and none of those brands that did launch then have really worked at all for us. It's really the strength has been the last two years, and particularly last year with the brands we've launched. So I expect that we're going to hopefully now return to that kind of pattern. And as I said in the comments, we're seeing that where these new brands are at, they are historically ahead of pace relative to what we've seen in this kind of now growing and constantly, you know, now they're going to grow and we'll find out which one of those become really top tier brands here over the next couple of years.
Mitch
And then, Chris, you mentioned the calendar shift in 2Q earlier. By my math, it looks like you're talking about about $10 million. Does that sound about right? And can you also, I know you're not given 3Q guidance, but I would guess an equivalent, if not maybe bigger hit to the third quarter. Can you maybe address that so that we get our models right?
Chris
Yeah, happy to do that. When we look at the year and what's remaining in the year, your number around 10 million is pretty much spot on. It works out to be right around 5% of growth just tied to the calendar shift. Again, this is back-to-school weeks moving into the second quarter as the calendar shifted with the moving past the 53rd week. The vast majority of that, or actually all of that, will really come back in the third quarter. And then as we all know, in the fourth quarter, we just have another detriment because the 53rd week goes away from, well, we having an extra week in 2023 that we don't have in 2024. So those Those are the main calendar shifts that we'll experience here. I will point out, as you look at May results, it is probably better to focus on the comp in May as well. You'll see a little bit of actually just the volume shift even starts in those May reported comps or reported sales trends. So comparable sales are the real key barometer to measure the business.
Mitch
Great. Thanks, guys. Good luck. Thanks, Mitch.
Operator
Thank you. Our next question comes from the line of Richard Magnusson of B Reilly.
Richard Magnusson
Hello. Thank you for taking our call. First, can you provide more details around your plans to manage inventory during back to school and any strategy for, although you did mention that you're focusing on full price, any strategy on managing any type of promotional or discounted merchandise packages? throughout that period? And then further, are there any outstanding trends that you believe you could capitalize on during that period?
Rick Brooks
All right, I'll start, and then Chris can add on. So first, yes, we believe we have some things that are really working, and you're going to see us be aggressive in those areas, appropriately aggressive on inventory positions during those periods. And again, I think our teams have done Whether you're looking here at the inventory results at the end of Q1 or through last year, I think our team did a really good job managing inventories. But we're going to make the appropriate investments in inventory that we believe we should based on what's driving the business forward. And of course, back to school, those apparel categories are more important to us on a relative basis in terms of mix. So, yes, we will be making investments there, but I think we have good and appropriate risk mitigation strategies in place for those investments. But we believe we have some good opportunity there to drive volume relative to taking some inventory positions. We do also, though, expect that back to school will be as promotional as ever. And I think that we'll see our competitors be traditionally probably more promotional than we are. But what we're going to do is we're going to do what we do for customers, I think, really well, which is lead on trend, have the cool new brands in place, and then use our private label and our bundling efforts to offer value as we package transactions for customers. And I think that's the way we always perceive we can really add that value for our consumer bases, make them some good deals, and let the private label businesses do that. So with that, again, but that's actually additive to margin, if we can do that. So it may be a good value for the customers, but it's also a good value for us and for our shareholders. So that's kind of our thinking and how we're thinking about back to school at this point. Chris, I'll let you add anything else.
Chris
Yeah, the only thing I'd add is, you know, as we quantify the numbers, this would be our third quarter in a row of seeing inventory declines. I think the teams are, you know, really focused on managing inventory at tight levels. You're seeing that in both the product margin trajectory we had in the first quarter as well as what we're forecasting here for the second quarter. And the last thing I'd just add to what Rick is saying is just this idea that we have the ability to chase. I think that's something that our buying teams have done a good job in their management of inventory to be able to really find trends here and chase. And what's What's unique about our current trend line is, again, while not quite where we want to be yet by any means, it continues to get better. We're seeing that growth, as we've talked about here on this call, in men's and women's. We're seeing something like footwear that is down low single digits, not down as significantly as what we've seen over the last couple years. And the inventory positions are getting in a better spot. So then you take all three of those together. And you're really talking about about 75% of our business. And that's important because if we look about the vast majority of our now 45 plus years that we've operated, we've operated across these five departments, and it's rare that we see them all comp positive. But here we're in a spot where we're starting to see 75% of the business in a really good spot. And so in a spot that we believe we can hopefully accelerate as we move through the year. So happy with where the inventory stands, happy that we have the ability to chase as we see trends that are really working here. And I think we've got some good brand partners behind us that are ready to chase as well.
Richard Magnusson
All right. Well, thank you. I'll get back to you too.
Operator
Thank you again to ask a question press star one, one at this time.
spk01
I would now like to turn the conference back to Rick Brooks for closing remarks, sir.
Rick Brooks
Thank you. And again, this I want to offer my appreciation for everyone's interest in zoomies and. Our continued challenge, we've worked through what's been a really challenging year over the last few years, and I think we're feeling good about our quarter-to-quarter trends, and we're looking forward again to talk to you in September. Thanks, everybody.
Operator
This concludes today's conference call. Thank you for participating. You may now.
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