Zumiez Inc (ZUMZ) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 ZUMIEZ, Inc. earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

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

Thanks, Michelle. good afternoon. Today's conference call includes comments concerning ZUMIEZ's business outlook, and contain 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 in the information that will be discussed is available in ZUMIEZ's filings with the SEC.

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

Thank you very much, David. Good afternoon, and thanks for joining us to discuss the ZUMIEZ second-quarter fiscal 2007 results. Joining me today is Trevor Lang, our Chief Financial Officer. Trevor joined the ZUMIEZ team in late June. And we are, frankly, thrilled to have him on board.

Following my opening remarks, Trevor will review our financial and operating highlights. And then I will provide closing comments before we turn the call over to the operator to conduct the question-and-answer portion of the call.

The second quarter was another good quarter for ZUMIEZ. We once again posted strong comp store sales increases. And our earnings per share increased 83% from a year ago. We opened 12 stores during the quarter, and ended the quarter with 266 stores.

We remain on track to open 50 new stores in fiscal 2007. And in fact, we have opened 31 of those stores year to date, and should have the remaining 19 new stores added before the Thanksgiving holiday. As always, I want to 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 47% in the second quarter with comparable store sales up 11.6%. We reported consistently strong comps throughout the quarter with monthly comps up 11.2%, 13.7%, and 9.7% for May through July, respectively.

Net income in quarter two increase 90% to $3.1 million, up from $1.6 million in quarter two last year, while earnings per share came in at $0.11 in the second quarter, up from $0.06 in the prior-year quarter.

There's been a lot of discussion about the retail calendar shift this year and the impact of a later back-to-school season in some regions of the countries. While there is some impact on our late July results, we're still quite pleased with our overall performance, and feel we are well-positioned for back-to-school. As we have always emphasized, we view back-to-school as six- to seven-week period that reaches well into September.

Due to the calendar shift, this year's August sales are likely to capture more of that spend than in previous years, partially at the expense of our September sales results.

And with that, I would like to turn the call over to Trevor to discuss the financial results in greater detail. Trevor?

Thanks, Rick. As Rick mentioned, we had another terrific quarter with growth in all key operating metrics -- sales, operating margins, and earnings growth. We ended the quarter with a strong balance sheet, and are poised for growth over the rest of the year.

For the second quarter, net sales totaled $82 million, an increase of 47%, compared with $55.8 million in last year's second quarter. The increase in sales reflects the opening of 45 new stores since the end of the second quarter of 2006 through the second quarter of 2007 and the comparable store sales increase of 11.6%.

In addition, our second quarter benefited for the first two months due to the acquisition of Fast Forward stores at the end of June of 2006. We had an increase in both the number of sales transactions and an increase in our average unit retail.

Gross profit for the second quarter increased $9.5 million to $28.3 million or 34.5% of net sales, compared with gross profit of $18.8 million or 33.7% net sales in the second quarter last year. This improvement in gross margin was driven primarily by better product margins as well as improved leverage on overhead that is included in our cost of sales.

Moving to expenses, in total, our SG&A expenses increased $6.8 million to $23.6 million compared to $16.8 million, but decreased as a percentage of net sales to 28.8% from 30.1% of net sales in the second quarter last year. The percentage decrease was driven by improved store labor as a percentage of sales, controlled spending in the remaining areas, offset by an increase in stock-based compensation.

Operating income was $4.7 million or 5.7% of net sales, compared to $2 million or 3.6% of net sales in last year's second quarter. Net income for the second quarter was $3.1 million or $0.11 per diluted share compared to $1.6 million or $0.06 per diluted share in last year's second quarter.

Our effective tax rate for the quarter was 38%. Going forward, we continued to anticipate a tax rate between 38 and 39%.

Turning to key balance sheet highlights, at August 4, 2007, cash and marketable securities increased to $33.4 million from $14.6 million at the end of July 2006. Inventory was on plan and current at $61.8 million versus $51.8 million at the end of July 2006. Average inventory during the quarter on a comp store basis decreased about 4% from the same time last year while driving an 11.6% comp store sales gain in the quarter. We remain comfortable with our inventory position.

Also on August 4, 2007, the Company had no long-term debt, including net outstanding balances on its revolving credit facility.

Turning to our first-half 2007 financial results, for the first six months ended August 4, 2007, the Company reported net sales of $150.8 million, an increase of 45.6% over the $103.5 million in sales for the first six months 2006.

Comp store sales for the first six months of 2007 increased 11.4% on top of a 15.8% increase in the first six months of 2006.

Gross profit increased 47.1% to $50.1 million, or 33.2% of net sales from $34 million, or 32.9% of net sales in the first six months of fiscal 2006. Again, this increase was driven primarily by improved product margins.

Year-to-date SG&A expenses increased 41.3% to $43.2 million or 28.7% of net sales in the first six months of 2007, compared to $30.6 million or 29.5% of net sales for the same period last year, an improvement of 80 basis points. This improvement was driven by improved store labor, offset somewhat by higher stock-based compensation.

Operating income totaled $6.9 million compared to $3.5 million in the first six months of fiscal 2006, an increase of almost 100%. And net income improved to $4.7 million or $0.16 per diluted share from $2.8 million or $0.10 per diluted share in the first six months of 2006.

Now let me outline our guidance for the rest of this year. For fiscal 2007, we're raising our guidance for diluted earnings per share to the range of $0.97 to $0.99 per share, up from our previous guidance of $0.94 to $0.96. Weighted average diluted shares for the year are expected to be approximately 29.5 million shares.

We are on plan to open 50 new stores in 2007, expanding the ZUMIEZ specific square footage in line with our target of 20% square footage growth.

Finally, I want to pick up on something Rick mentioned regarding sales by month and the impact of our upcoming sales report in August and September. As you know, fiscal 2006 was the year we added a 53rd week to our calendar. Due to this change, our 2007 reported sales on a monthly basis are a week later than they were last year. This will cause the week before Labor Day to fall into August sales this year versus September last year. This is a very large volume week for us.

While there is no impact on our comp store reported sales, as we continue to look at the same periods as last year, we do want you to keep in mind that our GAAP reported sales in September will be a tougher comparison due to the shift of this high volume week into August and out of September.

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

Thank you very much, Trevor. Again, we're very pleased with our results for the second quarter, and remain optimistic as we look into the remainder of the year and beyond.

We had a lot of questions about the ZUMIEZ culture and our ability to sustain the unique environment we have on the retail landscape. Today, we have 266 stores, and remain on track to eventually operated 800 stores. We are constantly looking at ways to infuse our team with empowerment that is critical to our Company.

We made great progress in building our culture over the last few years, and I feel confident that today, at 266 stores, our culture is stronger and more vibrant than when we had 50 stores. We look forward to continuing to build on this cultural foundation.

And now, I would like to open the call to your questions. Operator?

(OPERATOR INSTRUCTIONS). Jeff Klinefelter, Piper Jaffray.

First off, as we go into the second half of the year and specifically Q3, Rick, recalling from your last year's report, you did deleverage because of your store expansion, your acquisition. It was a heavy store opening period, or heavier than the prior year. And I think there were 70 to 80 basis points of higher occupancy costs in the quarter, if I remember.

Could you just update us on kind of how you are thinking about it going into this year -- how much of that you get back given how those stores have been maturing the last 12 months?

Gladly. I'll make a couple of topline comments. I'll let Trevor talk about it, too, Jeff.

From my perspective, I -- it all depends upon sales as always, right? That's always the fundamental nature of our business -- it depends upon the sales results and how good a job we do at driving those. And that being said, again, as I said in the comments, I think we are pretty optimistic about how we're positioned for the rest of this year. So I will let Trevor take it and maybe talk a little bit more specifically.

Yes, Jeff, we did achieve leverage in rent as a percentage of sales in the second quarter. But again, that was driven by having a 47% growth in sales and almost a 12% growth in comps. So we have guidance a little more conservative than that level of comp in the back half of the year.

And so to the extent sales come in where we are expecting them and projecting them, we would anticipate not to have a lot of leverage in rents in the back half of the year. But if sales continue at the rate they did in the first half of the year, then we are going to get leverage in that line item.

And again, Jeff, I remind you that again as -- the issue is the mix of maturing stores -- last year new stores; this year, it's a whole set of maturing stores. So we still have that bubble of stores moving through this system towards maturity. And the issue still exists relative to that term. But again, I think both Trevor and I feel comfortable with our position and the full-year guidance we've given.

Okay. Maybe more specifically on your new store model -- any updated thoughts on what your kind of first-year projections are for a new store today versus a year ago, given that you have expanded slightly, I think, the size of an average new store and gone into some new markets that are potentially higher volume?

Yes, Jeff, again, our model works a bit differently, in the sense that because of the strength of our people in the stores, when you talk about the average size of the store -- and I think Trevor can tell us exactly what the average size is for this year's set, and probably what our projected impact on the overall average size is -- but what we're doing here is a wide range of stores, everything from 2,400 to in excess of 4,000 square feet.

So again, we have to think from our prospective about rightsizing to the market. And as we do that, we're doing that to try to achieve -- we're doing that with the economics to achieve our targeted sales goals, so from that perspective, nothing in the economic model changes from my goals. We're just putting the right-sized store for the right location and the right market, based upon achieving our economic objectives.

Yes, and as we have shared with you guys or as the group here has shared with you guys, we are open in A, B, and C malls all the time. And they're different square footages, based on what the ultimate sales volume and the store economics are going to do within that store.

That being said, our average store this year is going to be just over 2,900 square feet. We're going to continue to target the three things on our new stores that we have always targeted, which is trying to get to 10% of occupancy at maturity; greater than a 40% IRR; and a 12- to 18-month cash payback, cash on cash. Those are the things we focus on as opposed to is it immediately going to provide leverage or accretion to the gross margin line. Those are the things we are going to focus on as we open new stores.

Okay. Great. One last question for you -- in terms of going to the second half and thinking about opportunities -- not specific brand, but sort of more broad category opportunities, I think the boardsports or some of the hard lines were a little bit more challenging last year, if I recall, in the fourth quarter -- maybe not favorable weather patterns again in the fourth quarter. But any opportunities that you see? Or what would be the biggest opportunities you have to outperform your comp guidance for the back half?

That is clearly one of them, Jeff. We had a great winter season across large parts of the country. That would be -- particularly, let me be more specific with that -- and we'd get early winter weather. That's a very impactful thing for our business. So yes, that would be an opportunity tied to a weather function.

I do think we have generic opportunities all throughout the business and what we're doing from just the fashion trend perspective. Obviously, we are having a good year in terms of comps. And as we look forward, I like our trend positioning.

But we are just being as we always are. As you know well, the first two months are low-volume months, and all of the money is made in the back half of the year. And that's really what we're focusing on. That's why we are being very disciplined about what we're doing.

Dorothy Lakner, CIBC World Markets.

Congratulations. I wanted to ask a question about just department performance. Last year, I think, at this time, you had some weakness on the junior side, and built that business back over the last year. So I wondered what the performance was like in the second quarter by department.

And then, you've got a new private label in the store. I wonder if you could just comment -- first, give us the sort of split between brands and private label on a percentage basis, and then maybe some color on how you are seeing the performance in private label.

And then lastly, if you could split the growth in comp for us between growth in AUR and transaction.

That's a lot. Let me try and pick these off. I think Rick was writing down feverishly as I was looking at these as well. And between the two of those us, we will try and get them. And I'm sure you will remind us if we missed any.

The product level performance, I think -- we've got a long history of not giving a lot of detail on those. Just know that all categories comped positive -- all departments, I'm sorry, comped positive in the quarter.

Our private label -- it's hard to look at that on any one individual quarter basis just because of the way trends will flow in our business. But we are happy with where the private label is going for the rest of the year. And there has been and material change -- I will tell you there's been no material change in the first six months, as private label as percentage of our business.

What drove the comps in the quarter -- it was led by transactions. And then secondly, it was led by the average unit retail price. And am I missing one? I think that was it, Trevor.

So a little bit more -- I think last quarter, you mentioned that there was more of an even split, so it was a little bit more driven by transactions this time.

That's correct, Dorothy.

And as it related to the new private label brand, we're not going to talk specifically about that. But as Trevor said, on the whole, our private label is performing as we expect it to be performing at this point.

Mitch Kummetz, Robert W. Baird.

Let me congratulate you on a great quarter. I got a few questions. Let me start with a follow-up to Dorothy's question about department performance. I know you don't want to comment on that, but on your July call, you did mention hardgoods was your strongest performance department for the month. Is something happening within the hardgoods segment that drove that, or is that more a function of a later back-to-school, pushing apparel purchases out of the tail end of July and August?

You are exactly right, Mitch, in that it is, from my perspective, primarily related to the fact that we moved out the back-to-school -- the large volume back-to-school weeks, as you know, in Texas and Florida, pushed them into August. And that just changed the mix of business in the last couple of weeks of the month.

So from my perspective, what you are seeing there is a mix shift and timing. If back-to-school had fallen on its regular pace, I believe that we would have been saying that men's was the driver.

Okay. And then on the women's business, as I recall last year, you guys had a negative comp in August for juniors. And I think you had mentioned that it was partly due to a lack of trend in that business. Are you seeing more trend there this year than last year? Or are you maybe doing a better job capitalizing on what trend is out there based on better utilizing your private label?

Mitch, you always get to remind me on the one time I mentioned a negative comp that I'd ever done in these calls. So thanks for that. I appreciate it.

As we look at our juniors business, as Trevor just said a moment ago, our departments all comped positive in July. I think relative to last year, we probably had some opportunity in juniors going into August, just because we had a tougher juniors month a year ago. So from that perspective, I think we have some opportunity in our juniors business heading into the month of August.

Okay. And then a couple of last items. On the snow business, both hardgoods and softgoods, when do you start bringing that into the stores? And will you be offering a larger assortment of vendor closeouts compared to a year ago based on some of your vendors there coming out of the season with more inventory on their hands?

Well, first off, you can already start to see some of the snow product on line, Mitch, on our Web store. So you'll be able to see some of what's going to be featured there. You are already seeing some of the snow apparel in stores today as part of our back-to-school floorset. So we have a whole -- again, as you know, it's one of the things that really distinguishes us out there is the fact that we have some great snow brands as partners. And we can deliver some apparel going into the fall season as part of our back-to-school assortment.

So you are seeing that is in stores today. We have either a table or a wall section of snow brands in the stores right now. And then, in September, we will set -- later in September, we will set the hardgood snow shop portion of our stores. So from that perspective, I think it gives you a good sort of sense and outline for our plan there in snow.

Now as it relates to closeout deals, no, we haven't done a lot of that in the business at this point -- not saying that there isn't any opportunity to do that. But we have not done a lot of this stage.

And then two real quick items. I assume the guidance reflects a mid single digit comp over the balance of the year.

That's correct.

And then just a quick update on Fast Forward. Are those stores now set with the full ZUMIEZ merchandise set, including all the private label?

Yes, Mitch. This is Trevor. We have sent all of those stores -- all but two of those stores have been adjusted to have everything ZUMIEZ, from our fixtures, from our training, the management team. And the two remaining stores -- the only reason those haven't been converted is just due to the fact that they're in the same mall with an existing ZUMIEZ that existed before the acquisition last year. So yes, they are completely up and running at ZUMIEZ brand.

And with the back-to-school shift, there is going to be a little bit of uniqueness in July. But we are very -- we are encouraged by what we have seen since the acquisition. And this group of stores is performing at our expectations from the pro forma model that we put -- that the team put together last year.

Sharon Zackfia, William Blair.

My line is a little fuzzy because I'm calling from Japan, so I hope this question hasn't been asked already. I was wondering I guess as a follow-up on the Fast Forward stores -- how has the private label been accepted by the customers at those locations?

I hope you are enjoying Japan. Private label Fast Forward -- we're going to able to talk more about that as we get through back-to-school. As you know, the back-to-school period has been pushed out in that marketplace. And as we said, this back-to-school cycle is the first time that we're really getting our [full] set of back to school products.

But I have absolutely no reason to believe based upon what we saw through the spring and in early reads in July that we aren't going to see those stores performing on an equivalent basis to our ZUMIEZ stores.

Okay. And then as a follow-up as well, I think in response to another question, you mentioned that the hardgoods leading comp in July was really just a matter of the calendar shift. Did I hear that correctly?

That's correct. It's really about the back-to-school shift, Sharon, of Texas and Florida moving out.

[Diane Kat], Morgan Keegan.

I have some questions from Brad Stephens. Our first question is, given that you plan on opening more stores earlier in the year, for 2008, how do you feel from an operational standpoint about opening all of these stores next year, assuming we are on the same pace as this year? For example, have you hired people for those stores?

I'll let Trevor talk a little bit about the timing of our planning of stores. And I will talk a little bit about the people side of it. Go ahead, Trevor.

Yes, as you would imagine, in the real estate business, you're almost a year out from the time you get started to the time you close the deal. So we are well into 2008 looking into the deals we're closing.

And I would characterize it the way we have characterized our long-term business model, in that we are focused on having 20% square footage growth each year, mid single digit comps. And we are executing our real estate strategy to deliver that, and also the 30% plus growth in earnings.

So we are executing our real estate strategy to do that, And that would mean that there's probably not going to be any material difference in the store openings as they have occurred this year -- the same way they will occur next year.

Okay. And then, Diane, as it relates to the people side of it, we planned that already -- because as Trevor said, we're planning a year out in terms of our plan of attack in terms of markets and how we're going to open stores.

So it starts really early on. And in fact, as you would guess, people from our operations team are involved in the real estate process. And so they are keeping in the loop right from the moment deals are approved. And they start that point in terms of planning where we might need new district managers, or how we might shift people around.

So it's an ongoing process all the way through the end of this year. And then really things start happening in January in terms of if we're going to move people around, that's when it would start happening, and then getting people in the local markets and getting them set up and letting them start the hiring process. So it starts sort at sort of a macro basis, and works its way down as we get closer to the opening of the stores.

Great. And then there's also some talk in the market about a transition from surf to skate. Are you seeing that sort of transition from surf to skate in some of your Southern markets?

I can't comment on that very specifically. I mean, we -- it's hard for us to measure that, and let me tell you why.

First off, there are many brands that transition, that play in the surf and skate and snow marketplaces. So those brands -- it's hard to tell what's driving those changes, whether it's surf, skate, or snow. So it gets to be a very difficult thing to try to answer that question relative to a macrotrend like that.

And then in the southern markets, I would tell you we're still learning the business in those southern markets in terms of what's the right mix of business. And as you would guess, in areas that aren't on the coast, skate is a much bigger part of the mix.

So the other thing that makes this difficult in looking at a trend like that is how we are rolling out and opening up new stores in these markets. So to address a macrotrend like that gets very difficult for me to do.

And then just one final question. Would you be able to tell us roughly what the stock-based compensation expense was in the quarter?

Yes. And just so you know, we have booked that -- part of it goes up into our gross margin expense, and part of it goes down in SG&A based on the classification of the employee.

But the total expense in the second quarter for stock-based compensation was $1.5 million. Of that, about $280,000 of it was in cost of goods sold. The rest of it was SG&A.

John Morris, Wachovia.

Systems initiatives, IT and whatnot as sort of a catch-all category -- you've had opportunity there. You been working on some new things. Can you give us an update on what you are working on and your kind of wish list from here?

Sure, John. And I would characterize the things we're working on as incremental in nature, I guess, is first the up. We're not working in any large kind of multimillion-dollar type of systems initiatives. We don't have anything like that currently in the works. So they tend to be incremental in nature, focused on the areas within the business where we think we can improve; tools to make better decision-making, faster decision-making.

We've done a number of things over the last year and we are making -- again, we sort of view this as an ongoing, incremental improvement opportunity. So last year, as you remember, we automated the new hire process in the stores. And this year, we're coming back around and we're going to roll out another sort of revised updated version that's going to encompass more things within that process to try to take out administrative time from -- take away necessary administrative time for our managers, simplify the process, speed the process through the use of Web-based technology. So we're going to do another round of that this year.

Another example for you would be in terms of the buyers -- last year, we did an upgrade in terms of some of their tools and decision-making tools at the buyers' level. We're in the process of doing another upgrade in a couple areas in the buyers, and next year, there will be another round of upgrades there again, relative to trying to speed the decision-making process for the buyers.

So from my perspective, it's an incremental nature, where we're really looking at tools and programs and how can we reduce administrative time for people ,and improve the speed to the decision.

Now the only big thing I think we have coming up on our horizon over the next few years is we're going to be looking at a change to our front-end POS system, John. But we've got a couple of years that we're working on that, and Trevor and his team are taking some time to look at the opportunities there.

Is that '08 or '09?

Yes, I don't think we be executing anything in the early part of '08. And we still would have to figure out exactly what it is we would do. The way I think we evaluate it -- the first priority to funnel as we go through things is anything we can do at the store level to help the speed of service at the store, to help the employees at the stores. So that's our first priority from a technology solution. And then Z-Hire system that Rick mentioned -- that's a perfect example.

And then it goes down the funnel of what can we do to help the merchants analyze the business so they are doing more time analyzing data as opposed to aggregating data so that they can make better decisions. And then you go back through the speed of which things can get through the distribution center. And all of those things, obviously, have an ROI attached them to make sure they've got good, reasonable returns for it.

And then finally is everything else in the back office that helps people do their jobs day-to-day. But that's how we prioritize it and focus it. And by far, I think the highest priority we focus on is trying to get things out there at the retail store that's going to help our retailers drive the business.

Sara Hasan, McAdams Wright Ragen.

On your store openings, are they still expected primarily in advance of the holiday season?

Absolutely.

Wonderful. And then, if I might ask, are you able to tell us who you are stealing share from?

You know, I wish I knew who we are stealing share from. I do think we're gaining share. I thing that's partly what the gain in transactions is telling us from that front, Sara.

But all I know -- and here's our focus -- we just try to sell as much as we can to as many people as we can out there. And we are just trying to do our best through what our buyer is doing, what our sales teams are doing, and what our whole home office team can do here to support the stores.

So we're letting the consumer make their choices. And we're just doing the best job we can to give the consumer great choice, great brands, and great service.

Jim Duffy, Thomas Weisel Partners.

Hoping to dig into the margins a little bit, if we can. On the gross margins, you mentioned better merchandise margin. I'm just wondering to what extent that's better -- IMU or better volume purchases, or whether there's some efficiencies that you are seeing in the distribution center, etc.?

Yes, as we said in the script, it's definitely being driven by product. And if you think about the other components of our cost of sales, the next biggest line item in there is store occupancy expenses and then distribution expenses. So you want to think about it in terms of most definitely the product, although when we do post nice comps like an 11.6% comp, you obviously get leverage on a number of the other costs that have a fixed nature with them. But I think we probably would leave it at that. I don't know if we're going to get into a lot more detail on that.

Jim, again, it's basically what falls out there in terms of the product margins. It's a lot of things would be -- [to a glance]. I can't point to any one thing. It is some IMU. It is related to our ability to reduce markdowns, our ability to drive deals with our vendor base and how we've approached it from a vendor base perspective. It's a lot of different factors that are making -- that are delivering that gross margin improvement.

Okay. I remember from the analyst day a year ago, there seems to be a lot of opportunity in the distribution center. A year later here, how much of that do you feel you have realized, and how much further opportunity is there on the margin?

Again -- I'm going to let -- Trevor actually has a lot of experience in here. And we're going to give Trevor some time to work with the team and figure out -- give us his assessment on it.

But at this point, Jim, you also have to remember that in the distribution center this year, we did add an additional 35,000 square feet of space, which -- we have not anniversaried those costs yet. So we're absorbing those costs within the numbers. So we haven't delivered a lot of leverage at this point from just a distribution cost perspective throughout this year.

Now, do we have a lot of opportunity there? Absolutely. And I think that's where we are, as always, looking at where the opportunity is and how can we deliver on improving efficiency of our DC. And again, our goal is not just a look at now. It's to look out for a year, two years and three years, and make sure that we're planning for success as we build the business.

Yes, and the only thing I would add to that, John, is we put some initiatives in place to really look at the entire supply chain and not just the distribution piece of it. And so for example, we're working with our vendors to make sure they understand what is important to us. And for the most part, our vendors are very amenable to helping us with those things. And you can think of things like preticketing, advance shipping notices, making sure that they have it boxed in a form that we can use and things of that nature.

So the people in that distribution center, they're doing a great job right now and they're supporting us well. But as we become bigger and as we become a little bit more sophisticated and implement some systems, we definitely believe there are savings to be garnered there. And again, that being said, our distribution center as a percentage of sales -- we don't give out of specifics, but it's pretty good relative to industry terms. So it's not like you're going to find 200 basis points of margin improvement there. But like with all things at ZUMIEZ, I think we're going to make an incremental approach here, and continue to improve that as a percentage of sales and leverage to against the sales growth that we have.

Okay, great. And then the SG&A as a percent of revenue is lower than I'd expected. And you mentioned one thing -- leverage of in-store payroll expense. Was their something specific that you did there differently, or is it just healthy sales numbers?

Yes, there's a couple of things. Again, this is a credit to store team here. They have done a tremendous job of really evaluating what does it take to be a first-class retailer, and how many hours do we need?

And what they basically did was sort of two things. And I don't want to give a lot of specifics, because there's obviously a lot of people listening on this call. But they basically took an evaluation of a long period of time -- what are the hours we need to run the stores at AA, AAA volume -- as you go down the volume levels? And they then allocated those hours based on what they expect those stores to be.

So it's not rocket science, but we sort of -- as everything we try and do at the home office, we try to take it and make it simpler for the store managers. And we have allowed them not to have to focus on to try and figure out -- okay, how many hours do I need to put on Wednesday versus Thursday versus Tuesday? We have created a tool that we here at the home office can segregate those stores by volume level, by task level, and then we are allowed to -- then we just basically give those stores, those hours so they can then use the store hours.

And it's been very beneficial, both from the store's perspective, because they're not trying to have to figure out some very difficult math and having to remember what they did last year and what programs are coming up this year. It's all handled out of the home office.

And then also, Rick mentioned briefly this Z-Hire process which is -- again, it makes it much more efficient at the store level, because where they were handling a lot of paperwork going back and forth in the past, it's all automated through the Internet, and they don't have to deal with anything. And the side benefit of that is we now have much more control over the wage rate that will be used, because it's based on a band on two things -- one, experience, and two, what wage rates we have to put in based on the area of the country.

So as you'd imagine, there's a lot of things, but those are the two biggest things that have helped us drive our labor rate, which is obviously our largest variable component of SG&A.

You guys are doing a great job. Keep up the good work.

(OPERATOR INSTRUCTIONS). Lauren Lyster, Tiburon Research Group.

Thanks for taking my call. I was wondering -- you've spoken on past calls about the warm weather package you have been working on, especially in your southern markets. Do you have any updates on that?

We're obviously implementing it at this point, Lauren, as you would guess, and adjusting it as we go. You know how it is -- you take your shot at what you think you need to do to set it, and then you measure and evaluate, and you adjust from there on an ongoing basis.

So we've tried a number of interesting things, not all of which I'm going to share, again, for competitive reasons, in terms of product mix and interesting -- different types of products. And then we've been adjusting -- the buyers have been adjusting to that.

We are also, as you would guess, making sure that all of the imagery in stores for the timing of the seasonal packages all ties back exactly to being unique and appropriately timed for each market across the country.

Okay. Thank you. And how much of an impact are you seeing on the business for brands that have gained a lot of mainstream popularity from MTV shows? There seem to be several that are pretty big right now, such as DC and Big Black.

Yes, DC is a terrific brand. And we have been selling DC for many years. And it's been, I think, a very significant brand for us for a very long period of time.

We don't look at it from the perspective of MTV shows. What we look at is from the perspective of a brand diversity, of having lots of exciting brands. And I think we're at a point right now where that's true for us. We have a number of great brands like DC we have sold for many years. And we have a lot of really exciting young brands that are coming up, so that there's no one thing that I can look at again from a brand perspective and say, oh, yes, that one thing is driving DC. DC has great product too. And that's a big part of what's driving DC.

And likewise, again, just like DC is a very good brand, there's lots of exciting brands out there that we're doing very well with right now.

Yes, Lauren, this is Trevor. I think as you want to think about this from an external party looking in, the buyers, the entire merchandising organization, the field organization -- they're very involved in this active sports lifestyle. So they drive the business based on being in the details of what is the hot brand right now. And there's lots of communication that goes on back and forth between the field and the merchandising group and marketing group as to, hey, we're seeing this brand be an up and comer. We think this is could be great in these stores. And there's a lot of interaction within the organization.

So I think we focus in more on what's hot in the action sports industry. And that's how we're going to drive the business versus looking at what's hot on MTV or things of that nature.

And as Trevor alluded to there too, Lauren, it's also what works in different parts of the country. Different things work in different parts of the country in different ways. And we're very sensitive about making sure that we've got the right brands in the right quantities in the right locations.

Right. But when you're talking about taking marketshare, do you think that the mainstream popularity of some of these brands is part of that, of attracting a broader customer?

I think it is, but there's -- it's much more than that too.

Right. And then just a quick question if you could answer, what was Q2 rent expense?

As a function of sales (multiple speakers)

Yes.

Or in terms of leverage or just gross dollars or --?

Dollars or as a percent of sales.

Again, we don't really get into that level of detail in talking about the margin. I think I will let Trevor take it from there if he has any additional comments in terms of any of the components of the gross margin number.

Yes, I'm just getting to play the new guy card here just a little bit. (laughter) I think we've shied away from giving that level of detail in the past. But again, I think we've hopefully clearly communicated that as you think about the margin that's been garnered over both the six months and the three-month period, the vast majority of that has come through product margins.

And again, we have gotten leverage in other components of SG&A -- or of the gross margin line. But again, as Trevor said, the most important piece of that is the improvement in the product margin.

That gets us close enough. Thank you. So I just had to try, but thank you so much for taking my call, and congratulations.

Jennifer Black, Jennifer Black and Associates.

Let me add my congratulations. I have a couple of questions. I wondered with the rising numbers of skateboarders, how do you know that this trend may not be something bigger, with estimates of over 12 million skateboarders, bypassing baseball, and with skateboarders becoming better and better and breaking more boards, I just want to know how you know that it's just back-to-school.

Again, just so I'm clear, Jennifer, I didn't say that our skateboard business wasn't good.

No, I know that you didn't say it, but --

Our skateboard business has been very solid for quite a long period of time -- in fact, for years. So and you know this business -- I know you know this business very well. We look at the skateboarding -- we look at what we do with skateboarding again as a very critical part of the lifestyles that we sell.

And it appeals to a very important age demographic for us of -- it goes all the way up very high, but a core group of 10- to 15-year-olds that we really focus on with that skateboard lifestyle. And it's been growing for 20 years.

And I guess as I look at it, I think it's going to continue to grow. I'm very optimistic about it because of the statistics you just mentioned.

So if I gave the impression that I minimize the importance of skate to us in any way, then that was the wrong impression. Skate is terrifically important to us, and it's an important part of what we are about as a Company.

And Jennifer, the other piece of it that I think -- I'm trying to read between the lines here on your question, is how do we know we're not leaving money on the table here?

And I think the beauty of ZUMIEZ's business model is we are a branded business. And because of that, we have the ability to go get brands quickly. We obviously are a growing and more important piece of all of our vendors' business. And as we've seen the skate business grow at a pretty high rate this year, we've had the ability to go and work with different brands to, a, let them make sure they understand and they see this trend so they're planning for it as well; but also, that we can go get that business quickly as we see the sellthroughs incrementally increasing at a quick clip.

So again, versus being a private label house, we have the ability to go to a number of different brands and bring in those skateboard which, again, will help fuel sellthroughs and help continue to grow this business.

And we can continue to fill your needs of skateboards, too, with our stores in Oregon, Jennifer. (laughter) So we are happy to do that for all of those broken boards you have.

Thanks. And then just a follow-up, do you feel that there is still the plethora of new brands that your customer demands and that you guys are so good at, and that these smaller brands can continue to execute?

I think it's a very exciting time for a lot of these young brands. And as many of you have heard me say over the last few months, that if you look at our concentration in top 10, top 25 and top 50 brands, we are actually less concentrated from the sales perspective in all those three areas -- all the three groupings than we were two years ago. So that speaks again to the excitement around young brands coming up.

Now, you also raise a good question, Jennifer, about, well, can those brands support you? Well, a lot of those brands you shouldn't think of as being even [all-store] buys. That's just not the way we work with them. It takes a while for those brands to mature and to resonate in broad parts across the country.

So many of these brands that we're selling -- we're selling different brands in different parts of the country. And again, that's an important part of our strategy from a product perspective. We want to make sure that we are micromerchandising the stores by what's relevant in every part of the country.

And the great thing about that is it gives those brands then that may start to build broader reaches outside their core marketplaces the time to grow with us and the time for us to see those brands grow and their capacity grow for us to be able to grow our business with them over a period of time.

So it's not like someone -- brands go in our system from a 10-store buy to and all-store buy. That doesn't happen. Brands tend to take time to mature and build in our business. And it takes time for them to resonate in broader geographic areas across the country.

So we have time to grow with the brands, I guess, is a way of saying that. And we have a lot of great, young brands.

Great. My last question would be -- anything new with your grassroots marketing? You guys do a great job there.

Well, as you know, one of the big changes -- I know you know this particularly. But one of the big changes we made in the Couch Tour this year was to include an amateur series contest. And that is something that we wanted to do for a number of years now, and it took us a while to find the right way to pull it off in a way that we felt was of very high-quality.

We think that was tremendously successful. We are excited about -- again, we think it's a great role for us to play in the industry, a way for us to give back to our consumers, our kids out there, our customers in the marketplace, to actually let them -- again, they will participate in the experience in the local markets where those local kids get to see their local heroes get a chance to perform in the skate contest.

So that was a big thing for us. And we are very, very pleased with how it turned out.

We're doing a number of additional events. We did a couple early this year; we're going to do a couple more here in the back half of the year that are broadening out our appeal in terms of looking at ways we can give back to the industry.

And I'm not going to talk specifically about them. But they're important things for us because we want to do our job to help bring the experience alive for the consumer in local markets. And so you are going to continue to see us in ways that we think are interesting and relevant continue to reach out to our consumer in the local markets.

Great. Good luck -- you guys are the best.

And as there are no further questions, I'll turn it back to Rick Brooks for closing remarks.

Thank you, Michelle. Again, I just want to thank all of you. We are tremendously appreciative of your interest in ZUMIEZ. And Trevor and I look forward to getting back to you as we finish the third quarter and sharing our third quarter results with you in November. Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.