Zumiez Inc (ZUMZ) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to your third-quarter 2005 Zumiez, Inc. earnings conference call. At this time, all participants are in a listen-only mode. We will, however, be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to your host for today's presentation, Mr. David Griffith of ICR.

Good afternoon. Today's conference call includes comments concerning Zumiez, Inc.'s business outlook and contains forward-looking statements. These 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 than the information that will be discussed is available in Zumiez's filings with the SEC, including its registration statement on Form S1.

At this point, I would like to turn the call over to Rick Brooks, Zumiez's President and CEO.

Thank you, David. Good afternoon, and thanks to all of you for joining us to discuss the Company's third quarter and first nine months fiscal 2005 results. Here with me today is Brenda Morris, our Chief Financial Officer. And following my opening remarks, Brenda will review the financial and operating highlights, and then I am here to provide some closing comments, and then we will turn the call over to the operator to conduct the question-and-answer portion of the call.

The third quarter was another record quarter for Zumiez, and we're pleased to be able to report these strong results, which did exceed our expectations. And we want to thank all our salespeople, our store management teams and the home office staff for making these results happen.

Net sales increased 27.2% in the third quarter, with comparable store sales up 9.8%. We're especially pleased to report consistently strong comps throughout the quarter, with monthly comps at 9.4%, 10.1% and 10% for August through October, respectively. And importantly, we remain encouraged with the early trends in November.

Net income increased 52.6% to 5.3 million, and earnings per share came in at $0.37 in the third quarter, up from the prior-year quarter of $0.27. Zumiez posted excellent results across all departments in the third quarter, with juniors delivering a 5% increase in our comp store base, men's up 12% and other departments up 10%. Our department mix remained relatively consistent with our historical trends, with juniors at 16% of sales, men's at 32% of sales and other departments at 52% of sales.

We feel good about our merchandise assortments as we head into the holiday and cold weather season. We continue to experience strong performance in our key brands and across our departments and categories. Now, we have also had a lot of questions from you about the importance of the cold weather and the snowfall on our winter business. And we would like to point out that, even with less-than-ideal conditions last year, our seasonal merchandise performed well, and we believe we'll continue to generate solid results in the coming months.

During the quarter, we also met our store expansion goals. We opened 14 new stores and ended the quarter with 154 total stores. On average, our new and remodeled stores continue to exceed our performance expectations. Since last October, we have opened 32 new Zumiez locations, and we have had strong performance in our regions for the year-to-date period ended in October. Our brand diversity, the category diversity and the quality of our people create a great in-store experience, which we believe distinguishes us from our competitors.

As an example of how we think we have differentiated Zumiez from the other specialty retailers, I would like to highlight for you our annual 100K event, which we will be holding in January. We bring together our top salespeople and all of our regional, district and store managers for an off-site event to be held this year in Colorado. The 100K event is about recognizing and rewarding our salespeople. We will spend the day snowboarding together. In the evening, we will celebrate and recognize the best salespeople in our company. We also have training sessions with our regional, district and store managers to increase productivity at all levels. And we feel this is an important part of the Zumiez culture and one of the reasons that we have high expectations for our staff and our stores.

Finally, before I turn it over to Brenda to discuss the financial results in greater detail, I'm happy to report that last week, we successfully priced a secondary offering for 2.731 million shares at $35.60 per share. And, given strong demand for the offering, we were able to increase the size of the deal by 0.5 million shares from the initial filing.

With that, I'll turn it over to Brenda.

As Rick mentioned, we continue to be pleased with the momentum our business has demonstrated, and remain excited about the growth opportunities that lie ahead for Zumiez. For the third quarter, net sales totaled $57.4 million, representing an increase of 27.2% compared to $45.1 million in the last year's third quarter. The increase in net sales reflected the opening of 32 new stores since last year's third quarter and a comparable store sales increase of 9.8%. Our sales growth benefited from an increase in average unit retail and in the average number of sales transactions. Earnings per share came in at $0.37 in the third quarter, up 37% from the prior-year quarter of $0.27 and ahead of the Street consensus of $0.34. During the quarter, we opened 14 new Zumiez stores for a total of 25 store openings during the year-to-date period.

Gross profit for the third quarter increased by $5.2 million to $21.4 million or 37.3% of net sales compared to gross profit of $16.2 million or 35.9% of net sales in the third quarter last year. The improvement in gross profit margin was driven by better vendor pricing, improved initial markups and lower markdowns, as well as by improved leverage.

Moving to expenses, in total, SG&A expenses increased to $13.2 million or 23% of net sales, compared to $10.6 million or 23.5% of net sales in the third quarter last year. This increase was primarily the result of costs associated with operating our new store and increased costs associated with being a public company. Having said that, we achieved leverage on our expenses of 50 basis points on our increase in sales. This brought operating income to $8.2 million or 14.3% of net sales, compared to $5.6 million or 12.4% of net sales in last year's third quarter.

Net income for the third quarter was $5.3 million, an increase of 52.6% or $0.37 per diluted share, compared to $3.5 million or $0.27 per diluted share in last year's third quarter.

Our tax rate for the quarter was 37.4%. Going forward, we anticipate a tax rate of approximately 37 to 38%.

Turning to key balance sheet highlights, at October 29, 2005, cash and marketable securities increased by $29.1 million to $30.1 million, from $1 million at year end, due to the proceeds from our initial public offering. Inventory was on plan and current at $43.6 million versus $34.6 million at the end of the third quarter in 2004. Average inventory on a comp store base increased slightly for the third quarter, up 4.1% from the average in the third quarter of last year. We remain very comfortable with our inventory position. Also at October 29, 2005, the Company had no debt, including no outstanding balances on our revolving credit facility.

Turning to our first nine months 2005 financial results, for the period ended October 29, 2005, the Company reported net sales of $130.2 million, an increase of 29.4% over the $100.6 million in sales in the first nine months of 2004. Comp store sales for the first nine months of 2005 increased 10.8% on top of an 8.2% increase in the first nine months of fiscal 2004. Gross profit increased 40.1% to $44 million or 33.8% of net sales, from $31.4 million or 31.2% of net sales in the first nine months of fiscal 2004. Operating income totaled $9.5 million, compared to $5.2 million in the first nine months of fiscal 2004. And net income improved to $6.1 million or $0.45 per diluted share, from $3 million and $0.23 per diluted share in the first nine months of fiscal 2004.

As to forward guidance for fiscal 2005, we are now raising our diluted earnings per share target to a range of $0.84 to $0.85, which represents an increase of about 50% compared to the same period a year ago. This new guidance includes expenses associated with our secondary offering, which we estimate will be roughly $0.02 to $0.03 per diluted share. Weighted average fully-diluted shares for the remainder of the year are expected to be approximately 14.4 million shares, while the average for the full year is expected to be about 13.7 million shares on a fully-diluted basis.

For the fourth quarter, we estimate comparable store sales gains in the mid single digits, on top of a tougher comparison of 12.5% in last year's fourth quarter. For the full year, we continue to expect to open 35 new stores, and at the end of the year, we plan to operate approximately 174 stores, expanding our 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. While we are still going through our budgeting process, we are slated to open 42 stores in fiscal 2006, and are committed to increasing total square footage by at least 20%.

Now, I will turn the call back over to Rick.

Thank you, Brenda. Again, we're pleased with the results for the third quarter and the first nine months of fiscal 2005, and I hope you all know that we continue to be very excited about the near-term and long-term prospects for Zumiez. As we head into the holiday selling season, we feel our momentum is strong, we believe we are well-positioned from a merchandising perspective and we feel like we have the right people throughout our organization to succeed.

As we look to our next year and beyond, we remain confident that we have the opportunity to expand our store base. Our strong brand and category diversity, unique and compelling store model and our great sales teams and home office staff, I believe, truly separates us from our peers. We remain committed to further building on our position as the destination retailer for the action sports and to generate long-term growth and increased shareholder value.

And with that, I would like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Jeff Klinefelter, Piper Jaffray.

First of all, on new store kind of performance by region, maybe giving us a little bit of detail on how these new stores have been opening, if you are seeing any differences as you look at the southern markets. I know Texas as a state, maybe, in particular, talking about the store performance there, any unique characteristics in performance or anything you are noticing versus your chain overall?

And then, the second question would be on inventory or maybe percent of inventory committed to the seasonal category as you discussed in your prepared remarks. Is there a change in the inventory committed to that category this year versus last year? And I don't know if you have shared or you care to share what your actual comp performance in that category was last year?

I'll start by talking about the first part of your question, which related to the new stores and the performance across regions. While we are not going to break it down in great detail for you, we expect that new stores in new regions obviously take a little bit longer to mature than do stores in our fill-in marketplaces, where we are well-established. But saying that and with that, in total, in aggregate, our new stores are, again, meeting or exceeding the targets. And I would tell you the same is true even within the regions.

Now, particularly as it relates to Texas, it's too early to tell for Texas. Those two stores that we have opened in the Dallas marketplace are really have been open only for a couple months now. So we are going to need to get through a peak season at this point; they both opened post back-to-school. So we're going to need to get through at least one peak season to get a better read on it. But again, where we are at so far, generally across regions and within regions, we're meeting or exceeding what our store plans and targets were for those new stores.

As relates to the seasonal commitment to product, we comped in the low single digits, I believe, last year in the snow product seasonal categories, and that was a tough -- as you know, that was a tough winter season for us. It tended to be a warm season, other than -- across most of the US, other than in Southern California and Northern California and, really, Utah. So we felt that was a pretty good result for us, coming out of a tough season. And we had a lot of great work with our vendors to help us with products at the end of the year. So overall, we came out of the season in very good shape.

Now, I will tell you that, as relates to commitments, without speaking specifically about it, we don't buy those seasonal products to the same growth rate that, typically, the business is growing at, because we always know that it's not going to snow somewhere. So our approach has always been let's be a little conservative on how we commit to the product, and then let's move the product and we'll let product chase the weather. So that's part of the reason that we have been able to mitigate some of the risk, is we don't quite go out there -- if we are growing at 27, 20% in total, you are not going to see us plan those categories at that level.

I know the Texas stores are new and other southern markets will be opening soon. Is there much of a difference in the actual assortments, particularly as you go into the winter months? Is there much of a difference in the assortments between those warmer-weather stores?

And then -- this is a recap, and I'm sorry if I missed this in your prepared remarks, but the gross margin performance in Q3 -- could you break down at all where the upside came from versus your plan?

I'll take the first part and let Brenda handle the tough part with the margin stuff. As it relates to the assortment within the stores, what I will tell you is that maybe 90% of all the stores have roughly the same assortment. But every region is -- we're doing some level of fine-tuning of that assortment throughout the whole company. And that's in existing marketplaces, and it is true in those new marketplaces. Now, the Texas's of the world, we're going to figure that out, I think, probably over the next 12, 18 months and really fine-tune that approach.

But let's talk about a market that has been more established, like the Phoenix marketplace, where you are not going to sell that much snow product. But we find that there are other categories of things like the motocross business that does better there. And so we're going to carry -- that would be an example of how we are fine-tuning the approach within that marketplace. But again, that's happening throughout the entire chain, and happening in every region; there's that kind of fine-tuning that's going on in terms of our mix of product.

And with that, Brenda?

On margin expansion, it really came from several areas this quarter. It came from a combination of vendor pricing and initial markup. As we grow our ability to get a little bit better pricing based on volume purchases, our ability to plan out a little bit better and place orders that are more of a commitment allows us to also look at container load options and so on. We're able to get better vendor pricing. And in some cases, actually, our initial markups are a little bit better, just based on this, as well. And our product flow initiative we've worked on in the last couple of years, our markdown process has allowed us to actually lessen the amount of markdowns year over year because our inventory is cleaner year over year, as well as we are finding that the product comes in at the right time and with the right mix. And then lastly is our leverage on the department center and our gross margin area distribution, occupancy and also our teams within that group buying and merchandising.

Kind of in that order and how you listed through it would be where the impact came from in clarity (ph)?

Exactly.

Mitch Kummetz, D.A. Davidson.

Any calendar shifts or other factors to consider when thinking about the monthly performance a year ago in the fourth quarter? I know the comp was, I think, 1 or 2% in November, and then it really ramped up from there. How should we be thinking about modeling Q4, based on that?

You are right; I think the numbers last year were 1.9% in November for our comp, and then roughly 16 and 17 in December and January. So those are tough comps, and we know that, and I think Brenda said in her prepared remarks that it's about a 12 plus comp for the entire quarter. So I think it's our toughest comp of the year.

So I can tell you, and I think Brenda mentioned this in her remarks, is that we're currently modeling the quarter with roughly low to mid-single-digit comp for the period. And that's how we're looking at it. And I think we feel comfortable with that at this point. But again, these are challenging comps for us as we look forward. And so that would be my advice. We don't see any major calendar shifts that would impact that. I think, like everybody, we will see the weather and the cycle of weather across the country will have an impact on maybe how those weekly numbers fall out. But on a macro basis, I think we're comfortable with that low-single-digit/mid-single-digit comp.

And then, you gave your comp performance in the third quarter by major division. I was hoping you could maybe give us that breakout for what you are going up against in the fourth quarter. Is that possible?

I don't have that in front of me, so we would have to get back to you on that.

And then, you mentioned that you were pleased with early November trends. Can you elaborate a little on that?

No. How about that?

Okay, one last question, then. Your share count and your tax rate came in a little lower for the third quarter than I was expecting. Can you just explain why that might have been? And I think, Brenda, you gave shares in taxes for -- I don't know if you gave them for the fourth quarter, or was it for the year? Could you just clarify what the guidance is on those two items?

Sure. Well, we at the end of last quarter, before the Q was issued, went through and did an updated calculation of our fully-diluted weighted average shares and made some adjustments just based on applying the treasury stock method. And so, for this particular -- the remainder of this year, we'll be about 14.4 million shares, fully-diluted outstanding. And the full-year average will be approximately 13.7. And our tax rate has been about a 37 to 39% rate, consistently. And it came in around 37.5 for this quarter. And it will be 37 to 38 for the remainder of the year, as well.

Sharon Zackfia, William Blair.

A question on the store development plans next year. I guess this year ended up being pretty back-end weighted. Do you hope to have more stores open for back-to-school next year, or how should we think about those 42 stores spreading out?

Great question, Sharon. I'm pleased to be able to tell you that I think we are further ahead in the real estate process than we have ever been in the history of the Company. So you should expect to see the stores more evenly spread out through the year next year, and with a larger portion of it happening pre-back-to-school. And we are not going to be as back-end loaded as we have been in the past.

And then, just to clarify, one quick question. I think Brenda might have said you were expecting mid-single-digit comps. And then, Rick, I think you said low to mid single this quarter. So I just wanted to clear the air there. Are we expecting low to mid or mid?

I'm always hedging.

And the guidance for next year is still low to mid, always?

Exactly.

Sarah Hasan, McAdams Wright Ragen.

Great quarter. I'm just kind of following up on Sharon's question. You had said on the Q2 call that you'd anticipated opening about 18 stores in the third quarter with six in the fourth quarter. Why the delay? It was only 14 this quarter. Are you having difficulty finding locations or just finding the deals, or what is the story behind that?

In general, we have had some stores shift out actually two ways. One, within the quarter we had a few stores shift to the end of the quarter, when we had anticipated that they would come on earlier in the quarter. And likewise, we had a few stores shift into the fourth quarter, which at this point we'll open the last of our stores this weekend and early next week. They will all be open by Thanksgiving, so we're very happy that the plan will end up being executed with the 35 stores coming onboard. Primarily, the reasons for the shift were construction-related, in regards to just delays on permitting, a couple of the new regions where we didn't anticipate we'd have any difficulty, permits were more difficult to get or more time-consuming, as well as just construction in some of the areas where they were high union areas and just a little tougher construction environment.

And I would tell you that I think you're going to see that mitigated next year by the fact that we're much further along in the planning process, as I said, than we have ever been in terms of at this point in the year for our real estate next year. So we are giving ourselves more room to maneuver on that front.

And then, on the new stores, what kinds of patterns are you seeing, in terms of the first-year, second-year, third-year performance. Are those trending better still, or are they kind of similar to what you've seen earlier?

On average, we continuing to model the same way with what happens in the first year of comp in the second year of comp. But what you're suggesting is true, that the newer stores tend to start a little slower and ramp faster than the stores that we're opening in existing marketplaces. If you remember, though, we are always trying to do a mix of stores between existing fill-in markets as well as new stores. So that's always try to be balanced out, as we do that, as we are always trying to mitigate some risk by opening a series of A, B and C models throughout the country, too. So we hope that those strategies tend to mitigate some of that risk. But yes, you do see those stores that are in new markets tend to mature with larger numbers than we do the stores that are fill-in markets.

(OPERATOR INSTRUCTIONS). Noah Blackstein, Goodman & Co.

I was just curious -- you said there's $0.02 to $0.03 cost for the secondary issue. When you were talking about the 30% growth, and this might sound like semantics, but do we do it off an $0.87 to $0.88 number, or do I do it off of the guidance you just gave?

Off the guidance that we've given.

Sharon Zackfia, William Blair.

This is a real easy one. Did you give your square footage at the end of the quarter?

Yes, I can give it to you. It's 448,000 gross square feet.

You have no further questions in queue at this time.

I just want to tell everyone thank you for your time today. As always, we appreciate your interest in what we are doing here at Zumiez, and we'll look forward to speaking with you again when we report our year-end results in March. So thank you, everybody.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Have a good day.