Zumiez Inc (ZUMZ) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2006 Zumiez Inc. earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes.

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

Thanks. 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 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. Now I would like the turn the call over to Rick Brooks, Zumiez President and CEO.

Thank you, David. Good afternoon and thanks for joining us to discuss Zumiez second quarter 2006 results. Joining me today is Brenda Morris, our Chief Financial Officer and following my opening remarks Brenda will review our financial operating highlights, and I will provide some closing comments before we turn the call over to the operator to conducted a question and answer portion of the call.

The second quarter was another record quarter for Zumiez. We once again posted strong comp store sales increases and doubled our earnings per share from a year ago. We also completed the acquisition of Fast Forward adding 19 stores located primarily in the Texas market. The Fast Forward integration has gone very smoothly to date.

Additionally, we opened 22 stores during the quarter and remain on track to open 42 new stores in fiscal 2006. As always I want to make sure that I recognize the contributions of everyone on our team from the store level to the home office and our vendor partners as well.

As for the results net sales increased 41.5% in the second quarter with comparable store sales up 12.6%. We reported consistently strong comps throughout the quarter with monthly comps at 18.2%, 12.4%, and 8.4% for May through July respectively. Net income in quarter two increased 94% to 1.6 million, up from $848,000 in quarter two last year.

While earnings per share came in at $0.06 in the second quarter, up from $0.03 in the prior year quarter. We opened 22 new stores in the second quarter and ended the quarter with 221 total stores including the 19 Fast Forward stores acquired in June. We're pleased to report that our now stores continue to perform in aggregate above our expectations.

We've gotten a lot of questions about performance at retail this quarter and especially as it relates to the juniors category. Juniors has been somewhat challenging, but we anticipated that, that the business would slow down to due to a lack of clear fashion direction in the market and have planned and continue to plan our inventory accordingly.

One of the things we're proud of at Zumiez is our ability to identify what's working in our stores and react to it in our merchandising. Our strong brand, category diversification, differentiates us from the other retailers in the mall and gives us the flexibility to adjust relatively quickly to changing trends.

Obviously back-to-school is very important to us, and there has been a lot of talk in general about the environment this year and a slow start to the season. As we said last year, it is important to understand that we view back-to-school as a six to seven-week period that stretches into September, and we're still early in that selling season.

With that I would like the turn it over to Brenda to discuss our financial results in greater detail. Brenda.

Thanks, Rick. As Rick mentioned we had another good quarter. For the second quarter net sales totaled $55.8 million, an increase of 41.5% compared to 39.4 million in last year's second quarter.

The increase in net sales reflected the opening of 71 new stores from Q3 2005 through Q2 2006, and a comparable store sales increase of 12.6%. Our sales growth again benefited from an average -- an increase in average unit retail and an increase in the number of sales transactions.

Earnings per share came in at $0.06 in the second quarter, up from $0.03 in the prior year, and ahead of the Street consensus of $0.05. Gross profit for the second quarter increased by $6 million to $18.8 million or 33.7% of net sales compared to gross profit of $12.8 million or 32.4% of net sales in the second quarter last year. The improvement in gross profit margins was driven by better vendor pricing, improved leverage on fixed overhead, improved initial markups, and lower mark downs.

Moving to expenses, in total SG&A expenses increased to $16.8 million compared to $11.5 million and increased as a percent of net sales to 30.1% from 29.2% of net sales in the second quarter last year.

The increase was a result of the expensing of stock based compensation adopted this year, public company expenses including Sarbanes-Oxley work, improved leverage, with fixed operating expenses, offset by an increase in store payroll for new stores, and preparation for back-to-school.

We should have experienced leverage overall if it had not been for the stock compensation expense. Operating income was $2 million or 3.6% of net sales compared to 1.3 million or 3.2% of net sales in last year's second quarter.

Net income for the second quarter was $1.6 million or $0.06 per diluted share compared to 848,000 or $0.03 per diluted share in last year's second quarter. Our effective tax rate for the quarter was 31.8%. This was reduced for the quarter as a result of an adjustment to taxes related to prior periods for investments, tax exempt interest. Going forward, we anticipate a tax rate of approximately 38 to 39%.

Turning to key balance sheet highlights, at July 29, 2006, cash and marketable securities decreased to $14.6 million from $17.8 million at the end of July 2005. We remain pleased with our cash position at the end of the quarter, particularly with the funding of the acquisition of Fast Forward which closed during the quarter.

Inventory was on plan and current at $51.8 million versus 42.2 million at the end of July 2005. Average inventory on a comp store basis at quarter end increased 3.5% from the average last year at the same time while driving a 12.6% comp store sales gain in the quarter.

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

Turning to our first half 2006 financial results. For the six months ended July 29, 2006, the Company reported net sales of $103.5 million, an increase of 42.2% over the $72.8 million in sales for the first six months of 2005.

Comp store sales for the first six months of 2006 increased 15.8% on top of an 11.6% increase in the first six months of fiscal 2005. Gross profit increased 50.4% to $34 million or 32.9% of net sales from $22.6 million or 31.1% of net sales in the first six months of fiscal 2005.

Operating income totaled $3.5 million compared to $1.3 million in the first six months of fiscal 2005 and net income improved to $2.8 million or $0.10 per diluted share from $808,000 dollars and $0.03 per diluted share in the first six months of fiscal 2005.

Now let me outline our guidance. For fiscal 2006 we are raising our guidance for diluted earnings per share to $0.66 to $0.67. Our updated guidance of $0.66 to $0.67 per share represents an increase of about 40% compared to fiscal 2005. Our weighted average fully diluted shares for the year are expected to be approximately 29.3 million shares.

For the full year we continue to expect to open 42 new stores and at year end we plan to operate approximately 236 stores expanding the Zumiez specific square footage more than our target of 20% square footage growth. Now I will turn the call back over to Rick.

Thank you, Brenda. Again, we're very pleased with our results for the second quarter, and we remain optimistic as we look at the remainder of the year and beyond which is 221 stores in operation we are still significantly under penetrated nationally. While we achieved much to date and we are proud of our accomplishments, we believe we have only scratched the surface in terms of our true potential.

Our great team is a foundation of our businesses and our unique concept and strong brand provides us with a powerful platform that will allow us to successfully grow and significantly expand our presence into the future.

We remain committed to generating strong results in the near yet at the same time we are focused on fully leveraging our potential and driving long-term growth and increased shareholder value for years to come.

Now I would like the open the call to your questions. Operator.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mr. Jeff Klinefelter. Please proceed, sir.

Yes, a couple questions for you. First, congratulations on a great quarter and a great first half. A question would be this, Rick, at this point given that there are challenges in the juniors market, you have a very well qualified sales force in your retail stores around the country.

Are you getting any interesting feedback from the female store employees at this point that would suggest kind of why there is a challenge right now in juniors or where it might be headed and any color at all that you think might be interesting for us?

We are getting feedback constantly, Jeff, but what I would tell you is that there is no clear direction emerging from that feedback at this point.

Okay. In terms of juniors being a negative last month being challenging, is it across the board? Does it appear to be a deceleration in the bottoms versus the tops? Is there anything to put it in context?

It appears that juniors is challenging around the market right now and some would think that the very strong denim trends and bottom trend the last couple years is, as that slows that's kind of the contributor, but is there anything in the tops category that's trending or any other color.

Jeff, I don't want to get into talking about details. As you know I am not comfortable talking about the details of individual category performance, and I also know that there is a focus on the juniors business at this point in time, but I want to remind everybody is that juniors is one of the smallest mixes within our business that I think last year 17% of our sales is percent of the mix and that again the message I really want people to take away is the strong brand diversification, the category diversification across juniors, mens, footwear, accessories, hard goods, so I am not going to talk about specific juniors categories because of that reason.

Is we're getting some good performance from our other departments, and juniors as a percent is one of the smallest of our mixes.

Okay. Back-to-school, a lot of people are talking about a later back-to-school season this year. Based on your stores in the markets they're in, are there shifts in terms of the starting dates of the back-to-school season that you're seeing? Is it just later because it is getting later every year and sort of aware now by as need cycle or why do you see the shifting later?

I think there is probably many, many reasons, Jeff. Obviously I think weather, the hot weather makes it more of a buy now marketplace across the U.S. I think there is many, many factors that are playing into that, and I am want sure I can tell you all the reasons for it.

I do believe, though, that we're going to see this shift -- the trends shift and that with our regionality, that's why we really want to make sure people are thinking about the business as the full back-to-school season of August and September combined because I think our regionality will -- typically it has a bigger effect on our September business with that shift and perhaps our August business.

Okay. Maybe just lastly, Rick, you've been -- you've had a lot of history as a private company before being public and have gone through a lot of different cycles. Can you put in context what we're seeing now?

It seems like later cycle maybe traffic is down a little bit in the malls, shifting between categories. Is there any sort of surf versus skate or any other cycles that with a historic reference would be helpful to people to appreciate about your business?

I think, well, first off, Jeff, you're right. We've seen this before in terms of these kinds of trends where it tends to move later into the season, and it can be again for many, many macro reasons that I think these shifts takes place.

Now as it relates to to the various segments of our business, surf, skate, even now the snow Tee's that you're seeing in the stores, we're not thinking of it from that perspective, Jeff, that there is any -- and I don't think there is anything historically that we would draw conclusions from again. It is too complex and depends on where we're at in each of those specific cycles.

What I would say, I guess, is I really want to communicate clearly to people is that -- and we really believe in this action sports lifestyle in a big way, and we think that we still got a great future in what we're doing with the action sports, so we're looking at this as a growing piece of the market, a growing lifestyle in the marketplace for the next five and ten years.

We think it is going to have deeper penetration amongst young women. We think it is going to have deeper penetration in ethnic groups and continue to just penetrate across America more deeply than it is today.

Again, I can't give you a specific answer, Jeff, because again it is more complicated than that as it relates to what's going on at particular cycles that we've seen in the past, but we're not seeing any significantly trends different than we've seen last year or this year in terms of the mix of our surf, skate, or snow business or motocross business.

Okay. Great. Thanks a lot.

Thank you, Jeff.

Your next question comes from the line of Ms. Sharon Zackfia with William Blair. Please proceed, ma'am.

Good afternoon. Understanding the crystal ball is only so clear, can you maybe update us on how you think comps are likely to pan out the rest of the year?

I am thinking about the real difficult Christmas comparisons you're up against and whether you still think low to midsingle digit comps are achievable during that time frame?

I think we continue as we've said, Sharon, before. We continue to plan our business to generate I think very healthy gains in earnings at that 3 to 5% comp range.

We're planning our back half of the year just as we plan the first half of the year in that sense, and then we intend to adjust to what the business tells us, and take advantage of opportunities that are presented to us. So, yes, we have some very challenging comps particularly in Q4, but I can tell you that we're not looking at this and saying that we're going to plan our business down.

That's just not the way we think about it, and we are still planning that we can drive that mid-single digit comp in that quarter.

Okay. You must be laughing that everyone is freaked out about an 8% comp in July. I guess secondarily on juniors, you obviously have the comp comparisons you're up against, and you know the trends. When do you expect juniors to go back in a positive territory?

I can't tell you that at this stage of the game. I think we just need to ride it through. As I said in Jeff's question, we've not seen a clear trend emerge, Sharon, so we're going to be -- we have managed the inventory I think well to this point. We're going to continue to manage our inventory positions in terms of our -- how we look at what's working and not working in the juniors category.

We're going to continue to experiment with different lines and different brands throughout the rest of this year, and we're going to try to find that next direction that's going to takes place, but right now I don't think any of us would say we have a clear idea where that is. My crystal ball is not working on that one, Sharon.

Maybe a few more easy questions. I think you have 15, 14 more stores to open this year. Are those all happening in the third quarter?

Yes, they all are. They will all be open by Thanksgiving.

Okay. Then, Brenda, what was your actual stock comp number for the quarter?

It was 500,000 for the quarter.

Okay.

What was the question, Sharon?

What was the stock comp hit for the quarter. Then I am assuming Fast Forward because it was only in for a little more than a month, did that have a material impact at all to the P&L bottom line?

No. Obviously their sales and expenses has rolled into our July activity, but it was a neutral effect.

Okay. No incremental expenses associated with the integration?

No.

Okay. Thank you.

Thanks, Sharon.

Your next question comes from the line of Ms. Lyn Walther with Wachovia. Please proceed, ma'am.

Hi, guys, a couple questions. I was hoping you could comment on what you're seeing in terms of brands out there. Are you seeing any shift to say smaller less well known brands or if there is any color you could provide on what's going on with the brands, that would be helpful.

No, we're not going to do that. Nice. You always try me. I will tell you again this is about the brand diversity in the stores, so we're continuing to work with brands and the young brands and we continue to work with our well established brands to try to maximize business for each one of them, and that is really how we think about what we're doing is how can we help each brand achieve its maximum potential within our store.

Okay. And then you talked about with juniors investing in some other areas where you're getting some better reads. Could you just give us nothing specific, but is it men's, is it accessories, is there some area that you feel a little bit more strongly about?

Well, as we said all year, men's has been the leading category in our business, and we are traditionally historically a young men's retailer in our business, so it has always been the biggest part of our business, and it has been performing best year-to-date.

We're going to continue to drive that business. I think we feel pretty good about our men's business, and otherwise it is not any -- it is really not anything that we're doing all the time, Lyn.

We're trying to find that hot look. We're trying to find the new brands, and we're always in there testing and evaluating what's working and what's not working in all the departments of the Company.

Okay. Finally, for Brenda, how should we be thinking about stock based compensation for the back half of the year?

Yes, as far as what I am modeling in?

Yes.

Okay. Consistent with what you saw in second quarter for third and fourth quarter as well.

Okay. Thanks. Good luck, guys.

Thank you, Lyn.

Your next question comes from the line of Ms. Sara Hasan with McAdams Wright and Ragen. Please proceed, ma'am.

Hi, guys, thanks. Congratulations. I was wondering if you could just give us an update on your tax rate. It came in quite a bit lower than I was expecting at least for the quarter and I'm just wondering, are you still looking for 38 to 39% for the full year.

Yes, our plan is still 38 to 39 for the full year because it is such a small volume quarter, it was truly a very small adjustment, but it obviously moved the effective tax rate for the quarter, and it was some tax exempt interest on some of our marketable securities that had been missed in actually the prior year, so it was a negligible impact to EPS but it will flow through for the rest of the year and get us at that probably 38 to 39%.

Okay. I also was wondering, could you talk a little bit about your plans for the private label business? It just seemed from recent visits that your sales people are pushing the Empire brand a little bit more.

No, there's no different in our plan with our private label business. What you've probably seen is people who love the brand, I think, Sara. I think it is probably what you're really feeling there. I think our Empire brand has been incredibly well received by our employee base in the stores, but we have no changes in plan to our private label program. It is designed to supplement and complement our brand strategy.

I anticipate that it will probably be about the same mix of sales it was last year which I think was just under 13% of sales. I don't anticipate a significant change from that. I think you're just probably feeling the enthusiasm for the brand among our people with the quality and the look of the product.

They do love it. They do love it. Then I am also looking for some color on your Internet business and maybe the potential for a direct business.

No. It continues to be again in terms of the mix of the business, I would anticipate on a full year it is going to be right about the 1% of our sales as it was the prior year. I would like to think that we have the opportunity over the next 3 to 5 years, Sara, to grow that business.

It has been growing faster than the base of our stores, so I would like to think we have some opportunity there. It is something that we're thinking about and working on at this point.

Great. Thank you.

Thanks, Sara.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Mr. Jim Duffy with Thomas Weisel Partners. Please proceed.

Thank you. Hello.

Hi, Jim.

Question for you on the juniors business. Have you tested a concept with no juniors merchandise? Is that an option for you to kind of marginalize that as a merchandise assortment in the stores?

Well, we used to have it. It used to be called Above the Belt and then Zumiez because again we started as a young men's retailer. We believe in the juniors business, and, Jim, as I said, I think a few moments ago, this is a part of our business.

I think over the next five years as our brands continue to develop their junior business, we intend to see this business grow, and I think it can be a big part of our business that grows significantly as the lifestyle penetrates that market even more, so we don't intend to walk away from the juniors business.

It is about how -- I think the issues now are about how well we manage that business. Again, I think we're feeling that we're doing a pretty good job of managing our inventory position in that business.

Sure. Given that you don't see any clear trends emerging, does it make sense to allocate square footage in the stores towards men's to be more productive near term? Is that an option that you've contemplated?

We do contemplate options like that, but we take those serious because we also want to have an adequate presentation for our juniors customers in the store, and as you already know, Jim, from being in the store, juniors has one of the smallest much smaller footprint in our stores than our men's business does throughout the whole year.

We feel that would be tough are to go smaller than we are today based on the size of what we feel is the presentation you need to have for that customer.

Okay. Brenda, can you quantify the store opening expense during Q2? You opened a lot of stores. Did that have a meaningful impact on your SG&A line?

Not a lot. Obviously most of those expenses are capitalized, Jim. Probably the area where it impacts us the most is we opened 22 stores is the wages area because you're always staffing a bit ahead of the curve.

Ahead of the revenue.

Yes. Because first of all you want the right manager in there recruiting for the right people, so that you got the right staff in place when that store does open, and that it is well merchandised and ready to hit the ground running.

There is a bit of front loading in wages, and as again we're pre back-to-school, we wanted to make sure the opening that happened in July were really solid openings, so there is a bit of an expense related to that. Other than that, we don't really have any preopening expenses or anything along those lines.

Okay. On the topic of expenses, how should we think about expenses associated with Fast Forward and are there any of those which we should see kind of burn off as the year progresses, any jobs that you are consolidating and so forth?

Yes. Good question. In general, no. What we have done in the transition here the last month, month and a half, is really very quickly moved to the position where those stores are just a part of the Zumiez environment, and we expect their expenses to be very much in line with the percentages that you see for the Zumiez business as well.

I think where we expect to see an impact from a profitability standpoint is as we move through their merchandise and get our own presentation and merchandise in and maybe some additional indoctrination as far as training staff and so on, we will start to see some improvements in their productivity and profitability, but it is not going to be anything significant. We feel like we have transitioned the team very quickly, and they have been -- they have come long fabulously.

Great. How have you found the state of the inventory in the Fast Forward stores to be?

The question of how do we find the state of the inventory, Jim?

In the Fast Forward stores. Through the wholesale -- I know there is a lot of overlap of the products and brands that you sell. Is there kind of a wholesale transition period that we need to see you endure?

Well, again, I would view this from -- you're right. There is tremendous brand overlap. There is virtually no brands that we don't overlap on. Again, our goal with these guys is to learn what they were doing well and try to incorporate that into the Zumiez business where it makes sense market wise and vice versa. So I think you are going to see some of the project strategies going both directions with what were their strengths and where we think that applies to Zumiez stores and vice versa.

As we said previously on previous calls regarding Fast Forward, their product margins were significantly below ours. As we move -- just as Brenda said, as we move through their inventory, we expect that we will see their product margins which was a primary differential between their store contribution rates and our store contribution rates, we're going to see those -- they're obviously going to be -- we're going to be buying at our discount rates with our greater scale and we're going to see the product margin come up to more consistent with the Zumiez margin.

Again, we're going to try to maximize the brand mix and the category mixes with what was right for those Texas Fast Forward stores.

Great. Good luck for the rest of the back-to-school season.

Thanks very much.

At this time there are no further questions. I would now like the turn the presentation over back over to Mr. Rick Brooks for closing remarks. Please proceed, sir.

Thank you. Again, we really appreciate everyone's time and their interest in Zumiez, and we'll look forward to visiting with you on our third quarter call in November. Thanks very much, everybody.

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