Zumiez Inc (ZUMZ) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Zumiez second quarter 2005 earnings conference call. My name is Steven, and I'll be your coordinator for today.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. For assistance at any time during the call, please press star zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. David Griffith with ICR.

Thanks, Steve. Good afternoon.

Today's conference call includes comments concerning Zumiez, Inc.'s business outlook and contains forward-looking statements. The particular 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 and 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 Zumiez' filings with the SEC including its Registration Statement on Form S-1.

At this time I'd like to turn the call over to Rick Brooks, Zumiez' President and CEO.

Thanks, David. Good afternoon.

Welcome to our first earnings conference call as a public company, and thanks for joining us to discuss the Company's second quarter and first half fiscal 2005 results.

Here with me today is Brenda Morris, our Chief Financial Officer, and following my opening remarks Brenda will review our financial and operating highlights, and then I'll provide some closing comments and turn the call over to the Operator to conduct the question-and-answer portion of the call.

As many of you know, on May 5, 2005, Zumiez completed its initial public offering of 3.6 million shares of common stock at $18 per share of which approximately 1.9 million shares were sold by the Company, and 1.7 million shares were sold by certain selling shareholders including about 469,000 shares of the underwriter's over allotment. Upon completing the offering, the Company and the selling shareowners received net proceeds of approximately $29.7 million and $28.8 million respectively.

We're obviously very pleased with the success of the IPO and we're excited to enter this new chapter in our Company's history. And with that I'd like to take a moment to thank all of our employees for their hard work and dedication and I also want to think our customers for their ongoing loyalty and support.

And now on to our second quarter results.

The second quarter was an exciting one for Zumiez and we're pleased to be able to report record results in the second quarter which exceeded expectations. Net sales increased 28.7% in the second quarter with comparable store sales up 11.3%.

We're especially pleased to report double-digit comps throughout the quarter and importantly we remain encouraged with the early trends in August. Earnings per share came in at $0.06 in the second quarter, up 200% from the prior year quarter of $0.02 and ahead of the street consensus.

Zumiez posted strong results across all departments in the second quarter with junior's delivering a 20% increase in comp store base, men's up 12%, and other categories up 8%. Our category mix remained relatively consistent with historical trends with junior's at 18% of sales, men's at 28%, and other categories at 54%.

We're in a great position with our merchandise assortments as we head into the back-to-school season. We continue to see strong performance in key brands and excited about emerging brands.

For competitive reasons we are not going to call out specific brands or categories of product. We think it's important to understand that one of the reasons for Zumiez' success is our ability to be very dynamic and respond to emerging trends and shifts in our customers' desires for brands and categories.

Historically this allowed to us report consistently strong comp store results.

During the quarter, we also met our store expansion goals. We opened five new stores and closed one store for a net increase of four stores to 150 stores total. Our new and remodeled stores continue to exceed our performance expectations.

Since last July we've opened 21 new Zumiez locations and of the 28.7% increase in sales in the quarter, about half was generated by new stores and about half from comp store sales increases. In aggregate our new stores in their new geographies including in Southern California and the Southwest have performed above our expectations validating our view of that Zumiez concept is transportable to new markets across the country.

We have enough experience geographically and we feel confident we can manage the store base successfully between regions. Our strength in the Midwest, South, Southwest, Northeast, and other areas have allowed to us fine-tune our models for different environments.

Going forward we continue to believe that our plans to open Zumiez stores in new geographies should provide a powerful growth vehicle for our Company. Additionally, our marketing efforts have proven successful in generating greater traffic to our stores and growing sales in consumer interest.

Our store sales teams, our store management teams, marketing and product teams all make tremendous contributions the unique and exciting customer experience.

We recently wrapped up our 12-city couch tour, now in its fifth year, and it was another phenomenal success for Zumiez and our partners. The tour again featured elite action sports stars such as the Volcom, Adio, DC, and Element skate teams as well as Victory Records recording artists including Aiden and Bayside.

We believe it's things like the couch tour that makes Zumiez unique and help cultivate the strong connection we have with our customers.

At this point I'd like to turn it over to Brenda Morris to discuss the financial results in greater detail.

Thanks, Rick.

As Rick mentioned, we are really pleased with the direction of our business and remain excited about the growth opportunities that lie ahead for Zumiez.

For the second quarter net sales totaled $39.4 million, representing an increase of 28.7% compared to $30.6 million in last year's second quarter. The increase in net sales reflected the opening of 21 new stores since last year's second quarter, and a comparable store sales increase of 11.3%.

Our sales growth benefited from an increase in average unit retail and in the average number of sales transactions. During the quarter we opened five new Zumiez stores for a total of 11 store openings during the year-to-date period.

Gross profit for the second quarter increased by 3.7 million to 12.8 million, or 32.4% of net sales compared to gross profit of $9.1 million, or 29.7% of net sale in the second quarter last year. The improvement in gross profit margin was driven by lower markdown, better vendor pricing, as well as improved leverage.

Now moving to expenses.

In total SG&A expenses increased to $11.5 million, or 29.2% of net sales compared to 8.6 million, or 28% is of net sales in the second quarter last year. This increase was primarily the result of costs associated with operating new stores as well as increases in infrastructure and administrative staff to support our growth and increased costs associated with being a public company.

It's important to note that seasonally the second quarter is not one where we typically get much leverage in our operation, in contrast to the second half of the year where we expect to see more leverage on our expense base. This brought operating income to $1.3 million, or 3.2% of net sales compared to 523,000, or 1.7% of net sales in last year's second quarter.

Net income for the second quarter was $848,000, or $0.06 per diluted share compared to $239,000, or $0.02 per diluted share in last year's second quarter.

Our tax rate for the quarter was 37.2%. Going forward we anticipate a tax rate of approximately 38 to 39%.

Turning to key balance sheet highlights now.

At July 30, 2005, cash and marketable securities increased by $16.8 million to $17.8 million from $1 million at year-end due to the proceeds from our initial public offering.

Inventory was on plan and current at $42.2 million versus $33.1 million at the end of the second quarter in 2004. Average inventory on a per store basis increased slightly for the second quarter up 1.9% from the average in the second quarter last year.

The increase has positioned us to have more product for back-to-school and to ensure a solid inventory base to achieve our back-to-school goal. Also, it should be noted that about $5.5 million of the inventory balance is goods in transit at the end of the quarter, and that we opened three stores late in July and an additional four stores in the first two weeks of August which we were carrying inventory for. In total we are very comfortable with our inventory position.

Working capital increased by $28.4 million to 33.2 million from 4.8 million at the end of the year. Also, at July 30, 2005, the Company had no debt, including no outstanding balances on its revolving credit facility.

Turning to our first half 2005 financial results now.

For the period ended July 30, 2005, the Company reported net sales of $72.8 million, an increase of 31.3% over the $55.4 million in sales in the first half of 2004. Comp store sales for the first half increased 11.6% as compared to the first half of fiscal 2004.

Gross profit increased to $22.6 million, or 31.1% of net sales from $15.2 million, or 27.5% of net sales in the first half of fiscal 2004.

Operating income totaled $1.3 million compared to an operating loss of 407,000 in the first half of fiscal 2004. Net income improved to $848,000, or $0.06 per diluted share from a net loss of 439,000 and $0.04 loss per diluted share in the first half of fiscal 2004.

As to forward guidance, since this is our first earnings conference call with the investment community as a public company we wanted to use this opportunity to introduce guidance for the full-year.

For fiscal 2005 we expected diluted earnings per share to range from $0.80 to $0.82, which represents an increase of about 45% compared to the same period a year ago. Weighted average diluted shares for the remainder of the year are expected to be approximately 15.05 million shares.

For fiscal 2005 we also estimate comparable store sales gains in the mid single digits.

For the full-year we continue to expect to open 35 new stores and at year-end we plan to operate approximately 174 stores expanding square footage by about 28% to 475,000 square feet. We also continue to believe that our projected long-term earnings growth rate of 30% remains very achievable.

And now I would like to turn the call back to Rick.

All right, thank you, Brenda.

Our record results that we're announcing today are an affirmation that our strategy at Zumiez is working well and we believe we're well positioned to deliver positive sales and earnings growth for the foreseeable future with unique and exciting concept in action sports. With just 150 stores in 19 states, we have significant store growth opportunities and the ability to leverage our operating platform on expected revenue growth.

As we look ahead, we expect our positive momentum to continue. We attribute this expectation to, first, our competitive advantage.

The Zumiez store experience is a powerful advantage at retail. Our store associates and management go to great lengths to offer superior customer service and create an atmosphere that our consumers love. The interactive environment, industrial look, and organized chaos bringing an independent flair to the mall-based store.

Second, our market position. Zumiez has an enviable position in the retail landscape with high growth categories featuring the action sports lifestyle, a wide assortment of popular styles from leading and emerging brands, and the demographic and spending trends of the action sports consumer continue to be quite favorable.

And third, tremendous expansion opportunities. As Brenda said we're on track to open the 35 stores this year and we've been pleased with the performance of our new stores to date.

At year-end we expect to have about 174 stores open, well below most other mall-based specialty retailers, as well as our long-term goal of about 800 stores. Additionally, we are currently in just 19 states and have fantastic opportunities to expand geographically and further leverage the Zumiez brand and expense base.

In conclusion, we're very pleased with direction of our business, with our store expansion, and the merchandising plans in place and we're confident that we're well positioned for a strong performance for the balance of the year and beyond.

And now I'd like to turn the call over to the Operator and I will take some questions. Steven?

[OPERATOR INSTRUCTIONS] Our first question comes from Joe Teklits of Wachovia Securities.

Thanks a lot. Great start, guys. Got a few questions for you actually. First, just on the guidance, in looking at August and September, last year for your comps you had a tough August and a great September. How are we supposed to look at the third quarter comping on top of that last year? Does that reverse or is it more smooth?

All right, Joe, thanks. Here's how we're looking at it internally and I hope this will give you some direction on this.

You know, last August we had a negative comp around 3% and then in September a positive comp around 27%. That entire shift was related to the movement of Labor Day a week out further into September. So our view of this is if you look at those combined periods we average approximately around an 8% comp, so internally we're looking at this and saying that shift has happened, it's taken place, and I think it impacted us more last year because of our regional locations of our stores and how many of those stores went back-to-school in the September time frame.

So we're looking at those two periods and we're saying, really, now that that shift is consistent with last year, we are really comparing ourselves in August and September as if we're up against approximately an average of an 8% comp across the whole back-to-school time period.

So the shift occurred last year and then this year is more apples to apples?

That's correct.

And just clarity, I think Brenda said comp of mid single-digit for fiscal 2005. I'm assuming she means that for the second half of 2005, because you just put up a couple of good double digits in the first half.

That number, Joe, was for the entire year of 2005 for the fiscal year.

But just the math would imply like flat comps in the back half of the year.

It does imply that, Joe. As we've done the model it actually shows that we're in our traditional low to mid-digit comp range for the back half of the year.

So low to single digits.

Yep.

That's perfect. Okay. Can you also help us with a little bit, I know you might not want to give full guidance for next year but some of the assumptions you're making for that 30% earnings growth next year, whether it's store square footage growth, some type of operating margin goal something like that just to help us get there?

Sure. First of all, just as far as giving any guidance for next year we're still in the process of putting together, Joe, our budgets for next year and really just getting started in the back-to-school season so until we know what our actual results are this year, obviously we're not going to plan out the full-year for next year.

And as you know and then we say it in our press release, we're planning a long-term earnings growth target of 30% and feel like it's very achievable and it will be based on that low to mid single-digit comp store growth consistently year-over-year.

Can you say if you plan to open more stores than you did this year or you're not there yet?

We're still committing to a 20% square footage growth annually.

Okay. 20% annually. Thanks.

You know, last question, more qualitative here if you want to weigh in on how denim is selling and if you think there's too much of it out there and, you know, if there are differences in what's selling and what's not selling. Have an opinion?

As we said in the prepared remarks, Joe, we're not going to comment on specific categories of product. And again, we look at our business and say it's so dynamic and there's so many things always trending up and other things trending down that from our perspective, you know, one category of product whether it's doing great, then fantastic, it's trending down, there's still going to be other things going on that are going to offset that business and make an overall perspective.

So what I'll tell you is what I said in the comments, is that we're encouraged by the trends here through the first two weeks of the August period. Now I'll also say that bigger volumes in this period for us are coming in and we're about half-way through the period in volume at this point in terms of sales volume, so we still have a long ways to go, but for the period we're very encouraged with the trends we have to date. Okay. That's helpful. Appreciate it. Thanks. Good luck.

Our next question comes from Jeff Klinefelter of Piper Jaffray.

Congratulations, everyone, on a great first half. A few quick questions. One would be, maybe just a couple of housekeeping things or reminders, Rick or Brenda, on your DC, your distribution center, could you remind us capacity on that DC for total stores and kind of what the anticipated timing is that you'd have to start looking at either an expansion of that or an additional building?

And then also, store productivity of your new stores here, the message that they're trending very well and above your expectations could you give us a sense for how that is versus the average store in terms of a sales per square foot kind of run rate that they come out at?

Sure. Jeff, I'll answer the first question on distribution first.

Most of you I think know that we moved into a new distribution center in January here and doubled the size of our distribution facility which took us to about a 240 to 260 store capacity with the existing space and no additional technology. We believe that with additional technology we can actually take this exact facility to about a 360-store capacity, and then we do have right of first refusal on about 150, 000 square feet of adjacent space that we'll continue to look at as opportunity to expand our distribution center as we grow our unit base.

And then on new store productivity you are correct on new stores, in general, our new stores in aggregate are exceeding or meeting our expectations, and the reason's where we've anniversaried in kind of the new geography is we are comping at above the average overall. And our existing store base, again, is comping in the double digits and we're very pleased with their performance.

Okay. And just, I know you don't want to talk about categories, but could you remind us if we have any color on, has the space changed materially year-over-year, Rick, in terms of how you've allocated men's, women's footwear? I know they were trending categories within your store. But did that space change much from last year at this time?

And then maybe just one more way to look at it is historically there have been some ups and downs in the industry based on surf versus skate-related brands and product. Can you characterize at all kind of what kind of environment we're in now?

I'll tell you this off the top, Jeff, that there is no significant major shifts in how we've allocated space within the store but as you said, and you're correct, is that things within the space are obviously trending in different directions and again, that's part of this really dynamic model we have, right?

Emerging brands, new brands bring a lot of excitement to the store so things are moving around within that space. We positioned how we think the product should be positioned to take advantage of the current trend so if you walk through the store I'm sure you'll see what we're trying to do with that. So there's really, but in the aggregate there's no significant changes as to how we've allocated space amongst men's, women's, and the other categories.

As it relates to the lifestyles brands, I mean both those lifestyles, in fact, I would tell you that most of the lifestyles within our store at this point including again, there's so many things happening from a trend perspective, Jeff, you've got the concept of the action to core action sports, sort of the fashion, all the fashion elements going on now, the whole casual luxury thing, right? You combine that with our ability to focus on unique and emerging brands, I'd tell you that right now for us all of those things are trending well. Okay. Great. Thank you.

Our next question comes from Sharon Zackfia of William Blair.

Hi. Good afternoon. Rick, my pen wasn't fast enough. I think you gave us the percentage of the mix that was in men's, junior's and other and I was wondering if you could reiterate that? And do you have the year-ago percentages for that as well?

Be glad to do that for you, Sharon. Again it's women's was that 18% in terms of the mix, men's was at 28 and the balance of the other departments were at 54%. A year ago, those were 28 for men's, 17 for women's and 55 for all other.

Okay. So no big shift there.

No, and, you know, I wouldn't expect any, Sharon. I think we've been very, very consistent on that if you look at our history so I wouldn't anticipate any big shifts. You know, junior's I might anticipate over time will grow a little bit faster just because of the nature of that business but our men's business, as you heard, was also very strong in the second quarter.

Okay. And then Brenda, a question on gross margin. You talked about three items obviously lower mark-downs, better vendor pricing and improved leverage on strong sales. Can you maybe give us a better breakdown of what you got basis points-wise on all three of those items?

You know, we're actually, hi, Sharon. We're not actually going to talk about product margin specifically so I can say in that general we're very pleased with the performance in all those areas.

Could you give us those in, kind of in order of importance for gross margin?

Sure. In order of importance this is exactly how I shared them, which is lower markdowns and improved pricing and then better leverage.

And on a go forward basis our expectation is that we'll continue to see all three of those components helping us to leverage gross margin but not to the same rate that we've experienced it in the first quarter. First half of the year, excuse me.

Okay. Great. Thanks. It's good to have some good news.

Thanks, Karen.

Our next question comes from Mitch Kummetz of D.A. Davidson.

Thanks. Let me add my congratulations.

Thanks, Mitch.

On the guidance I was hoping you might be able to provide a little bit more color there with regard to margins. I'm trying to get to the earnings guidance that you've provided given the comp guidance. I'm just kind of curious how you would expect the margins to shake out over the balance of the year, or for the full-year, if you'd prefer to provide that it way.

Yeah, Mitch, this is Brenda. Thank you.

At this point we're not going to be any more specific on the impact of margin leverage and our margin performance in our overall guidance. Again, we expect that we'll continue to see leverage in that area, and primarily driven from those areas that we've talked about, lower markdowns due to clean inventory, better pricing just based on scalability, and then also leverage on our expense base as we grow.

But, Mitch, I'd add to that again that as we look into the balance of the year we don't expect it to be at the level that we saw in the first two quarters.

Right.

And that's primarily related to a lot of inventory cleanup we did a year ago in the first and second quarter of fiscal '04.

Okay. And Brenda, you mentioned in your prepared remarks that you would expect to see more leverage on the SG&A line in the back half of the year and I'm curious to know why that might be especially if your comp assumption in the back half isn't as strong as what you reported in the first half.

It's just volume-based. Obviously as we increase our volumes for back-to-school and holiday we're just able to leverage our fixed base much more. The first half of the year for us obviously is very, very small in comparison to the back half, plus those fixed costs don't increase relative to that.

Okay. And then just a housekeeping item on the tax rate. What tax rate are you looking at for the year?

38 to 39% for the remainder of the year.

Okay. And then lastly on the inventory, Brenda, you mentioned that this year there are about $5.5 million worth of goods in transit. Could you say what that was in comparison to last year?

Yeah, it was 2.3 million last year so it's a net change of 3.2 million.

Okay. Thank you.

Sure. Thanks, Mitch.

Our next question comes from Sara Hasan of McAdams and Wright Ragan.

Hi. It's actually McAdams Wright Ragan. Good afternoon. Among your store openings in the first half of the year, could you tell us what percent were in new markets versus existing markets, please?

You know, I don't have it right off the top. I can actually, why don't you give me the next question, I'll give you that information.

Sure. And then, for the back half of the year for the 23 stores that you expect to open, actually, I guess it's 24, do you have a breakdown between the third and the fourth quarter? Should we expect more in the third quarter ahead of holiday season?

We're anticipating it will be 18 in the third quarter and six ahead of the holiday season in the fourth quarter.

Okay. And could you tell what preopening costs were for the first half and what you expect for the second half?

I'm sorry, Sara, we don't actually have significant preopening costs. Probably the only preopening costs that impact our SG&A is just any management, labor or so on that we bring on prior to the store opening. We don't have any capitalized preopening costs, though.

Okay. And then shifting gears a little bit, what were your public company costs for the second quarter?

You know, Sara, I don't have that exact number off the top. We still are obviously, we worked through all of our IPO capitalization and so on. I would say an estimate is 200 to $300,000.

Okay. Great. Thank you.

I just kind of looked through here and in general, all of the stores we opened in the first half are backfilling existing markets except for theoretically we consider Southern California a new marketplace for us, you know, almost like an all-new state, and so we did open four stores in the first half down in the Southern California area.

Great. Thank you.

Thanks, Sara.

Our next question comes from Steven Martin of Slater Capital Management.

Hi. As a follow-up to that last question, you said you don't have significant preopening costs but don't you start paying rent and other expenses before you actually open the store, so aren't there costs you incur above and beyond the manager ahead of the actual store generating revenue?

I'm sorry. Was this Steven?

Yes.

Hi, Steven.

We actually don't have any preopening costs. We start paying rent the date that the store opens. And then we levelize rent obviously per the GAAP requirement, so again, really the only thing we have is typically labor that we bring on in advance to help get the store set up and get a manager trained, especially if it's in a new region, getting them relocated, that type of thing.

Gotcha. And in terms of the comparison of openings how many did you open in the first and second quarter last year?

A total of 15 in the first half of last year.

Gotcha. Thank you very much.

Thank you.

Our next question comes from Noah Blackstein of Goodman and Company.

Hi, guys. Just a congratulations on the first quarter out of the box and just figure next call maybe the music you can change to a System of a Down or the Lords of Dogtown soundtrack to get us in the mood. I'm wondering on the direct business over the Internet the [inaudible] are on board and stuff like that, how much do you think going forward you could do direct and when you start doing direct over the net, does it help the gross margins on the hard goods side? Thanks.

You know again, we're not going to talk specifically about our direct business in great detail. And the reason for that is just not at this point that significant part of our business. It continues is to trend just below 1% of our sales.

So you're right, Noah, as you think about that, that the mix of business is a little bit different on the Web that the hard goods is obviously the higher ticket items tend to be a bigger factor on the Web so as a mix to the business it will be a little bit different as you look at our Web business. But in the whole as you all shake it down amongst those departments it works out relatively consistent.

We're looking what it we can do in terms of expanding the potential of or Web business but we don't have any firm plans at this point and it continues to grow faster than the overall average for the Company's comp store base.

Well could I just ask then, on the customization of your own board, how long have you been running that on the Web?

We've been running that since we started the Web business in 1999.

And I guess, I mean, can you give me an idea of, you know, as you expand, have you, it's hard to see in the overall sales but you're saying that that business is growing at a faster rate than the rest of the business? I know it's a much, much smaller base but I'm just curious.

Give me your question again.

I'm saying, the business that you're doing in hard goods over the direct, are you seeing that expand at a much faster rate than your existing business, even though it's a small base?

The answer to it relative to last year's Web business as a mix of business is no. It's relatively consistent.

Okay. Thanks very much, guys, and congratulations.

Thank you.

Our next question comes from David Goldberger of Fortress.

Hey, guys. Congrats on an awesome quarter. Was hoping you could provide some update as to how your stores are doing regionally or more specifically, what you're seeing in those stores in regions where schools have already returned to session?

Again, we're not going to comment specifically as it relates to the back-to-school period, David, but I can tell you that for the second quarter I think all regions comped positive for us. Again, there's always some variability between the regions as you guess based upon regional differences, fashion trends that mean more in certain regions than others, but that all regions generally were positive comping.

Great. Thanks again and good luck.

Thanks, David.

As a reminder please press star one to ask a question. We have a question from Jeff Ignall of JP Morgan.

Hey, guys. I just wanted to actually see if you could let us know what the typical lead time is on opening a store and just kind of walk us through the couple of phases that happen.

That's a big question, Jeff. So lead time from what point in time are you starting? From after the deal's been struck and the leases are signed? Where do you want me to start in that process?

Maybe one stage before that. I mean I guess if you're identifying an area you want to be in or a city you want to be in, how long does it typically take you to identify where you want to be and then getting that locked up and then from that standpoint, you know, progress from there? Great.

From that standpoint, we are at least 12 to 18 months out in terms of looking at which markets we believe are going to be the most attractive markets for us, doing some market tours, doing so research into the marketplace, and then start the deal making, contacting, working with the landlords, working with the deal makers with the landlords, and working through process. Once the deal is struck and the lease is signed and we're ready to start construction, it's probably anywhere from approximately a 12-week window from the time we start construction to opening the store.

Right.

Okay. So hypothetically right now you are kind of thinking about, you know, up to, you know, a year from now, that you're saying in terms of beginning that process of which stores you want to open a year from now?

That's correct. We'd take it a little bit further than that. We're thinking again, that 18 to 24-month window in terms of planning which regions we want to attack and why we want to go to those regions, and then starting the real estate process there.

Okay. Great. Thanks a lot.

Thanks, Jeff.

And there are no further questions. I'll turn the call back to Rick Brooks for any closing remarks.

Again, we'd just like to say thank you to everybody in your interest in Zumiez and we'll look forward to speaking to you again when we report third quarter results in November. Thanks again, everybody.

Bye, bye.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.