Zumiez Inc (ZUMZ) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Q4 2005 Zumiez Inc., Earnings Conference Call. My name is Rob, I will be your operator today.

[OPERATOR INSTRUCTIONS]

At this time, I'll turn the conference to your host of today's call Mr. David Griffith of ICR.

Thanks, Rob. Good afternoon. Today's conference call includes comments concerning Zumiez Inc., business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that maybe 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 and the information that will be discussed is available in Zumiez's filing with the SEC including it's registration statement on form S1.

And now, I'd like to turn the call over to Rick Brooks, Zumiez's President and CEO.

Thank you, David. Good afternoon, and thanks for joining us to discuss Zumiez's fourth quarter and full year fiscal 2005 results. Joining 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 before I turn the call over to the operator and conduct the question and answer portion of the call.

The fourth quarter was another record quarter for Zumiez, and a positive way to end our first year as a public company. Fiscal 2005 was a great year for us on a number of different fronts. Sales were up 34% to a record 205.6 million, and net income increased 77% to 12.9 million or $0.94 per share for the year. In addition to a very successful IPO in May, we also complete a secondary offering in November. We opened 35 new stores increasing square footage by 28%. Our strong comp store sales performance was complemented by new stores, which on aggregate exceeded our sales plans.

We continue to expand the reach of Zumiez by entering new markets in regions. And we further enhance our position and the premier action sports lifestyle retailer. We're pleased to report [you] strong results and accomplishments, and we want to recognize the contribution that everyone on our team from the store level to the home office and our vendor partners as well.

Also, today we announce that our Board of Directors has approved the Two-for-One Stock Split of our common stock for those shareholders of record on March 29th, 2006. The stock distribution date is scheduled for April 19th 2006. The split is intended to make Zumiez shares more accessible and increase our shareholder base and market liquidity and we express our confidence in our long term strategy in the growth potential of our company.

As for results, net sales increased 32.3% in the fourth quarter with comparable store sales up 20.7%. We are especially pleased to report consistently strong comps throughout the quarter with monthly comps up 18.8%, 20.9% and 23.2% for November through January respectively. Net income in the fourth quarter increased 59.3% to $6.8 million, while earnings per share came in at $0.47 in the fourth quarter up from the [prior] quarter of $0.32. We opened 10 new stores in the fourth quarter and ended the year with a 174 total stores and we're pleased to report that our new stores continue to perform an aggregate above our expectations.

Having said all that, we don't spend much time looking backwards, and we're very focused in driving the business going forward. Diversity of our brands, our unique business model and our terrific people we have working in the stores are critical components to our success, and we intend to keep building on them. We believe our cultures are one of kind and we're utilizing Zumiez University to train our employees and build on that culture.

On our last conference call, I mentioned our annual 100-K event, which we held this past January in Colorado. Not surprisingly, this was our biggest 100-K event ever as recognized by the contribution of 600 of our top sales people and all of our regional and district managers. While we had a lot of fun, snowboarding during the day and celebrating in the evening, we also accomplished a great deal in our training sessions. The interactions amongst our managers is amazing, and then as they share ideas and challenged each other to be better which is part of the Zumiez's culture.

And on that note, I'd like to turn it over to Brenda to discuss the financial results in greater details. Brenda?

Thanks, Rick. As Rick mentioned, we had an excellent quarter and year. And so we have a solid foundation for future growth. For the fourth quarter net sales totaled $75.4 million. An increase of 42.3% compared to $53 million in last year's fourth quarter. The increase in net sales reflect to the opening of 35 new stores during 2005, and a comparable store sales increase of 14.2%. Our sales growth again benefited from an increase in average unit retail and an average number of sales transactions.

Earnings per share came in at $0.47 in the fourth quarter, up 47% from the prior year quarter of 32%, and ahead of the street consensus of $0.46. Gross profit for the fourth quarter increased by $12.7 million to $46.7 million or 38.1% of net sales, compared to gross profit of $34 million or 35.9% of net sales in the fourth quarter last year. The improvement in gross profit margin was driven by better vendor pricing, improved initial mark up, and lower mark down as well as by improved leverage.

Moving to expenses. In total SG&A expenses increased to $18.2 million or 24.1% of net sales, compared to $12.2 million or 23% of net sales in the fourth quarter last year. This is primarily the result in increases in infrastructure and administrative staff, to support our growth and cost associated with being a public company. Absent these public company expenses, we would've seen leverage in the quarter and we expect to demonstrate that going forward. Operating income was $10.5 million or 14% of net sales, compared to $6.8 million or 12.9% of net sales in last year's fourth quarter.

Net income for the fourth quarter was $6.8 million and increase of 59% or $0.47 per diluted share, compared to 4.2 million or $0.32 per diluted share in last year's fourth quarter. Our tax rate for the quarter was 38%. Going forward we anticipate a tax rate of approximately 37 to 38%. Turning to key highlights, at January 28th, 2006 cash and marketable securities increased to $43 million, from $1 million at the end of last year due to the proceeds from our initial public offerings and strong cash flows from operations. Inventory was on plan in current at $30.6 million, versus $23.2 million at the end of fiscal 2004.

Average inventory on comp store basis for fiscal 2005 increased 2.1% from the average last year, while driving a full year comp store sales gain of 14.2%. We remain very comfortable with our inventory position. Also at January 28, 2006 the company had no long term debt, including no outstanding balances on its revolving credit facility. Turning to our full year 2005 financial result, for the year ended January 28, 2006 the company reported net sales of $205.6 million, an increase of 33.9% over the $153.6 million in sales in fiscal 2004.

Comp store sales for the full year of 2005 increased to 14.2% on top of a 9.6% increase in the full year of fiscal 2004. Gross profit increased to 44.3% to $72.8 million or 35.4% of net sales from 50.4 million or 32.8% of net sales in fiscal 2004. Operating income totaled $20 million or 9.8% of sales, compared to $12 million or 7.8% of sales in fiscal 2004. And net income improved to $12.9 million or $0.94 per diluted share, from $7.3 million and $0.56 per diluted share in fiscal 2004. As you may recall, our initial earnings guidance for 2005 was $0.80 to $0.82 per share, which is subsequently raised to $0.90 per share following our December sales results.

You may recall that when we went public, we outlined our stated annual goal of 30% earnings growth. 20% square footage growth and an operating margin of 8%. We're very pleased to have exceeded each of these goals in 2005. Now let me outline our guidance. For fiscal 2006, we are providing guidance for diluted earnings per share of approximately a $1.22, which includes an initial estimate of the impact of the FAS123R and is before the effect of the Two-for-One Stock Split.

This represents in an increase of about 30% compared to fiscal 2005. And we expect quarterly earnings to grow relative with our annual growth projection. Weighted average fully diluted shares for the year are expected to be approximately 14.65 million shares. For the full year we continue to expect to open 42 new stores, and at year end we plan to operate approximately 216 stores, expanding square footage by at least 20%.

Now, I would like to turn the call back over to Rick.

All right. Thank you, Brenda. Again, we're pleased with our results for the fourth quarter and the full year fiscal 2005. And we remain optimistic as we look into 2006 and beyond. We flourished as a highly differentiated retail concept by bringing the feel of an independent shop to the mall. And we'll continue to work hard to ensure that we keep that unique feel even as we expand our store base. In fact, one of the keys store success is letting our store managers have autonomy, an input into the merchandizing and feel of our stores.

I'm actually happy that our stores don't all look alike, and that we are able to cater to our local customers as we become stronger nationally. While we're accomplishing a great deal the past year, we truly believe that we are only scratching the surface in terms of our potential. The 174 stores were still dramatically underpenetrated, when we consider other mall base retailers have over 800 stores in the U.S. We think we can add square footage have least of the 20% clip per year for the foreseeable future. In addition, we will continue to push ourselves to constantly make improvements in our business across the board. We're committed to fully capitalize in our powerful and growing position in the marketplace.

And now I'd like to open the call to your questions. Operator, Rob.

[OPERATOR INSTRUCTIONS]

Sir, I have your first question coming to you from Mr. Jeff Klinefelter.

Yes, congratulations to the team on the great year.

Thank you, Jeff.

Thank you, Jeff.

Few questions for you. First of all maybe, Brenda, the SG&A increase in Q4. Could you talk more specifically about what that is in terms of incremental head count infrastructure? And how you start to leverage that going forward? Just maybe recap for me. If that mentioned on the last call, I can't recall.

Sure. The majority of those cost increases really came from being a public company. Just for example our audit fees, our additional IR fees, our legal fees, our printing fees. That's really where the accumulation came from. We obviously added a couple of people in some of the home office position to manage the compliance issues and so on. On go forward [inaudible], a good majority of those cost starting May of next year and obviously will level the playing field.

Okay, and then in terms of your guidance, your $1.22 that does include stock options. Can you give us a sense for what the magnitude is in terms of per share -- earnings per share hit that you're taking because of those options of this year? And if possible can you give us some guidance on what that sort of would've been last year, so that we can true up the comparisons year-over-year?

Okay, well I can tell you that -- where we are with that we've included in our estimate for our guidance this year. It's not a significant number. And [inaudible] is still finishing their review. Our auditors are still finishing their review. So at this point we're preferring not to actually to give out the number. And in the 10-K the pro forma piece for last year will be in there, once we issued that here in the week or two. So right now I could tell you it's not significant, and it is modeled in.

Okay. And then in terms of the performance during the fourth quarter, going into the fourth quarter you're clearly up against some challenging comparisons in terms of same store sales last year performed very well. An opportunity had been in the seasonal area, which the year prior had not been a top performing category. Can you -- I know you're not going to get at too many specific categories details. Can you talk a little bit about that, Rick? And how it performed this year given the maybe better or earlier snowfall, and how the inventory in that area looks coming out of the holidays?

Well, Jeff, you always tell me to talk about things, and I always have to tell you I'm not going to talk about. But [this] for you, I'll help you out here. Obviously, I think everybody knows that the previous winter wasn't the best of winters. And this year was a better winter. But I want to be clear, as you look at our snow hard goods business in terms of the comp number it was no -- it was right in line essentially, Jeff, with where the rest of our comps are that we reported.

So it wasn't exceptionally outside because of the strength of the winter business. So, again and I want to emphasis that my from my perspective one of the great things about our business model, is diversity of our categories. Again, across all the lifestyle categories that we're offering. But in general, Jeff, it was a better winter this year than the previous year. But in terms of cost of performance, the [inaudible] business was relative to [our] whole performance.

Okay. Relative to the company average, but a better comp performance than the prior year?

That's correct.

Okay.

But I want to remind you, even in the tough year [we're] still comp positive through the fourth quarter.

Okay.

Now your last final question related to our inventory position. And we continue -- I think Brenda said in her commentary that we remain -- we're very comfortable with our position as we come out of the winter season.

Okay.

And we feel, we feel like we're coming out in a good position. We feel that overall our inventories are in very, very strong position.

Okay. Just one last question. In terms of your store openings you did mention Rick, that you're comfortable with at least 20% square footage growth. What is your flexibility to increase the number of store openings? In a lead time wise how quickly would you have to add those stores to get them open, for example this year?

We're very close, Jeff, to being done with our new -- the 42 new stores that we discussed this year. We're still finishing some issues up. We still have some options on to the various locations we can look at. But we're very close to being done with those with that -- this current year set of stores.

So, and which is also I think good news from our perspective. We're the furthest [along] in the real estate process we've been in the last few years. So kudos store team on that front. So, we're very close to be done, Jeff. So it's not a lot of flexibility to adjust in our plan at this point of time. It's now about execution.

Okay. Great. Thank you, very much. Good luck.

Thanks.

Thank you.

Okay, sir. Thank you. Your next question is from Mitch Kummetz.

Yes, thanks. Just, just a few quick questions. Brenda, could you help us out a little bit on the 42 new stores? I mean, how are those going to hit by quarter? And are they concentrated in any particular markets? Are you adding any new markets in the process?

For 42 stores this year, Mitch, we're going to more evenly distribute them for this year than we have in the years past. So, there will be less weighted towards the back half of the year. I don't have the final count per quarter yet, as we're still finalizing some of the deals -- some of the opening date. So I can tell you to Rick's earlier point, we're very, very pleased with the position, and feel like we'll be able to bring stores on a lot of more uniformly throughout the year.

As far as new markets, we do have a few new markets that we're entering. Where we're expanding into Florida. And we're expanding into Texas. We're building the New Jersey and expanding into the Philadelphia market. We're continuing to grow our Southern California market, which to some extent is new although we have a presence there at this point in time. So--.

And again, Mitch, my comments to you on this is, is we've been seeing those same markets for the last 12 months that we've been talking to investors. So, no change in the plan, and nor do I anticipate because of the huge potential on just those markets alone, I anticipate that most of the 2007 new stores will be focused on those same new markets.

Okay. That's helpful. On your guidance for '06 I think on your last call you had mentioned 30% earnings growth with a low to mid single digit comp. I think the $1.22 also equates to about 30% earnings growth. So should we all -- should we continue to see the same low to mid digit comp there for the year?

That is the way we're planning the business internally, Mitch. And, we -- February was also a, a very good result. But you know as well I do February is a relatively inconsequential month, just because of its low volume. So we are continuing our internal look at this as we not only model our 2006 plan, but future years in the same way that low to mid single digit comp number for our processes. It is far too early in the year for us to make any change in that at this point.

And how should we be thinking about balance of the first quarter. You mentioned that February is inconsequential or relative to the March and April. Just given the Easter shift, how much of an impact do you think that could have swinging results from, from March and April?

That's a difficult question, Mitch. Because there is definitely an impact from the movement of Easter. There is no doubt about that. But I'm not sure how much spring breaks move around that, so I can't give you an exact clearance of that. I can tell you the way we're viewing it internally, is that we need to evaluate the two months as one. And I'd encourage you to think about it the same way, as you look out there -- really I think no one's going to have a great idea on how March and April are going to turn out until we get through the March and April together.

Okay. All right. Great. Thanks a lot.

Thanks, Mitch.

Okay, thanks. Sir, your next question is from Sara Hasan.

Hi, guys. Great quarter.

Hi, Sara.

Hi, Sara.

Hi. Can you quantify the impact of the extra week in 2006?

Yes, I can tell you that it's, it's not significant in the full year. And we have factored it in to our model for this year, the 53 weeks this year versus next year. It's not a huge part of our business as far as the shift goes. So, I don't have -- I have an exact number, but like I've said it's relatively small.

Okay. And then as far as capital expenditures, they're building that lovely building in your backyard. But when will that second distribution center will come online if you choose to take it?

Yes, the company that owns our existing facility here, the home office distribution center is starting construction on the facility behind us. We have made no commitment on that building. It is something that we're in discussion with them about as far as our timing, and when we'll need some of that square footage to come online for us. I definitely think that that will be an obvious move over time. But that's the extent of the conversation at this point in time. So, no commitment.

Okay. And then are you planning to do anything new on the marketing front in 2006?

Sara, our track on marketing is to continue to stay focus on building great grassroots events. We love to do more individual sort of market specific one-off events for individual store locations. The [Couch Tour] we're continue to do this year. It is one of our major efforts. Our goal this year is not to increase the number of Couch Tour. We're going to maintain it at 12. Some of the [stops] are moved between market places with different market sets from last year.

And what we're going to really focus on with this year's Couch Tour is improving the interactivity. You've heard me talk about how important that is within the event itself. But we love there to be even more interactivity for local kids to be involved in the individual tour stops sales. So well, I'm looking at this year's marketing efforts, and yes I love to do some more individual local store focused events. But it's primarily our effort this year is going to be about really focusing and making sure that the events are of great quality.

Thank you.

Thanks, Sara.

[OPERATOR INSTRUCTIONS]

Sir, I have a question from Chris O'Donnell.

Good afternoon. Congratulations on a great quarter.

Thanks, Chris.

And one more for the pile, I just wanted to confirm that your $1.22 earnings guidance for this year that is based off of a low single digit comp, correct?

That is correct.

All right. Thank you.

Thanks, Chris.

Okay, thank you. We have one follow-up question from Jeff Klinefelter.

Yes, another follow-up for you. I'm not sure who wants to answer it. But, and I know again I'm not getting into questions that you don't want to answer in terms of the mix of the business. But thinking about the very strong comp performance that you've had the last couple fourth quarters, clearly people focused on that now as we go into the next year, and getting comfortable with just how high productivity can go in your stores during some of these peak seasons. Is there any way to get us more comfortable about the mix of the business or the composition of these, these comp gains in terms of average unit retail increase, versus the number of transactions or the size of the transaction, Rick? And how we might, I think about that going into this next holiday season.

Okay. There is a lot there, Jeff. Usually you ask complicated questions. It may seem easy Jeff, but it's [inaudible] complicated [to] me. The first thing I'll tell you is, as it relates to the lower productivity in the fourth quarter is, I always have to make sure [people] harp back and look at just -- more than just the past two, fourth quarters. We have a terrific track record of driving business in the fourth quarters. I don't think we've had many down fourth quarters in my 12 plus years here. We know how to do the fourth quarter extremely well between the winter business and holiday business. We're very, I think, very good at doing that.

This last year in the fourth quarter the biggest driver, Jeff, why we did get I think mid to high single digit AUR increase, average unit retail increase. The vast majority in terms of the increase, in terms of comp stores sales results of the big 20 plus comp in the quarter was driven by more transactions. And I would tell you that's -- the credit for that goes to quality of the buying team and the quality of our sales team and the ability of our great salespeople on our sales floor. And we're still putting -- in some ways at getting more, I think a bigger share of the pie.

Okay.

So, I think we have a lot of room to go yet in terms of our productivity in the fourth quarter. I don't think anyone here would say that we -- that we're done with what we can get in our fourth quarter results.

Okay. So you -- anything above and beyond kind of what you plan for comps would most likely would come from just better traffic and conversion trends, as opposed to looking for any sort of AUR increases?

At this stage in the game, I think that we may see some AUR increases. But our primary focus is on trying to drive more traffic.

Okay. Great. Thank you.

Thanks.

Okay, thank you. Sir, there are no further questions. I'd like to turn the conference back to Mr. Brooks for any closing remarks.

Thank you, Rob. Again, my final comments are just again thank all of you for your interest in Zumiez. We greatly appreciate it. And we're working hard to try to earn that interest. So with that, again thank you everybody. And we look forward to talking with you again in our May, first quarter conference call. Thank you.

Thank you.

Okay, thank you sir. Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.