Zumiez Inc (ZUMZ) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Zumiez, Inc., 2006 first quarter earnings first quarter conference call. My name is Letitia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to David Griffitih of ICR. Please proceed, sir.

Thanks, Letitia. 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 actually 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' filings with the SEC. And now I'd like to turn the call over to Rick Brooks, Zumiez' president and CEO.

Thank you, David. Good afternoon, everybody, and thanks again for joining us to discuss Zumiez' first quarter fiscal 2006 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 I'll provide some closing comments before we turn the call over to the operator to conduct the question-and-answer portion of the call.

The first quarter is not a record quarter for Zumiez, and while it's typically our seasonally slowest quarter in terms of sales and earnings, we are very pleased to have started 2006 on a positive note. We are pleased to be able to report these strong results and accomplishments, and I want to make sure I recognize the contribution of everyone here on our team, from our store-level employees to our home office team as well as our vendor partners.

Yesterday we announced the signing of a definitive agreement to acquire Fast Forward, which will give us additional 19 stores in desirable locations for Zumiez. The closing of the Fast Forward acquisition is subject to customary conditions, including regulatory approvals and is expected in the second quarter of fiscal 2006.

Over the years, we've looked at numerous acquisition candidates and never felt like they're the right fit for Zumiez and currently have focused on new stores as our best avenue for growth, and organic store growth is still our number-one priority. However, with Fast Forward, the opportunity was so unique and compelling that we had to pursue the combination. The cultures of our two companies match up extremely well as do the merchandise and service in our stores.

Additionally, the locations are complementary to our expansion plans with very little overlap. We are thrilled to be working with the Fast Forward team and are working towards making the integration of our companies seamless.

As for the results, net sales increased 43.2% in the first quarter with comparable store sales up 19.7%. We reported consistently strong comps throughout the quarter with monthly comps up 28%, 14.3%, and 19.3% for February through April, respectively. Net income in quarter one increased to $1.1 million, up from a $40,000 loss in quarter 1 last year while earnings per share came in at $0.04 in the first quarter, up from breakeven in the prior-year quarter.

We opened five new stores in the first quarter and ended the quarter with 179 total stores, and we're pleased to report that our new stores continue to perform in aggregate above or expectations.

We continue to look for ways to build on the strength of the Zumiez culture. Last week we held our manager's retreat with over 200 participants including our store managers and some of our assistant managers. It's a great teaching and learning experience, and their interaction was valuable for everyone involved, and we believe this is the kind of thing that sets Zumiez apart in the retail landscape.

With that, I'd like to turn it now over to Brenda to discuss the financial results in greater detail. Brenda?

Thanks, Rick. As Rick mentioned, we had another strong quarter. For the first quarter, net sales totaled $47.8 million, an increase of 43.2% compared to $33.4 million in last year's first quarter. The increase in net sales reflected the opening of 34 new stores from Q2 2005 through Q1 2006 and a comparable store sales increase of 19.7%.

Our sales growth again benefited from an increase in the number of sales transactions and an increase in average unit retail. Earnings per share came in at $0.04 in the first quarter, up from the prior year's breakeven quarter and ahead of the street consensus of $0.02.

Gross profit for the first quarter increased by $5.4 million to $15.2 million or 32% of net sales compared to gross profit of $9.8 million or 29.5% of net sales in the first quarter last year. The improvement in gross profit margin was driven by better vendor pricing, improved leverage on fixed overhead, improved markup, and lower markdown.

Moving to expenses -- in total, SG&A expenses increased to $13.8 million compared to $9.8 million and decreased as a percentage of net sales to 28.9% from 29.5% of net sales in the first quarter last year. This is primarily the result of leverage on fixed corporate costs.

Operating income was $1.5 million, or 3.1% of net sales compared to breakeven in last year's first quarter. Net income for the first quarter was $1.1 million or $0.04 per diluted share compared to a loss of $40,000 or breakeven per diluted share in last year's first quarter.

Our tax rate for the quarter was 39.1%. Going forward, we anticipate a tax rate of approximately 38 to 39%.

Turning to key balance sheet highlights -- at April 29, 2006, cash and marketable securities increased to $38 million from $1.3 million at the prior year-end due to the proceeds from our initial public offering and strong cash flows from operation. Inventory was on plan and current at $38.1 million versus $31.3 million at the end of April 2005. Average inventory on a comp store basis increased at quarter-end, up 5.5% from the average last year at the same time while driving 19.7% comp store sales gains for the quarter.

We remain comfortable with our inventory position at this time. Also at April 29, 2006, the company had no long-term debt including no outstanding balances on its revolving credit facility.

Now let me outline our guidance. For fiscal 2006 we are raising our guidance for diluted earnings per share to $0.65 to $0.66, up from our prior guidance of $0.61 per share on a split-adjusted basis of which $0.01 to $0.02 is from the acquisition of Fast Forward. The accretion from Fast Forward is expected to come primarily in the fourth quarter. Our updated guidance of $0.65 to $0.66 per share represents an increase of about 38 to 40% compared to fiscal 2005.

Weighted average fully diluted shares for the year are expecting to be approximately 29.3 million shares.

For the full year, we continue to expect to open 42 stores and at year-end we plan to operate approximately 216 stores, expanding the Zumiez square footage by at least 20%. When the Fast Forward transaction closes, we will add an additional 19 stores to our store population, or an increase of 12% in square footage from our fiscal 2005 year-end square footage number.

And now I'd like to turn the call back over to Rick.

All right, thank you, Brenda. Again, we are pleased with the results for the first quarter, and we are optimistic as we look at the remainder of the year and beyond. We're on a clear growth path that should serve us well for many years to come, and we feel very good about the way we are currently positioned in our existing markets and are excited about our expansion opportunities in new markets.

With that, I'd like to turn -- I'd like to open the call to your questions. Operator?

[OPERATOR INSTRUCTIONS] Mitch Kummetz, D.S. Davidson.

Congratulations on a good quarter. A few quick questions, Rick, maybe you could just provide us a little bit more color on Fast Forward. I know they presented at a recent investor conference, and if I recall correctly, they'd indicated that their annual sales were sort of in the mid-20s range. Could you confirm that, and then could you maybe speak a little bit to their margins and how those margins might compare with yours?

Sure, Mitch, I'd be glad to do that. Their sales for the prior year were roughly around just, I think, slightly under $24 million last year. They closed some stores last year, opened some stores, so it will vary somewhat around that number.

From a margin perspective, let me just cover some basics, I guess, before I do that. Their average size of their stores is approximately 2,900 square feet, so it's slightly larger than our average, although, like us, it ranges from, I think a small about 1,800 square feet up to a size of 4,100 square feet. So they have, I think, the right thing to try to position the right-size store for the right-size marketplace.

Their average revenue per store is very similar to ours, so with their slightly larger store, their sales per square foot is a little bit below ours -- sales per square foot, a little bit below ours. Mitch, I guess, talking about margins, in particular, what I just want to do is focus on the four-wall contribution to give us a starting point here, and what I'll tell you is their four-wall contribution is lower than ours. Now, we expect that we can raise that over the next 12 months to be equivalent to ours based upon our volume discounts that we have with our vendor base that is a function of our size as well as the introduction of our private label business and the margin enhancement we'll get from that because they, at this point, don't have a significant private label business.

So I think within the 12-month window, we anticipate that we will be able to achieve a store contribution level similar to our average.

Okay. How quickly -- in the press release it was mentioned that over the next 18 months you'll be changing the name plate of the stores from Fast Forward to Zumiez. How quickly will we start to see that? Will you want to keep them as Fast Forward stores for a period before you make that adjustment?

We're going to evaluate it, Mitch. Some of it will depend upon the lease-renewal cycle, like they -- Fast Forward, just like us, has some stores that are coming up for renewal. So those stores will obviously change more quickly than others. So we'll evaluate what the impact of those changes are and then make decisions about how quickly we'll go after we evaluate the impact of changing a few stores.

Okay, and then one other question on the Zumiez business -- if I'm not mistaken, about 40% of your store base is in West Coast states, and I think it's been pretty well documented that the weather out there has not necessarily been ideal for selling seasonal merchandise. When you think about the next few months and look at that business, do you feel like there's a fair amount of pent-up demand out there that if, all of a sudden, we do see some warm, sunny weather out West, that that could provide a bit of a catalyst for your comps on those stores over the next few months?

You know, Mitch -- while the weather has been tough in the West, our seasonal business has been pretty good. So I don't see it, I guess, from that perspective. But you know how it is -- if the weather changes, we have a wet summer, then it will all be different. So what I'll say is that I think we're well positioned seasonally with our seasonal merchandise.

Lyn Walther, Wachovia.

Hi, guys, thanks and congratulations. A couple of quick questions -- first, on Zumiez, could you just give us a little more detail on the gross margin, degree of magnitude, how much were merchandise margins up versus occupancy leverage?

Hi, Lyn, it's Brenda. About a half split between the margin expansion and between product, which is driven by pricing and better initial markups, and the other half from fixed overhead leverage, which includes occupancy, distribution, and then some of our buying and merchandising team.

Okay. And then can you also give us a little bit more detail on the performance of just, in general -- I know you don't like to give too much detail -- but juniors, men's, other -- how did they perform during the quarter?

Well, you know, Lyn, you're exactly right. We don't like to give too much detail. What I will tell you is that in the quarter all of our departments comp positively. So we didn't have a negative performer on a comp store basis across our departments.

Okay, and then in terms of Fast Forward, I understand they have a catalog business. I'm just wondering what your thoughts are there -- if you have any plans to continue that -- just a little more detail on that.

The Fast Forward team was experimenting with the catalog business. It's not a significant part of their business, so it's not something that we view as a significant play for us going forward at this point. The direct channel is a broader question for us, which we have yet to fully address.

Sharon Zackfia, William Blair.

I guess the question on your longer-term margin goals, because obviously it looks like you're going to have real good margin expansion again this year. Where do you shake out, given that you have less private label and, obviously, the hard goods component on where you think the gross margins can go, over time. And then SG&A -- I know you've been in a 23 percentage range in prior years, and you've got corporate overhead with being a public company and options and things not helping you out, but is that an achievable level again, you know, five, six, seven years out?

Okay, so the first one -- first margin expansion this year -- you know, again, we've seen good expansion in the first quarter better than we had planned primarily because of the cost. So we are still being conservative in our plan as far as expansion goes on a go-forward. You know, modeling it in out of a mid single-digit comp store gain. I think that this year, what we expect is to continue to see mild expansion as far as leverage on the fixed overhead and then continued improvement on pricing, dependent on our product flow and how we're working that through.

But, again, you know, I've said it a few times -- we don't want to model it similar to last year's expansion because we still need to make sure that we're executing on all those pieces.

Okay, maybe to ask a different way, and I didn't mean to be too specifically focused on this year. I was just thinking longer term. You know, one of the questions that I get a lot, and I'm sure you get a lot is how does the private label portion, which is lower than a lot of other retailers, and the hard goods portion end up weighing in on your gross margin, over time? What do you think an ideal optimal gross margin will be for you five, 10 years hence?

Looking at a longer basis, Sharon, what I would say to your question is that we look at it, and we expect that we should see incremental improvement every year, and I guess a way to benchmark it or ballpark it for you is to say that there is nothing structural. If you wanted to benchmark our business against our competitors, I don't see any reason structurally that we can't achieve similar operating margins. Now, it may come from different reasons, right, because of the nature of our business being some branded business and, again, private label is not as big a part of our business as it is for most of our competitors, but I think you'll see us find other ways to squeeze a margin out. So I don't see any structural reasons. We want to see achieve similar margins to other specialty retailers that carry branded products.

Stephanie Wissink, Piper Jaffray.

Good afternoon, I'll offer my congratulations as well. Just a quick question on maybe looking at your two business lines -- surf versus skate, pitting those against each other. Who is winning out? What are some of the cycle dynamics you may be seeing currently? And then any change in the assortment in terms of brands? I know some questions have been asked about private label, but what is that percentage today? What's the long-term goal? And maybe what brands are standing out coming into summer in either surf or skate?

We're not going to comment on specific brands performance for obvious competitive reasons, so I'm not going to touch that piece of your question. As it relates to private label, we anticipate -- again, looking at a full-year basis at private label is going to be approximately in the range of traditionally run in that 12 to 13% of sales, I think just under 13% in fiscal '05. So, Stephanie, I think you're going to see that at a similar level for this current fiscal year in terms of private label performance.

In the surf versus skate, that's a complicated question, and I don't think I could give you a good answer, honestly, and the reason for that is that some brands are more than just pure surf or skate lines. So they truly are lifestyle brands who cover many pieces of that. So it gets to be very difficult to break down surf versus skate, and so it's not really the way we think about it here. We really think about it in terms of the performance of brands, the performance of departments, and then the categories within the department. So, you know, it's difficult for me to say -- to answer that question about surf versus skate because, again, it's hard to clearly break down the lines between the products that we're selling. Does that make sense?

It does, I think you actually tapped into the question around the lifestyle brands. Could you talk, then, maybe to any specific trends that you're seeing in terms of silhouettes or fashion especially in juniors with that piece of your business as a growth initiative?

I'll try that for you, and what I'll tell you is that from our perspective we see a lot of different trends out there currently within our stores, and I think that's what -- part of things that makes our stores so interesting to our customers is that we have a lot of different things happening within the four walls of the stores.

If you want to talk about major departments within the business, juniors has been the toughest part of our business in terms of the comp performance. Now, I'll be clear, as I said earlier, all of our departments comp positive, and I'll tell you, juniors did comp positive in this last quarter, and it comped positive against very, very difficult comp numbers, big comp numbers from the prior year. But yet I would say the trend direction in juniors is the least clear of all of our major departments. So we're being cautious in what we're doing with juniors from an inventory position.

Sara Hasan, McAdams Wright Ragen.

Hi, guys, congratulations. On the distribution center, how many stores can it support.

Right now our current DC, about a 260- to 280-store capacity. That would be [optimally] squeezed, so we're continually looking at our long-term plan, and what that means as far as technology or additional distribution phase.

And then I just want to clarify on the store count for the year-end -- you're going to open 42 new stores. Will you be closing any of the two overlapping stores between going forward?

That's a good question, Sara, and we'll be having discussions with our landlords about that, but we don't have any rush to do this. Both sets of the Fast Forward stores and the two malls where we overlap in our own stores are both contributing positively. So we have no great need to rush into anything on this front. But those are things we'll work out with our landlords as we move forward.

So for the year-end, should we look for a total of 235 or [inaudible].

I don't believe we are going to be able to close those two stores by year-end, or, again, we're not in a big rush to do it.

Okay, and then what kinds of costs to integrate the stores will there be? Should we see some kind of pick up in SG&A Q2 or Q3?

At this point, we have models and some transition costs for -- are we talking about just the overlapping stores or all transitions, Sara?

All transitions.

Yeah, so we have models into our model the cost to transition stores to a Zumiez storefront and the Zumiez environment. It's not significant per store, and it is included in the EPS number that we gave you.

Jennifer Black, Jennifer Black and Associates.

Good afternoon, congratulations. I was just curious if you're going to add the Couch Tour and also the 100K to your new stores that you are purchasing; if you're going to integrate your training program and all the great things you do.

Good question, Jennifer, and the answer is yes, over time. We want to be very cautious with what we do. The Fast Forward stores have a great culture, they've built a great culture within themselves, and, as best we can, we want to learn what we can from them, too. We might learn some new things, and so we're certainly open to that in the process, and they clearly know -- for example, they clearly know the Texas market better than we do, so we're anxious to learn more about what they're doing in the marketplace.

But over the next 12 months, we will be introducing our training programs, we will be involving them in our major events, including 100K. I think it's just a great cultural event, no matter what, so we're going to be excited about that opportunity for the Fast Forward team to participate in those events. So you will see us over the next 12 months ease our programs and processes into place, and hopefully, again, we're going to take the best of what they do, learn from them, and incorporate in our system, too.

Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I will turn the call over to Mr. Brooks for closing remarks.

Thank you. Again, I just want to tell everyone how much we appreciate their interest in Zumiez, which we greatly do. So thank you all for that, and we'll look forward to speaking with you again in our second quarter call in August. Thanks, everybody.

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect and have a good day.