Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. second 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, 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 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?

Hello, everyone, and thank you 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 second quarter and the start of the back to school season before touching our strategic priorities for 2024. Chris will then take you through the financials and our outlook for the balance of the year. And after that, we'll open the call to your questions. We're happy to report that our business delivered a stronger than anticipated performance in the second quarter, exceeding our expectations and demonstrating the resilience of our brand and our customer base. Led by a North American region, total comparable sales inflected positive in June, increasing low single digits, and strengthened as the back to season got underway in July, up high single digits for the month. Total sales for the second quarter increased 8% year over year to $210 million, well above our guidance for sales between $199 and $204 million. We're pleased with results we achieved in the quarter as they reflect the contributions of multiple areas of our business. Our men's category continued its positive momentum growing year over year for the third consecutive quarter with an accelerating pace. Our women's category, which turned positive in Q1, accelerated meaningfully in the second quarter, posting strong double-digit growth versus a year ago, while we also saw footwear turn positive. Our solid top line performance resulted in noticeable leverage in the second quarter across our cost structure. At the same time, our heightened focus on driving full price selling in Europe helped push merchandising margins higher than a year ago. This all fueled a significant increase in our bottom line, with our loss per share improving to $0.04 compared to a loss of $0.44 per share last year, which is also meaningfully better than our guidance for a loss of $0.40 to $0.30 per share. As we transition to the third quarter, we've seen another step up in our business with comparable sales results up 12.1% quarter to date through September 2nd. While our teams have made significant progress returning to positive comparable sales growth and improving profitability, we believe the business is capable of much more. As we continue to navigate a challenging retail environment, we will stay focused on the items that are within our control to grow sales and drive the business back towards its historical operating performance and beyond. As shared on our fourth quarter call in March, our focus continued to be the following strategies. First, we're concentrating on reinvigorating our top line sales through investments to ensure that we continue to win with customers. Some of these initiatives include infusing our product assortments with fresh offerings. We launched more than 100 brands in 2022. more than 150 brands in 2023. We remain on track to launch a similar level in 2024. We're already seeing our newly launched brands from the past couple of years accounting for a larger portion of current sales than we've seen historically, indicating they're resonating well with customers. We're continuing to expand our private label brand portfolio this year and expect to continue to grow private label share. 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. 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 allow us to engage with them in more personalized and relevant ways. Along with these 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 shifted focus to enhancing the productivity of our nearly 90 stores across nine countries and our pan-European web business that currently serves 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's no doubt that trends emerge locally and grow globally, and our current penetration in 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've done in other international markets like Canada and Australia. Beyond Europe, we're focused on profitability and other markets as well. In 2023, we closed 20 underperforming North American stores and remain on track to close approximately 25 additional underperforming locations in 2024. As a result, we decreased field and corporate staffing levels to align with the reduced store count. We are also further optimizing store labor through several initiatives, including adjustments to staffing models at lower volume stores. We 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. Overall, these adjustments to our operating strategy, combined with our strong balance sheet with more than $125 million in cash, position us well to navigate the current environment and emerge a stronger and more profitable company. We're encouraged with how 2024 has unfolded thus far and feel that we are well positioned to capitalize in the upcoming holiday season. Longer term, I believe that by staying true to our customer, our culture, and our brand, with an intense focus on our long-term strategies, we can continue capturing market share by generating increased value for our shareholders. 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 second quarter results. I'll then provide an update on our third quarter to date sales trends and some perspective on how we're thinking about the full year. Second quarter net sales were $210.2 million, up 8.1% from $194.4 million in the second quarter of 2023. Comparable sales increased 3.6% for the quarter. The shift in the retail calendar had a positive impact on our results, increasing net sales growth by approximately 530 basis points during the second quarter. The calendar shift will have a negative impact on the third quarter net sales growth. Comparable sales results, as reported, are adjusted for the calendar shift and represent a more accurate measure of operating results. Our second quarter performance was driven by a North America business, which was positive for the second consecutive quarter. The strength was partially 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. From a regional perspective, North America net sales were $176.3 million, an increase of 10.4% from 2023. Other international net sales, which consist of Europe and Australia, were $33.9 million, down 2.6% from last year. Excluding the impact of foreign currency translation, North America net sales increased 10.6%, and other international net sales decreased 1.7% year-over-year. Comparable sales for North America were up 5.9%, and comparable sales for other international were down 7.6% for the quarter. From a category perspective, men's was our largest positive comping category, followed by women's and then footwear. Hard goods was our largest negative comping category, followed by accessories. The consolidated increase in comparable sales was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transaction were up for the quarter, driven by an increase in average unit retail and an increase in units per transaction. Second quarter gross profit was $71.8 million, compared to $61.7 million in the second quarter of last year. Gross profit as a percentage of sales was 34.2% for the quarter, compared to 31.7% for the second quarter of 2023. The 250 basis point increase in gross margin was primarily driven by 140 basis points of leverage in store occupancy costs, 90 basis points of leverage in shipping costs, and 20 basis points of leverage in distribution center costs, while product margin was flat to the prior year. SG&A expense was $72.2 million, or 34.4% of net sales in the second quarter, compared to $72.2 million, or 37.1% of net sales a year ago. The 280 basis points decrease in SG&A expenses as a percent of net sales resulted from the following. 100 basis points due to leverage of store wages on higher sales 80 basis points of non-wage corporate cost leverage, 50 basis of leverage in non-wage store operating costs, 50 basis points benefit to the timing of employee training, and 20 basis points of leverage of corporate wages, offset by 30 basis point increase in incentive costs. Operating loss in the second quarter of 2024 was $0.4 million, or 0.2% of net sales, compared with an operating loss of $10.5 million, or 5.4% of net sales last year. Net loss for the second quarter was $0.8 million, or 4 cents per share. This compares to a net loss of $8.5 million, or 44 cents per share, for the second quarter of 2023. Our effective tax rate for the second quarter of 2024 was 252.1%, compared with 8.5% benefit in the year-ago period. The increase in our effective tax rate was primarily due to the allocation of losses across the jurisdictions in which we operate. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $127 million as of August 3rd, 2024, compared to $140 million as of July 29th, 2023. The $13 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $19.4 million and capital expenditures of $14.7 million offset by $23.6 million in cash provided by operating activities. As of August 3rd, 2024, we have no debt on the balance sheet. During the second quarter, we purchased approximately 945,000 shares of our common stock for $19.4 million and an average price of $20.55 per share under the 25 million repurchase authorization approved on June 5th, 2024. Third quarter to date, we have purchased an additional 220,000 shares of our common stock for $5.6 million or $25.39 per share, completing the June 5th authorization. Cumulatively, this resulted in approximately 1.2 million shares purchased under the authorization at an average price of $21.47. This represented 5.7% of our outstanding stock at the time of the authorization. At this time, We have no open repurchase authorization. We ended the quarter with $158.8 million in inventory, up 1.3% compared with $156.7 million last year. On a constant currency basis, our inventory levels were up 2% from last year. Given the sales backdrop, we're happy with our ending inventory balance for the second quarter and expect to continue to bring in newness as we move into the important holiday selling season. Now to our third quarter date results. Net sales for the 30-day period into September 2, 2024 increased 6.8% compared to the 30-day period in the prior year ended August 28, 2023. As previously stated, the calendar shift will have a negative impact on net sales growth for the third quarter. Comparable sales for the 30-day period into September 2, 2024, which are adjusted to remove the impact of the calendar shift, were up 12.1% from the comparable period in the prior year. From a regional perspective, net sales for our North America business for the 30-day period ended September 2, 2024, increased 7.8% compared to the 30-day period ended August 28, 2023, while our other international business decreased 0.9%. Excluding the impact of foreign currency translation, North American net sales for the 30-day period ended September 2, 2024, increased 8% from the prior year, while other international net sales decreased 2.1% compared to 2023. Comparable sales for North America increased 14.4% for the 30-day period ended September 2, 2024, compared to the same weeks in the prior year, while comparable sales for our other international business declined 4.2%. From a category perspective, men's was our largest positive comparable sales growth category, followed by our women's and then footwear. The accessories category was our largest decline in comparable sales, followed by hard goods. The comparable sales increase was driven by an increase in dollars per transaction and an increase in transactions. Dollars per transaction increased for the 30-day period due to an increase in average unit retail and an increase in units per transaction. With respect to our outlook for the third quarter of fiscal 2024, 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 third quarter to be between $221 million and $225 million, or a 2% to 4% increase from the third quarter last year. As a reminder, the second quarter benefited from the calendar shift, which pulled one week of heavier back-to-school volume into the second quarter and out of the third quarter. Adjusting for the shift, we are estimating third quarter sales growth to be between 7% and 9%. We expect that our third quarter 2024 product margins will be slightly positive. Consolidated operating income as a percent of sales for the third quarter is expected to be between 0.2% and 1.2%, and we anticipate earnings per share will be between a loss of $0.04 and income of $0.06, compared to a loss of $0.12 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 annual financial guidance but do want to share our expectations for the full year. With the business turning positive in the second quarter and the strong back-to-school season nearing a close, we are seeing new trends and brands within our merchandise assortment resonating with customers. With our year-to-date results and our third quarter guidance, we now believe sales growth for the year could be in the low single-digit range despite the anniversary of the 53rd week and store closures previously reported. After two years of difficult performance and product margin, We believe that with a more stable sales environment, we will grow product margin for the full year in fiscal 2024. With sales growth in 2024, we anticipate we'll leverage SG&A costs year over year beyond the benefit we'll 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, and we anticipate that our full year effective tax rate will be roughly 60% in the fiscal 2024. We are planning to open nine new stores this year, including three in North America, three in Europe, and three 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 25 stores in fiscal 24 and most of our closures in North America. The number of closures could go up or down depending on our 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 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. And we are currently projecting our diluted share count for the full year to be approximately 19.3 million shares. This includes the shares repurchased in the third quarter, which completed the open share repurchase authorized by the board on June 5, 2024. No further authorizations are currently in place. With that, operator, we'd like to open the call up for questions.