Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. third quarter fiscal 2024 earnings conference call. At this time, all participants are in 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 Zoomies, Inc.' 's filings with the SEC. At this time, I'll turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Hello, and thank you, everyone, for joining us on the call today. With me is Chris Work, our Chief Financial Officer. I'll begin with a few remarks about our third quarter and the start of the holiday season before touching on our strategic initiatives. 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. When we shared the outlook for 2024 during our Q4 earnings call back in March, we believed that we could build on the improving trends that we were experiencing at that time and deliver total sales growth for the full year. I'm pleased to report that our third quarter results demonstrate further progress towards our goal as comparable sales increased 7.5%. Our top line performance was fueled by the North American business as comparable sales in the region accelerated from mid single digits in the second quarter to low double digits in the third quarter. US and Canada sales results more than offset some expected and some unexpected softness in our international regions. Total sales of 222.5 million were in the middle of our guidance range as warm weather in Europe hampered demand for snow-related apparel and hard goods late in the quarter. However, thanks to our continued focus on profitability, we reached the high end of our guidance range for earnings at six cents per share. Much the same as the prior quarter, our third quarter comp performance was driven by contributions from multiple areas of our business. Our men's category continued its positive momentum, growing year over year for the fourth consecutive quarter at an accelerating pace. Our women's category, which turned positive in Q1, again accelerated meaningfully after posting strong double-digit growth year over year in Q2, while footwear also experienced a noticeable pickup in sequential demand, driving comps into the low double digits from the mid-single digits in the second quarter. The fourth quarter and holiday season are off to a good start and have us in a good position to deliver a meaningful improvement from our 2023 results. While we're pleased with the progress we've made returning to positive comparable sales growth, improving profitability, and driving cash flow, we believe that business is capable of much more. As you look ahead to 2025, we will continue to focus on the following strategies to grow sales and drive profitability. First, accelerating top line expansion through strategic investments to ensure we are winning with our customers. Our strategies continue to focus on three key areas. Injecting assortments with newness. We are on track to introduce well over 100 new brands in 2024, following the launch of 150 brands in 2023. These new brands constitute a larger portion of our sales this year compared to last year, demonstrating that they resonate with our customers. We recognize that our customers rely on Zoomies to discover new and unique products, and we remain committed to continuing to fulfill that expectation. Private label expansion. Private label represented approximately 12% of sales in 2021 compared to 18% in 2022, and 23% in 2023. We've continued to see our private label share grow in 2024, as year-to-date private label represented over 27% of total sales. The increase in penetration is a testament to our team's ability to capitalize on both trend and value-conscious consumers, providing another avenue for growth. Customer engagement. We continue investing in our people and technology to maintain best-in-class service both in stores and online, aimed at enhancing our relationship with customers and connecting with them in a more personalized and relevant way. Along with these top-line initiatives, we will continue to focus on profitability, both in Europe and in North America. In Europe, we have pivoted from our store expansion strategy to concentrate on enhancing the productivity of our nearly 90 stores across nine countries and our pan-European web business that currently serves the European market. While our work has yielded progress, it has been slowed by what continues to be a difficult cycle in Europe, which in the past couple of months has been impacted by unfavorable weather. Despite that setback, we are confident that by focusing on full price selling for our existing footprint, we can unlock the potential for the business and create value. There's 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've done in other international markets like Canada and Australia. North America, we've taken actions to improve our cost structure. Along with our plan to close approximately 31 underperforming North American locations in 2024, we're implementing comprehensive operational efficiencies across our business. This includes optimizing store labor through targeted staffing model adjustments, particularly for lower volume stores. We've executed structural changes to reduce shipping and logistics costs company-wide, and have significantly reduced discount selling compared to previous elevated levels. These strategic cost management initiatives are part of our broader effort to streamline operations and improve margin performance. These carefully crafted initiatives have already demonstrated their value, helping us accelerate sales growth while simultaneously expanding margins, all while we continue to operate in a challenging retail environment. While we recognize a significant amount of work ahead, we remain optimistic that these strategic initiatives will continue to drive near-term results and ultimately help return Zoomies to its historical performance and beyond. Our path forward is clear. stay focused, be adaptable, and create value for our customers, our brand partners, and our shareholders. To that end, I want to thank the entire Zoomies team for their hard work and dedication to fostering a culture that has served as a cornerstone of the company's foundation for over 45 years. It will be the driving force behind our future success for many years to come. With that, I'll turn the call over to Chris.

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 and some perspective on how we're thinking about the full year. Third quarter net sales were $222.5 million, up 2.9% from $216.3 million in the third quarter of 2023. Comparable sales increased 7.5% for the quarter. The shift in the retail calendar had a negative impact on our results, decreasing net sales growth by approximately 510 basis points during the third quarter. Comparable sales results, as reported, consider the calendar shift and represent a more accurate measure of operating results. Our third quarter performance was driven by our North America business, which was positive for the third consecutive quarter. This 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 American net sales were $186.8 million, an increase of 2.9% from 2023, Other international net sales, which consists of Europe and Australia, were $35.7 million, up 2.7% from last year. Excluding the impact of foreign currency translation, North America net sales increased 2.9%, and other international net sales decreased 0.3% year-over-year. Comparable sales for North America were up 10.4%, and comparable sales for other international were down 5.6% 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 and an increase 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. Third quarter gross profit was $78.3 million, compared to $73.2 million in the third quarter of last year. Gross profit as a percentage of sales was 35.2% for the quarter compared to 33.8% for the third quarter of 2023. The 140 basis point increase in gross margin was primarily driven by 70 basis points of improvement in product margin, 60 basis points of leverage in store occupancy costs, and 60 basis points of benefit in web shipping costs. These improvements were partially offset by a 30 basis point detriment related to inventory shrinkage and a 10 basis point detriment related to increased incentive compensations. SG&A expense was $75.9 million, or 34.1% of net sales in the third quarter, compared to $73.4 million, or 33.9% of net sales a year ago. The 20 basis point increase in SG&A expense as a percent of net sales resulted from the following. 50 basis points from increased incentive compensation, 20 basis points of deleverage in non-wage store operating costs, offset by a 40 basis point reduction related to employee training. Operating income in the third quarter of 2024 was $2.4 million or 1.1% of net sales compared with an operating loss of $0.2 million or 0.1% of net sales last year. Net income for the third quarter was $1.2 million or $0.06 per share. This compares to a net loss of $2.2 million or $0.12 per share for the third quarter of 2023. Our effective tax rate for the third quarter of 2024 was 63.4% compared with a modest tax expense in the prior year quarter despite a pre-tax operating loss. The change 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 $99.3 million as of November 2, 2024, compared to $135.8 million as of October 28, 2023. The $36.5 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by share repurchases of $25.2 million and capital expenditures of $14.2 million, offset by $3.7 million in cash provided by operating activities. As of November 2, 2024, we have no debt on the balance sheet. We ended the quarter with $187.2 million in inventory, up 6.5% compared to the $175.9 million last year. On a constant currency basis, our inventory levels were up 5.6% from last year. Given our recent sales performance and current trend, we feel good about our ending inventory balance for the third quarter and expect to continue receiving newness as we move to the important holiday selling season. Now to our fourth quarter to date results. In discussing our fourth quarter results, it is important to recognize the significant calendar shift in holiday movements impacting sales in the quarter. These include One less week in the current year with the fiscal fourth quarter of 2024 being a 13-week quarter and fiscal 2023 being a 14-week quarter. Shifts in the retail calendar, which we expect to have a modest negative impact on the fourth quarter of roughly negative 50 basis points, but benefited the quarter-to-date sales we are reporting by approximately 790 basis points. And Christmas is falling on a Wednesday this year, which we expect will condense more December volume around the holiday and on a comparable basis drive more sales into December. With that said, comparable sales for the 31-day period in December 3, 2024 were up 2.9% from the comparable period in the prior year. Total sales for the 31-day period in December 3, 2024 increased 10% compared to the 31-day period in the prior year ended November 28, 2023 and benefited from the previously mentioned calendar shift. From a regional perspective, net sales for our North America business for the 31-day period into December 3, 2024 increased 10.8% compared to a 31-day period ended November 28, 2023, while international business increased 7.3%. Excluding the impact of foreign currency translation, North American net sales for the 31-day period ended December 31, 2024, increased 10.9% from the prior year, and other international net sales increased 8.3% compared to 2023. Comparable sales for North America increased 5.5% for the 31-day period ended December 3, 2024, compared to the same weeks in the prior year, while comparable sales for our other international business declined 5.9%. From a category perspective, women's was our largest positive comparable sales growth category, followed by men's. The hard goods category was our largest decline in comparable sales, followed by footwear and accessories. The comparable sales increase was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transaction increased for the 31-day period due to an increase in average unit retail and an increase in units per transaction. With respect to our outlook for the fourth 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 that total sales for the fourth quarter will be between $284 million and $288 million. representing growth of approximately 0.7% to 2.2% from the prior year. Total sales growth for the fourth quarter will be negative impact by the additional 53rd week included in the prior year, as well as the retail calendar shift. The total impact of these items will be a detriment to sales growth of approximately 520 basis points in the quarter. Comparable sales growth for the 13 weeks ended February 1st, 2025 is expected to be between 6% and 7.5%. Comparable sales growth is not impacted by the 53rd week or calendar shift and represents a more accurate measure of our operating results. We expect that our fourth quarter 2024 product margins will increase between 180 basis points and 210 basis points from the prior year. Consolidated operating income as a percent of sales for the fourth quarter is expected to be between 7.3% and 8%, and we anticipate that earnings per share will be between $0.83 and $0.93 compared to a loss of $1.73 per share in the prior year, which is inclusive of the $41.1 million goodwill impairment in 2023. Lastly, with the upcoming change in U.S. government leadership and potential for change in international relations, we are anticipating that some of our imported goods may be subject to new significant tariffs in 2025. We are currently evaluating our product inflows from impacted regions, and making determinations as to whether we pull forward some inventory purchases from these areas in fiscal 2024. Depending on the amount of inventory that we take in early, we anticipate that our ending 2024 inventory could grow more than our current sales trends and that it will have an impact on the timing of operating cash flows. We are also evaluating other regions not impacted by these tariff actions for potential future production. Now, I want to give a few updated thoughts on our fourth quarter guidance rolls into our full fiscal 2024 results. Inclusive of our fourth quarter guidance, we anticipate that total sales will increase in the 2% to 2.5% range for fiscal 2024 compared to 2023, despite the anniversary of the 53rd week and store closures previously reported. The 53rd week will have a negative impact on annual sales growth of approximately 150 basis points. After two years of difficult performance and product margin, we believe that with a more stable sales environment and a full price strategy in Europe, we'll 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 will receive a 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'll turn positive operating margins for the full year. While effective tax rates are likely to fluctuate significant by quarter, we anticipate that our full-year effective tax rate will be roughly 80% in fiscal 2024 using the high end of our guidance. We are planning to open seven new stores during the year, including three in North America, two in Europe, and two 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 33 stores in fiscal 2024 with 31 of those 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. We are currently projecting our diluted share count for the full year to be approximately 19.3 million shares. And with that, operator, we'd like to open the call up for questions.