Zumiez Inc.

Good afternoon, ladies and gentlemen, and welcome to the Zoomies, Inc. First Quarter Fiscal 2026 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 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'll turn the call over to Rick Brooks, Chief Executive Officer. Mr. 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 remarks about our first quarter performance and the operating environment we're navigating. Before discussing our strategic priorities for remainder of fiscal 2026, Chris will then take you through the financials and our outlook for the second quarter. After that, we'll open the call to your questions. We continue to make important progress towards sustained profitable growth. First quarter comparable sales increased 4%, marking our eighth consecutive quarter of positive comparable sales growth. This performance was driven by ongoing strength in our North American business, which posted a 4.4% comparable sales gain, coupled with 5.5% comparable sales gains in Europe, as strategic work we began last year continues to gain traction. Our first quarter results were largely in line with our expectations, even as the operating environment became more dynamic as the quarter progressed, and we observed increasing pressure on consumers during the latter part of the quarter. Despite these headwinds, our merchandise assortments and customer experience initiatives continue to resonate with our core customer base, demonstrating the resilience of our business model and the strength of our strategic positioning. What's particularly encouraging is the progress we're making in Europe. While still in the early innings, the work we're doing to replicate our full price selling model in the region is gaining traction. contributing to year-over-year improvements in both sales and margins, as well as meaningful bottom-line improvements for the last two quarters. This validates our disciplined approach to new assortments, full-price selling, and expense management that we implemented just over a year ago. From a category perspective, our first quarter departments were broad-based. Men's led our positive and comparable sales growth, followed by hard goods, women's, and accessories. This diversified strength across multiple categories reinforces the effectiveness of our merchandising approach and the investments we've made in product newness and private label expansion. As we look ahead to the remainder of the year, we remain focused on the same three strategic priorities that have driven our success. First, driving revenue growth through consumer-focused strategic initiatives. Our commitment to refreshing our product mix with innovative, distinctive offerings continues to be a cornerstone of our success. The momentum from introducing over 150 new and emerging brands in fiscal 2025 has carried forward into 2026. And this newness continues to generate strong customer response and represents an increasingly important component of our sales mix. Private label performance remains a standout success story. At 34% of sales in the first quarter, we've maintained the highest penetration levels in company history. The sustained expansion demonstrates our organization's ability to identify emerging trends and create compelling products that resonate with our customers while simultaneously enhancing our margin profile. Our private label business provides us with important flexibility while delivering the distinctive products our customers expect. Our investment in delivering exceptional customer service experiences across both physical and digital touchpoints continues to yield results. The enhanced staff development programs and technological capabilities we've implemented allow us to engage with customers in increasingly personalized ways, strengthening our relationships that have long served as the foundation of our success. Second, sustaining our rigorous commitment to profitability optimization across our geographic footprint. Within North America, our premium pricing strategies continue to support both margin expansion and market share growth. The operational improvements we've executed are keeping sales growth ahead of expense growth, establishing a more efficient and profitable framework that positions the business for strong flow through on incremental sales. In Europe, we're encouraged by continued progress. The significant product margin improvements we've achieved in the fourth quarter of fiscal 2025 have continued into 2026, and we're seeing positive comparable sales for the first time in several quarters. While market conditions remain challenging, Our disciplined approach is demonstrating results. We remain committed to our long-term vision for the countries in which we operate and continue to see tremendous value in our ability to identify trends locally in each market before they expand internationally. Third, capitalize on our solid financial foundation to manage volatility by funding strategic expansion. Our financial position remains exceptionally strong. We ended the first quarter with cash and marketable securities of $124 million, up from $101 million a year ago. This financial flexibility enables us to continue investing in our strategic objectives while delivering value to shareholders through our share repurchase program. We're encouraged with our start to fiscal 2026 and look forward to further deploying our strong cash generation to drive growth and enhance shareholder value. Despite operating in an environment characterized by evolving economic pressures, I am confident in our ability to generate value for all our stakeholders. The fundamental strategies that have powered our performance through fiscal 2025 and into 2026 continue to demonstrate their relevance. Our team's proven adaptability and execution capabilities, combined with our strong financial foundation, fuel my optimism about weathering any near-term headwinds and cap-lazing on our opportunities especially during the key back-to-school and holiday season when the consumer has a reason to come out and shop. Our direction remains clear. Maintain our dedication delivering distinctive, fashion-forward merchandise through the customer and connection strategies that have driven our growth, while preserving the operational discipline that has strengthened our financial performance. We've demonstrated our resilience and ability to execute through various market cycles, and I'm confident we're strategically positioned to continue building on this track record. Before turning things over to Chris, I want to express my appreciation to our entire organization for the continued commitment and exceptional execution. Your dedication to our values and our customers remains a foundation for all our achievements and positions us well for continued success throughout fiscal 2026. With that, Let me hand things over to Chris for our financial review.

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our first quarter fiscal 2026 results. I'll then provide an update on our May sales trends before providing our outlook for the second quarter. Net sales for the first quarter of fiscal 2026 increased 4.9 percent to $193.3 million, compared with $184.3 million in the first quarter of fiscal 2025. Comparable sales were up 4 percent for the third quarter with a solid mid-single-digit growth in both North America and Europe, even as consumer pressure intensified during the quarter. For the first quarter, North American net sales were $155.6 million, an increase of 3.9% from fiscal 2025. Other international net sales, which consists of Europe and Australia, were $37.8 million, up 9.1% from last year. Excluding the impact of foreign currency translation, North American net sales increased 3.7%, and other international net sales were down 0.1% year-over-year. Comparable sales for North America were up 4.4%, marking the ninth consecutive quarter of comparable sales growth in this region. Other international comparable sales increased 2.2% in the first quarter, representing a significant improvement from recent quarters and reflecting the traction we're gaining with our strategic initiatives in Europe. From a category perspective, men's was our largest positive comping category, followed by hard goods, women's, and accessories. Footwear was our only negative comping category. 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. First quarter gross profit increased to $61.3 million compared to $55.3 million in the first quarter of last year. Gross margin was 31.7% of sales for the quarter compared with 30% in the first quarter of fiscal 2025. The 170 basis point increase in gross margin was primarily driven by 70 basis points increase in product margin, 50 basis points of leverage to store occupancy costs, 30 basis points of benefit in web shipping costs, and 20 basis points of benefit from decreased inventory shrinkage. SG&A expense in the first quarter of fiscal 2026 was $76.5 million, or 39.6% in net sales, compared with $75.2 million, or 40.8% in net sales in fiscal 2025. The 120 basis point improvement SG&A as a percentage in net sales was driven by 150 basis points related to a one-time $2.9 million litigation settlement that occurred in the first quarter of fiscal 2025, 50 basis points of efficiency in store wages, 40 basis points in non-wage store operating cost leverage, partially offset by 70 basis points detriment from vendor credits received in the first quarter of 2025, 20 basis points increase in non-store wages, and 20 basis points of increase in other corporate costs. Operating loss in the first quarter was $15.2 million, or 7.9% net sales, compared to prior year operating loss of $19.9 million, or 10.8% net sales. This represents a 290 basis point improvement in operating margin. Net loss for the first quarter was $13.3 million, or 82 cents per share. In the year-ago period, we reported a net loss of $14.3 million, or 79 cents per share. As a reminder, the prior year first quarter included the 2.9 million legal settlement, which negatively impacted earnings per share by approximately 13 cents, as well as 3.4 million favorable charges to the foreign exchange valuation and interest income items that did not repeat in the first quarter of 2026. Our effective tax rate for the current quarter was 8.2% versus 9.1% a year ago. Lastly, due to our repurchase activity over the past 12 months, our share count is down approximately 11% since the first quarter last year, which will positively benefit full-year EPS, but it's a headwind in quarters where we record a loss. Turning to the balance sheet, The business ended the quarter in a strong financial position. We had cash and current marketable securities of $124.2 million as of May 2nd, 2026, up from $101 million as of May 3rd, 2025. The increase in cash and current marketable securities from the first quarter of last year was primarily driven by $47.5 million in cash flow from operations and the release of $3 million in restricted cash, partially offset by $19 million in share repurchases and $10.5 million of capital expenditures. As of May 2, 2026, we have no debt on the balance sheet, and we continue to maintain our full $25 million unused credit facility. During the first quarter, we repurchased 0.3 million shares at a total cost of $6.2 million under the authorization approved by the board of directors on March 11, 2026. We ended the quarter with $153.2 million in inventory, up 2.2%, compared with $149.9 million last year. On a constant currency basis, our inventory levels were up 0.7% from last year. We feel good about our current inventory position and the quality of our inventory on hand. Now to our May sales results. Net sales for the four-week period into May 30, 2026 increased 0.1% compared to the four-week period into May 31, 2025. Comparable sales for the period decreased 0.1% for the comparable period in the prior year. From a regional perspective, North America net sales for the four weeks ended May 30th, 2026 decreased 1.9% compared to the four-week period ended May 31st, 2025, while our other international business increased 10.7%. Excluding the impact of foreign currency translation, North America net sales for the period decreased 2% from the prior year, while other international net sales increased 5.3% compared to 2025. Comparable sales for North America decreased 1.5% during the period, while comparable sales for our other international business increased 7.2%. From a category perspective, quarter to date, men's was our largest positive comping category, followed by accessories, women's, and hard goods. Footwear was our only negative comping category. 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 period, driven by an increase in units per transaction, partially offset by a decrease in average unit retail. With respect to our outlook for the second quarter of fiscal 2026, I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales, product margin, and earnings growth, given the variety of internal and external factors that impact our performance. This is particularly true in the current environment, where we're seeing increased pressure on consumer discretionary spending. While our business continued to perform well in Q1, we are taking a measured approach to our outlook given the evolving macroeconomic pressures we observed building as the first quarter progressed and continued into May. We believe it's prudent to look forward with an appropriate level of conservatism given these consumer headwinds. We are anticipating total sales to be between $210 million and $250 million for the 13 weeks ended August 1st, 2026, representing growth of negative 2% to positive 0.5% compared to the prior year. Comparable sales for the same time period are expected to be consistent with the overall sales trend. For the second quarter, we are expecting product margin to be down slightly to up slightly from the second quarter of last year. Consolidated operating income for the second quarter is expected to be between negative 1.5% of sales and break even. We anticipate earnings per share will be between a loss of 23 cents and 8 cents compared to a loss of 6 cents in the prior year. Regarding our full year fiscal 2026 outlook, As we discussed in our fourth quarter fiscal 2025 earnings call, we remain confident in our strategy and execution. However, with the increased consumer pressures we're observing, we believe appropriate caution is warranted. We will refrain from providing specific full-year earnings guidance at this time, but we'll provide some context around how we see the business trending throughout the year. With the momentum we've built over eight consecutive quarters of positive comparable sales, we believe we can grow total sales for the year, inclusive of the negative impact of closed stores worth approximately $12 million in sales. This directional guidance is inclusive of our softer start to the second quarter, the difficult macro environment, and an assumption the back half of the year is down slightly from our original expectations. We believe we will continue to grow product margin year over year in fiscal 2026 through steady improvements in North America and continue pricing discipline and full price selling in our international entities. Our private label business now at over 30% of sales will continue continue to be an important driver of margin expansion. In addition to product margin growth, we believe further leverage exists that will drive modest growth margin expansion for the year. With anticipated sales growth, we expect to generate some leverage of our SG&A costs. Further contributing to operating margin expansion through this will be dependent on the pace of sales growth throughout the year. With the previously mentioned assumptions and barring significant deterioration in the consumer environment, We continue to anticipate operating margin growth in the 50 to 100 basis point range in fiscal 2026, as we outlined on our fourth quarter call. While effective tax rates will fluctuate by quarter, we anticipate that our full year effective tax rate will be roughly 40 to 45% in fiscal 2026 compared to an effective tax rate of 44.4% in fiscal 2025. We are planning to open five new stores in fiscal 2026, all within the U.S. We plan to close approximately 26 stores during fiscal 2026, including 20 in North America and six internationally. We expect our capital expenditures for fiscal 2026 to be between $14 million and $16 million compared to $11 million in the prior year. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $19.1 million, down from $21.3 million in fiscal 2025. We are currently projecting our diluted share count for the full year to be approximately 16.9 million shares. The share count does not include the impact of any potential share repurchases after May 2, 2026, under the $40 million repurchase program approved by the Board on March 11, 2026. We will continue to monitor the consumer environment closely and provide updates as we progress through the year. Our strong financial position and proven ability to execute give us confidence in our ability to navigate the current environment while continuing to invest in our long-term strategic priorities. With that, operator, We would like to open the call for your questions.