Zumiez Inc (ZUMZ) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Zumiez Incorporated earnings conference call. My name is Melanie, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. David Griffith of ICR. Please proceed.

Thanks, Melanie. Good evening. Today's conference call includes comments concerning Zumiez Inc.'s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties and actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially and the information that will be discussed is available on Zumiez's filings with the SEC. Now I'd 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's fourth quarter 2007 results. Joining me today is Trevor Lang, our Chief Financial Officer. Following my opening remarks, Trevor will review our financial and operating highlights and then I'll provide some closing comments before turning the call over to the operator to conduct the question and answer portion of our call.

I'd like to start off this call by discussing the current marketplace. It's no secret today's retail environment is tough. And the teen consumer is not immune to the current macro issues. It appears that the few companies that are outperforming the group as a whole are the more promotional players in the industry. As you know, this has never been our strategy and we do not believe that it's prudent to adopt a short term strategy that could potentially hurt us in the long run. While we're not in the business of prognosticating on the economic outlook, we are in the business of managing a growth retail concept. As such, we've taken what we believe are the appropriate measures to manage through these difficult times.

First and foremost, we are managing our expenses and our inventories conservatively, and we'll continue to do so in order to protect our margins. Over the past several months, we spent a lot of time with our team, making sure they're focused on what they can control, which is maximizing every sales opportunity, driving dollars per transaction, and controlling expenses. We believe the strategy that made us successful for 30 years are just as effective if not more effective during tough economic times. I'd like to remind investors of the key strategies that we plan on executing both this year and in the years to come.

First, we'll continue to focus our energies around motivating, hiring, training, and retaining great retailers. We believe the techniques and skill sets we give our salespeople merchants and home office staff is second to none and will allow us to grow even if at a more moderate level in 2008. Second, we believe we'll continue to be a destination shopping experience for the action sports consumer and we'll continue to focus on delivering a great diverse product offering. Third, we plan to continue to grow our store count because we believe our growth feeds our success, provides our employees with opportunity and keeps the most talented employees engaged and provides them with a career path. In prior economic downturns, we've been able to acquire great talent and locations and believe this may occur again during the current cycle we're operating under now. In our opinion, the stronger disciplined well-financed companies like Zumiez benefit longer term from these periods of retail shakeup.

We also believe we have a strong management team with almost 100 years of experience between us and we've operated in both good and tough economic times. Even with the tough environment we faced in the latter part of the year, we reported record sales and earnings. We added 50 new stores, posted positive comp store sales increases in each month, and increased annual diluted earnings per share by 18%. Our business model has proven successful for the last 30 years. Over the last five years, we have averaged a 10% comp. Over that same period of time, our operating margins have improved 390 basis points to 10.2%, and our compounded annual growth rate diluted earnings per share has increased 50%.

We believe our unique concept has continued room for organic growth and that we can operate 800 stores. As always, I want to take a moment to recognize the contributions of everyone on our team from our store levels to the home office and our vendor partners as well. With that, I'd like to turn the call to Trevor to discuss the financial results in greater detail. Trevor?

Thanks, Rick, good afternoon, everyone. I'd like to walk you through our fiscal 2007 fourth quarter and full year results and speak about our current views on 2008 guidance. For the fourth quarter, net sales totaled $126.6 million, an increase of $14.2 million or 12.7%, compared to $112.4 million in last year's fourth quarter. When the additional week from fiscal 2006 is excluded, net sales were up 18.5% in the fourth quarter. The increase in net sales reflected the opening of 50 new stores since the end of the prior year, and a comparable store sales increase of 4%. Our sales growth again benefited from an increase in average unit retail and an increase in the number of sales transactions.

Gross profit for the quarter increased $4.5 million or 10%, to $48.6 million, or 38.4% of net sales compared to the gross profit of $44.1 million or 39.3% of net sales in the fourth quarter last year. The slight decrease in gross profit margin was driven primarily by an increase in store occupancy costs as a percentage of sales and the loss of one week of sales. Moving to expenses, in total, SG&A expenses increased $3.1 million or 12% to $29.2 million, compared to $26.1 million, but decreased as a percent of net sales to 23.1% from 23.2% of net sales in the fourth quarter last year. The slight percentage decrease was driven primarily by lower bonus accruals, largely offset by the loss of one week of sales and to a lesser extent an increase in depreciation expense as a percentage of sales.

Operating income increased $1.2 million or 7% to $19.3 million, or 15.3% of net sales compared to $18.1 million or 16.1% of net sales in last year's fourth quarter. Net income for the fourth quarter was $12.4 million or $0.42 per diluted share, compared to $11.3 million or $0.39 per diluted share in last year's fourth quarter.

Turning to the full year fiscal 2007 financial results, for the year ended February 2nd, 2008, the company reported net sales of $381.4 million, an increase of 28% over the $298.2 million in sales in fiscal 2006. Comp store sales for fiscal 2007 increased 9.2%, that's on top of a 13% increase in fiscal 2006.

As many of you know and will recall, we've talked about our new store productivity for a while. The class of 2005 and 2006 stores which are the two most recent classes where we have a full year's worth of sales, their first full year of sales came in at about 70% of our mature store volumes. The class of '07 stores is currently trending below that average, but as you know, we are projecting a material amount of their sales because with the exception of a couple of those stores they have not yet hit their anniversary date. I believe we do need to be careful about projecting the future growth of these stores because of the fact that they've got a lot of year left before they're fully mature. I know there's been lots of concern about our new stores, and I want to peel back this issue just a bit.

When you look at our class of '07, about 40% of these stores were built in California, Arizona, Nevada and Florida, markets that we and other retailers have spoken openly about the difficult operating environment we find ourselves in. With the exception of Florida, which is a new market for us, these markets have been very productive for us and we have no reason to believe they will not return to historic levels at some point. These performances for us were doing very well through back to school, and we believe the class of '07 will be fine once the economic returns to more historic levels.

As investors and analysts research our business, I think the simple way to evaluate how our new stores are performing is to look at the spread that the new stores contribute to our sales. Spread is simply defined as the difference between total sales and comp store sales. If we continue to add about 20% new stores a year, and those stores contributed about 70% to mature store volume, they should add about 14 to 16% to our new store sales. So when you listen to our monthly and quarterly sales calls, if you're calculating the spread you come in somewhere between 14 to 16%, you should be confident we're executing against our business model I shared with you.

Moving on to gross profit, gross profit increased 27% to $137 million or 35.9% of net sales from $108.2 million or 36.3% of net sales in fiscal 2006. This decrease in margin percentage was driven by an increase in occupancy costs, somewhat offset by improved product margins. SG&A expenses increased $22.3 million, or 29% to $98 million, compared to $75.8 million, and increased slightly as a percentage of net sales to 25.7%, from 25.4% of net sales in fiscal 2006. The slight percentage increase was driven primarily by an increase in our stock-based compensation.

Operating income was $6.5 million or 20%, increased 20% to $38.9 million compared to $32.4 million at fiscal 2006. Full year operating margins were 10.2%, versus 10.9% in prior year, due to the decrease in gross margins and higher depreciation expenses. And net income for the full year increased $25.3 million or $0.86 per diluted share, from $20.9 million or $0.73 per diluted share in fiscal 2006. This represents an 18% increase in diluted earnings per share over fiscal 2006. Our effective tax rate for the year was 37.7% and going forward we continue to anticipate a tax rate of approximately 38%.

Turning to key balance sheet highlights. At February 2nd, 2008, cash and marketable securities increased $76.5 million from $52 million at the end of fiscal 2006, an increase of 47%. Inventory was $48.7 million versus $42.2 million at the end of fiscal 2006. Average inventory during the quarter on a comp store basis increased about 4%, from the same time last year driving a 4% comp store sales gain in the quarter. At the end of the quarter, inventory on a per square foot basis was $59 versus $63 last year, down about 6%. We remain comfortable with our inventory position. Also as February 2nd, 2008, the company had no long-term debt including no outstanding balances on its revolving credit facility.

Now let me outline our guidance. As Rick discussed at the outset, we face a particularly difficult operating environment in 2008. However, our current expectation is that we can grow both sales and earnings in 2008. Although we can't control the macro environment we are currently operating in, we are focused on things we can control. Based on our current outlook, we continue to target 20% square footage growth and are planning to open 57 new stores in fiscal 2008. We currently expect full year fiscal 2008 sales to be in the range of 430 to $445 million, and this assumes a flat to low single digit comp for the year. Based on these assumptions, we are introducing guidance for fiscal 2008 of approximately $0.90 to $0.93 in diluted earnings per share.

Given the recent trend in comps and the difficult comparisons from last year, we expected EPS for the first half of the year will be down in the low single digit negative comp. Our expectations are EPS for the second half of the year will increase in upper teens to low 20% range based on a low single digit positive comp. Weighted average diluted shares for the fiscal year expected to be approximately $29.7 million. And now I would like to turn the call back over to Rick.

All right. Thank you, Trevor. While 2008 while be a challenging year, we continue to be optimistic regarding the long-term prospect for Zumiez and our expectations for strong growth remain intact as we grow Zumiez to 800 stores. With that, I would like to turn the call over to the operator for the question and answer period. Operator?

Yes, sir. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Tom Filandro with SIG. Go ahead.

Thanks. I got a couple of questions. First, on the expense side, as you've taken a more conservative approach, Rick or Trevor, can you at least give us a little more of specifics of exactly where you're cutting costs? Is it payroll or wherever you can cut costs and can you give us a sense on an annual basis what kind of comp do you now need to leverage and then I have two follow-up questions.

This is Rick. I'm going to let Trevor handle a lot of this. I just want to preface the comments to your questions with making sure I'm putting out the idea that we're being very mindful of trying to manage expenses but at the same time we're not -- we're still trying to make sure that we're not shorting ourselves for the longer term growth of the business. So we're making sure that as we've looked at what we cut back on that we're trying to position ourselves well to support the growth over the next few years. So with that I'll let Trevor address the leverage points in more specifics.

Good question. So we continue to believe that in the 3 to 4 to 5% leverage is the place we can get leverage from a comp perspective. So obviously the higher that number goes, the more ability we have the ability to leverage. So we have taken a very fine pencil to this year's budget and gone through with the team numerous times to make sure that we've cut the expenses that we believe we have the opportunity to do so, things in our supply chain where we've made investments, we have opportunity there. We can leverage expenses here at the home office with our teams here, in Finance and IT and things like that. But we have not cut back investments where we're talking about investments in systems, investments in people and things like that. So we believe those are critical so that we can continue to grow at 20%. We think those investments will continue to be made so that we can grow beyond this year. So current expectations is yes, if we get up north of 3% comp that we would have the ability to leverage operating margin.

Okay, and then two other quick ones. On the 20% square footage growth, is it fair to assume that you're going to avoid some of those markets that are trending lower like the Californias and the Arizonas and the Floridas or will you continue to open in those kind of markets with the longer term view that they recover?

First, Tom, again, have you to remember that the deal making process doesn't happen in the last quarter of the year. So we have tried a lot of our deals for the 57 deals that Trevor talked about in his comments, those have been in place for quite a while now, the vast majority of those. But we have where we could try to trim it down. So this year we are going to lower the number a bit to I think we're right around 35% of the mix of the 57 doors of being -- still being in those markets. We'll be able to adjust that more as we look into this upcoming year.

Tom, just to add to that a bit, currently we're going to open in about 20 states this year. We're going to introduce two new states, potentially three, Massachusetts, Rhode Island and potentially Virginia, and if you look at the spread across the map, our current expectations is about 35% of our stores will be in the west, about 20% would be in the Midwest, roughly 25% would be in the east and about 20% would be in the south. And I think it's important, again, I just want to reiterate something I said in the prepared comments, is that California, Arizona, Nevada, have been very strong markets for us for a very long period of time, and so we think when those markets return to more historic levels, then those will be very good performing stores. And as you know, we are managing this for the long-term. As we have opportunities to do what we think are good rent deals for the long-term, we will be very proactive in addressing those because we think over the long-term we can get some good deals in some of those states.

One final one. I don't know if you can specifically answer this. Rick, you noted earlier that you're going to do what you can, obviously. One of the things you highlighted was driving or at least focusing on driving average transaction value, I think you said. Is there anything specific about that, I mean that you're giving, are there different tools or this is just more of a motivation to keep the field force focused on it. Anything specific around that would be helpful.

It's a really good question, Tom. I appreciate you asking that. I can address it. Which is, we are very proud of our sales efforts out there. We think that our numbers, relatively speaking, most teen retailers, we have very strong performance in dollars per trans and units per trans with our team. We also have a company that's loaded with very competitive and aggressive people, so these environments that we go through like this can be very tough on the team. So for both business reasons as well as motivation reasons, we in this mode, we really focus them in on things they can control. They can control the experience with each customer that walks in the door, and that's why in this kind of environment, we really focus our sales teams on UPTs and DPTs. Units per transactions and dollars per transactions.

And we focus less potentially in a situation where you have negative transactions, we focus less in that environment than on the concept of productivity or sales per hour. We try to give people tools they can control. Our managers in their training and efforts will be focused around how to help that experience with each individual customer. We kind of narrow our historical broad focus on all three including productivity and narrow on these first two, giving the team the opportunity to demonstrate what they can do on the sales floor, focusing on those dollars per trans and units per trans.

Great answer, thank you Rick. Good luck, gentlemen.

Our next question comes from the line of Sharon Zackfia with William Blair.

Good morning. Good afternoon, gosh it's been a long day. Question on the guidance, if you're looking for and Trevor, if I misunderstood this please correct me, you're looking for high teens to low 20% earnings growth in the back half and down earnings in the first half. So it must be down fairly significantly on the first half. Is that correct?

I think you also have to remember, Sharon, last year about 19% of our earnings came in the first half of the year. We did $0.16 a share versus doing I think $0.70 in the back half of the year. So that's going to become a bit more pronounced this year. Yes, I think they will be down when you look at the raw percentage but when you look at it as a percent of the full year, I think it's a lot less meaningful because of the fact that you're only earning 20% of your earnings over 50% of your year.

The expectation for comps to improve in the second half, is that just a function of the easier comparisons or are you expecting some of the things you detailed to actually start to bear fruit in the second half.

To be clear, we have very tough comparisons through September. So I think we comped 13, is that right, Trevor, in September? Comped a positive 13 in September. So Sharon, we have some tough numbers out there. But we're pretty good in the peak seasons. I think it gets back to what I talked about a moment ago with the quality of our salespeople and the diversity of our brand presentation and category diversity, I think those things in peak seasons, when we get traffic, we seem to do pretty well. That's the first thing. The last point is we think there is some opportunity for us in the fourth quarter where we didn't have -- we're simply not up against this tough of comps.

Going back to the fourth quarter that you just completed, obviously you beat your guidance by a bit and you knew what your sales were going to be. Is that a function of the incentive accrual being a bit lower than you expected or can you give us some explanation as to where the variants occurred?

I think Trevor did mention that in his comments, Sharon. As things get tougher, we're taking actions here too. Trevor is working with the team. I'm working with the team and saying where can we make cuts, where can we make changes, what can we do with inventory, how can we move inventory out, push it up, adjust it with our vendors, cancel products to get inventory in the right position. So throughout the fourth quarter, we were doing a number of things like that that helped us I think get to these final results.

Just so I'm clear, Sharon, the guidance we gave the first week of January, we would have only had November's results at that time. So there's lots of revenue and closing of the books, if you will, before we got to where we had the numbers done. So I want to make sure I understand what your question is about the variance of the guidance we gave.

Well, January wasn't markedly different from what you were thinking. I think you had guided to low single digits for the month of January. That obviously came in fairly much in line. I'm wondering from a cost perspective where you were better than you expected in the fourth quarter. Was it merchandise margins or bonus accruals or where the positive surprise was.

I think what Rick said was right, I understand your question.

It does include both of those, at the top line Sharon, yes.

Okay. Thank you.

Our next question comes from the line of Mitch Kummetz with Robert Baird. Go ahead.

Yes, thanks. Got a few questions. Let me start with that back half comp assumption of positive low single digits. Rick, I know you mentioned easy comparison in the fourth quarter. Some of that would be because of snow business was bad this past year, footwear got tough in January. I mean, when you think about where you would expect to drive comp gains, particularly in the fourth quarter, is it in those categories that with were tough for you? Is it an easy snow comparison? Is it expectation of better footwear results, especially as PacSun scales back on footwear, basically starting with back to school. Is that where you would expect to see the bigger increases?

I would think so, Mitch. Talking about fourth quarter here again as we look into it. Obviously those are the easy areas, just as you said, based on our comments we made previously within the sales releases. But broadly, right, as you know, we're about brand diversification, broad selection of categories and products, that's about as detailed as I can get with you on it because I'm not exactly sure what's going to be the drivers. We have a lot of business to do between now and then, trends are going to adjust and adapt and we're going to figure it out just like we always do. And I know that may sound a bit frustrating as an answer. But that's the way it works here. We go with what the customer tells us they want, and we adjust our inventory positions which is the reason we're being conservative with how we plan our inventory now, to go for what is going to work now. I do think we have opportunities in those two broad departments as it relates to snow and footwear.

Okay.

I do want to caution on the footwear, Mitch. Our competitors deciding to do something different, we don't know what their exit strategy is in footwear in terms of liquidation strategy so we are being very cautious in terms of our estimates on footwear relative to what their liquidation strategy is going to be, when it's going to place, whether it rolls over and might impact back to school. We're being cautious around that front.

Trevor, on the back half earnings guidance, you're saying high teens to low 20s and that is on a positive low single digit comp. Help me get there with that comp assumption. You just kind of reiterated your leverage point of a three to five comp. How do we get that level of earnings growth in the back half, based on low single digit comp?

The majority of it is not going to come from gross margin. I'll start there. We do not see any substantial improvement there. You will remember from our sales calls one of the things that was a big expense for us this year, very big expense we talked about the last two, stock based compensation expense. We have structured our equity based incentives in a way that will not be dilutive this year to earnings. It's going to grow at a much lower rate than sales. We think we've done it in a way that aligns the interest with our shareholders and our management team. There are other areas where we made investments last year in SG&A and people and invested ahead of the curve that we just don't feel like we have to make that level of investments again next year.

And so there is a number of things in the SG&A line items probably the people investment as well as by far the biggest one being the stock based compensation is where we can get some leverage out of that in the back half of the year. We will not at that low level be able to make improvements in the gross margin because any improvements we garner through product margins or shrink, we probably will be giving that back in the store occupancy line item, because as you know, we have to have a much higher comp number to leverage that line item. We're not going to see much improvement in the gross margin line this year unless sales do something dramatically different than what they're doing now. We do have the ability to leverage SG&A.

Trevor, you mentioned class of '07 stores kind of underperforming historical levels. Can you talk a little bit about by how much or quantify that a little bit and then what would that class look like if you exclude the 40% in those markets like California, Nevada, Arizona, Florida? If you take the other 60%, are they tracking consistent with what historical levels are?

It gets closer, Mitch. I mean, right now, and again we just have to be a bit cautious about this because we're projecting a lot of revenue on these stores, right. The stores we opened in the back half of the year only have six months of revenues. You're trying to project what the revenue is going to be for the remaining six months of the year. The current expectation is they would do just over 60% versus the historic levels would be 70%. The class of '05 and '06 did 70% of mature store volumes. These stores look like they're going to do closer to 70%. Sorry, 60%.

If you back out those stores, you get most of the way there. You're not going to be quite at 70%. But you do get substantially closer to that historic average of 70%. And the other thing that has impacted our stores to some extent this year is we opened a higher mix of new centers. Centers that were not in existence before we opened up and did the grand opening with them. That's the higher proportion. That's a lesser extent to the issue but we did do those. We think most of those centers as the population grows in around them are going to be really good centers for us. Just going to take a little bit of time for the population to grow in or around these 10 or 11 stores and we think those stores as well as the population grows in the around them will do fine as well.

Okay. And then what spread is assumed in your sales guidance for '08? I mean, you mentioned 14 to 16% I think growth on that new store base kind of historically. Is that a similar spread that's assumed in the guidance?

As you would imagine, it's basically right spot in the middle.

Okay. And then last question, just hoping maybe Rick you could comment on the men's business, it comped poorly in February. I know February is a small month, it's a tough month to really gauge trends. I know you had a tough comp there over last year. Is there anything else that you can kind of put your finger on now that you stepped back to analyze the comp performance of that business for the month?

Mitch, the first thing you said it absolutely correct which is we have some very tough comp comparison numbers in our men's business that we're going up against, and as you know it's the bigger part of our business, the bigger mix of our business. So I look at it just as a broad overview of where we're at. I mean, virtually every department is being hit by these macroeconomic cycles. I think that department, because we were so good last year, is a bit more difficult, just because of the strength of the department a year ago. But I don't see any -- I'm not looking at anything there, Mitch that I look at and say we've got something that we need to work on here. I just think we've got the macro issues.

Do comparisons for that business ease up in the back half?

No, not much, no.

Okay.

You'll remember, most of our sales calls, Mitch, I've been here just over seven months, I think it's been the leading one for probably at least five of those so it's been pretty strong most of the year.

Okay. Great. Thanks a lot. Good luck.

Thank you, Mitch.

Our next question comes from the line of Jim Duffy with Thomas Weisel Partners. Go ahead.

Thank you. Hello, everyone.

Hi, Jim.

Question for you guys related to the new stores in California and Nevada, Florida, Arizona. Did you see similar softness in the performance of your comp stores in those regions?

Yes.

You did. Okay. And then I'm wondering if you have an estimate for what the cannibalization impact is from new stores opened in backfill regions?

We've looked at that over the years, Jim, and because most malls now, it's a bit different, there are certain markets that it is different. Let me state sort of the general conclusion as we've looked at it over the years. Most malls where we're heavily concentrated, most malls tend to be existing centers, they've established a marketplace and we actually don't see much cannibalization in these core markets.

Far enough apart.

Exactly. There are certain markets where that's not true. Colorado being one of them, for example, where it's a very, very, probably over-malled Metro Denver area. There you have to be very careful about adding new locations because I think you do see cannibalization in those kind of markets. So it's a market by market consideration.

Got you. On the topic of regional performance, aside from those four markets that you highlighted, were there any regional differences of significance?

What I would say, particularly here recently, particularly more in January, February type of timing, Jim, is it was tougher everywhere. It wasn't that we had a few areas that did -- that I would say outperformed or met expectations but generally it was tougher across the board.

Okay.

More difficult, again, as Trevor said in those four particular regional areas.

And then within your new store class of '07, are you pleased with the performance that you're seeing in newer stores on the East Coast and Midwestern regions, places outside of what were your kind of heritage.

Core markets, yes. You know, we expect those stores to have a longer maturation cycle, I think we've talked about this a lot, those stores we've opened in our core markets, we expect that there's a shorter maturation cycle. In new markets when you're moving into them, it takes the full three years before you really start to see those stores perform at the peak level. I'll let Trevor add any comments he wants. I think generally they're where we expected they would be at this point.

If you look at markets that people would describe as outside of our core market, places like Texas and Minnesota, those markets perform well for us and there's lots of -- I know I've heard questions and read analysts about how pervasive is this lifestyle once you get on the other side of the Mississippi. Our belief is that it is a lifestyle that is attractive to individuals who want to express themselves in the Action Sports industry, and again I think Texas and Minnesota would be a couple of markets that we might call out that they did take longer to mature but now I think Minnesota, for example, performs at over the chain average and Texas, which is kind of a quasimarket for us because of the acquisition of Fast Forward, but Texas is a market that is progressing nicely for us. So we think that those markets will continue to take a little longer to mature but that they will ultimately be a successful market for us as we've seen in some of the other markets as we've moved east.

And having been here and when we first opened our first Minnesota location I think which was in 2000, we went through the same process, Jim, and as Trevor just said, Minnesota it took the full three years and now that region is one of our top performing regions.

So it was a little more of an evangelical effort to get the stores going.

As we get in there with our people, as we open new markets, we move experienced Zumiez team members into those stores, we move a new district manager that's experienced Zumiez district manager, grown up here and it takes a while to get the locals building into our kind of approach to retail.

Right. Right. Final question, the average ticket has been healthy, merchandise margins have been healthy, it really seems like a traffic issue. Is there anything in the '08 plan geared towards driving traffic to the stores? Are you going to increase kind of merchandising budget allocated to that or marketing budget allocated to that or is it more come as they will?

I'm not sure from my perspective it would do us much benefit to do that, Jim because I think what's preventing people from coming out and why traffic is down in the malls, what's preventing them is the fact that they're just being far, far more careful on how they're spending their money. So I'm not sure that driving some marketing dollars there would be something we would tend to do. And as you know, most of our marketing dollars, which is not a big spend relative to sales, most all of that is invested in longer term brand building initiatives. So would I divert dollars from the longer term brand building initiatives to more tactical traffic driving initiatives, no, I think it's better for us to stay focused on the longer term brand building initiatives.

Jim, I would just tell you that is one of the areas that based on the guidance we've given, we are growing that line item slightly more than sales. That would be one of the areas where we believe it's important enough for the long-term grass roots marketing that we do, that we wouldn't want to scale back in that arena. There are other areas that we've been tougher with. That is one of the areas we believe is right for the long-term of the brand, and we don't spend a substantial amount on marketing to begin with, but it is one of the areas that we are planning on growing at levels slightly higher than sales.

Sure. Makes sense. Okay. Thanks, guys.

Thank you, Jim.

Our next question comes from the line of Brad Stephens with Morgan Keegan. Go ahead.

Hey, guys. Good afternoon. Hopped on a little late so I apologize if these have been asked. As I look towards your earnings guidance here that implies the up back half, could you give us an idea of the gross margin decline in the fourth quarter? The breakout of product versus occupancy, and then maybe how merchandise margins looked ex snow.

Brad, just so I'm clear, are you talking about the guidance or --

I'm trying to understand how we're going to get to the guidance in the fourth quarter so if you could give me an idea on the fourth quarter of '07's gross margins.

Our gross margins in the fourth quarter were down about 90 basis points and almost entirely attributable to occupancy costs. And so we built a bottom's up budget based on the stores that we feel like we're going to open and if we have that low single digit comp, we're still assuming that we're going to deleverage on occupancy costs in '08. Because of leverage up costs in our buying team, in our supply chain efforts and quite frankly having a slightly better shrink, we think we can mostly mitigate that. Again, you missed the part where we said we don't assume gross margins are going to increase in the back half of next year. The operating margin improvement that's going to come through in the back half of next year is going to come through SG&A.

Can you give us an idea of what product margins looked like in the fourth quarter, maybe if we backed out the snow category?

Product margins were up a tick. We're talking tenths of a percentage point in the fourth quarter. Snow is still a sub-10% business, even in the fourth quarter when it's a big -- when it's at its biggest, so it would have slightly increased that tenth by maybe another tenth but it's not so meaningful that it would make it a full 100 basis points or anything like that higher.

Second, I think at a conference in January you were asked about long-term square footage plan and you said that that's something that you guys would be considering, I think since then you've had a Board meeting. Has there been any change in thought?

We're modeling our business, Brad, out to that 800 store target. With that is about that 20% square footage growth is kind of how we're looking at this. It really hasn't changed from that perspective.

Our team has done a substantial amount of modeling again from sort of the bottom's up approach to that 800 store model and I think as people analyze it, which this is the right question in my mind, as people think about, as we add somewhere around 20% square footage, that number kind of tails off as you get toward the 800 stores, you might imagine, you don't grow at 20% a year and then grow at zero the last year.

We believe at a mid single digit comp, which we think is achievable based on the first 28 years that the company's had comps that we should be able to grow operating profit 25 to 50 basis points in an average year, better than that in the good years that we think are available. If we're able to do that, that would indicate an EPS growth in the -- on the low end of 20%, and on the really good year, the number is much than 20%, and I think if you look at how the company performed for most of this decade, it performed at levels higher than that and so our belief that we could still get to an operating profit in the low teen range is very doable. We've taken our Board through it. We sort of vetted ourselves many times and based on what we know today, we still think that that is an achievable goal as we look out over the next six or seven years.

Trevor, the stock option expense, could you break down how much that was a drag on SG&A and gross profit this year.

Our expenses are -- let me flip there real quick, Brad. So our -- the total expense went up by about $3 million this year, which is about $0.06 a share. It went up about $0.5 million in cost of sales with the remainder of it hitting in SG&A.

Thanks. Best of luck, guys.

Thanks.

Our next question comes from the line of Stephanie Wissink with Piper Jeffrey. Go ahead.

Thank you. Just had a couple of questions. Trevor, first, one for you. In reference to the pace of store openings by quarter, how should we think about that in '08 as it compares to the back couple of years.

This year we had 62% of our stores opened by the end of the second quarter. Currently, we're on pace to do that or slightly better.

Okay. That's helpful.

Two-thirds of the stores are open before Labor Day and the remainder (multiple speakers)before back-to-school. The remaining third opens in the third and fourth quarter.

That's very helpful. And Rick, just a couple for you. Could you talk a little bit about your inventory assortment mix, pricing strategies and are you getting any support from your vendors, particularly in the footwear business?

We are of course looking at that on virtually a daily basis, Stephanie in terms of what's working. Again, as I've said many times, we're a lifestyle retailer so we're playing at multiple price points, at the higher end price points, at moderate price points and at value price points and we're doing that within most of the major categories within the business. So we're looking at that on a regular basis to how by category of product we're doing at each price point threshold. That's kind of an ongoing process for us in terms of evaluating the business.

I guess I'd start off by on an overall basis saying our plan is to be a bit more conservative in looking at our open to buy planning process this year, leaving some room to maneuver. We're not going to be as committed as we have been fully in prior years so we have room to chase the products that we really believe in and that we're going to position ourselves to go after those products. So we're being very careful around those fronts in terms of planning the business and then the rest of it, again, is probably more just day-to-day grinded out management. As you might expect, Stephanie, as your question kind of indicated, we work very closely with our vendor partners and we have high expectations for them in terms of their product, as well as their ability and willingness to work with us.

Okay. Just talk a little bit about footwear, what are some of the initiatives or efforts in place to revive that business this year?

Footwear, we kind of, again, let's do a little bit of retrospective history back to last year. Most of footwear last year from our comments, we ran low single digit comps and then in -- it really got hard for us in December. So we think a lot of our footwear business is solid but we think a good chunk of our experience in footwear is the replacement cycle has lengthened because of the price point related to footwear. We are doing I think in footwear, from a trend position what we're doing in many categories of business, we're looking for brighter pop colors, we're looking for that type of effort in the footwear business. I think you'll find that as you watch our walls of footwear here over the next few months that you're going to see that take place. But those are the normal processes about just being on trend. I just think we have to weather through this category as relates to the economic cycle.

Stephanie, this is Trevor. The only thing that we've talked about with a few investors too, if you look at the two most expensive things we sell in our stores it's the snow hard goods business and then shoes is probably the second thing from a macro perspective in our stores. When you think about the kid that is shopping in our stores, they're always going to want to have something new and cool. If they've got slightly less discretionary income, either because of their parents or gas prices or whatever the case may be, they're still going to want to be cool but they're going to trade those dollars for something that isn't as expensive.

What we think is going on there is the macro is impacting the higher price pointed items in our stores. We think those are important and that business is going to be a good long-term business for us. Until some of this cloud comes over on the consumer, that business is probably not going to turn around any time soon. The other thing I will mention on snow, because I think it may be on people's minds is that business becomes to be almost infinitesimal very quickly. Last year for example our snow business in the month of March was 1% of our sales and goes down to a very small tenth. Ostensibly, we are out of the snow business until right about now until we get back into it in October, Septemberish next year. Snow becomes a very small piece of our business going forward until we get back into it for the next season.

We looked at our hard goods position, inventory positions in snow and at this point working with our vendors, our vendors have been very helpful, we're feeling that we're positioned appropriately with the inventory.

Thanks, guys. Good luck.

Our next question comes from the line of Crystal Kallick with DA Davidson. Go ahead.

Trevor, could you give us an idea of where you're planning your inventory levels for '08?

Yes, so the company has made great strides in the last three to four years, really since Lynn's been here and the team has been spectacular, not having a large growth if any growth in the average inventory and this year is no different, as I said on the call. Our average inventory on a per square foot basis was down 6% to $59 per square foot and average inventory on per store basis was down about 4.5% to about $170,000. As we sat down and talked with the team and listened to Lynn and our strategies about that we think we picked a lot of the low hanging fruit there. As we go forward, our current assumption is that we would have sort of low single digit increases on a per store basis. We still think we have the ability to grow inventory at or lower than the sales growth but being able to drive double-digit comps with no increase in inventory I think we've garnered most of those benefits over the supply chain efforts the company has gone through over the last three years.

Okay. Great. And did the juniors business maintain the positive trend in Q4?

Yes, juniors was very strong. I think juniors was a double-digit comp for us in most of the fourth quarter last year and we were very happy with that trend. And we would like to probably get a little more inventory in juniors right now because that has been a strong business for us. Juniors was strong for us most of the fourth quarter.

Excellent. Excellent. And I know this is probably one of those questions you hate to be asked but I have to ask it. As you look at coming out of a winter that was not great obviously for the snow business, is there any different way that you approach the business? I realize you've been through quite a few cycles of great winters and bad winters. Are you approaching the business any differently this coming year than you have in the past?

As I just said, I think we're going to come of this season with a inventory position that's very manageable. We don't have any big issues from an inventory perspective on our snow hard goods business. Part of the reason for that is the way that we have learned to plan that business is that we always plan it relatively conservative, again, unless the inventory tries to follow the weather. So that's kind of been our approach in the past and I think it's the reason that whether we have a good season or a weak season is we tend to be able to manage our inventory positions pretty well. We're going to do that again.

Okay. Great. And then just finally, what other feedback, I'm sure probably your most valuable information is coming from the stores, from your associates and customers, what are you hearing out there from both of them?

Well, we're hearing that traffic is light in malls and for competitive aggressive young salespeople, that can be a frustrating experience because they're used to success from working with customers. Again, as we said on the call, we're really focusing our team on the things that they can control and the things they can impact and in the field team situation, that is about dollars per trans and units per trans. Fashion-wise, again, I don't think we're hearing or seeing from our field team or our own look as we shop around the country, I don't think we're -- we aren't believing that we're missing anything major in our fashion direction at this point. So we're feeling -- we're fine. We just think we have to get through a challenging economic time that is depressing traffic within the malls.

Thank you very much and good luck in '08.

Thank you, Crystal.

Our next question comes from the line of John Morris with Wachovia. Go ahead.

Thanks. Hi Rick. Hi, Trevor. Rick, any thoughts about changes to the breadth of the brand mix going forward? Talked a lot about managing the business effectively. Any thoughts about the breadth?

That's a good question, John, you know, and that is one of the things that we do look at on a regular basis and we have been seeing this trend over the last few years that the breadth is actually increasing and our concentration among our top, again, top 10, top 25, top 50 brands has been less over the last few years, if you look back, particularly since 2004. So I think that's a good thing for our business, John, because it speaks to younger brands taking a bigger part of the mix and I think this last year we had I think two or three brands moving into the top 10 that weren't there the prior year. So it gives you that flavor for I think newness within the store. That's always a challenge and we're always talking internally about how can we help young brands build their businesses, what can we do to assist them and how can we be a positive player for those brands as they build their business. We're constantly looking at that. It's a multi-year process, John, but as you look at the diversity and the breadth today, we're actually more diverse than we were particularly two and three years ago.

And then also the success that you've had with your private label, I know it's a small, very small piece, but any kind of color you can give us there or would we step back and look and assume that the performance there is consistent with what the total company's performance is?

Our private label I believe, Trevor, did increase its penetration this year.

Private label went to 15.4% of sales versus 14.3% and we did have margin improvement as well.

And we do feel that we are -- our team, and again, that's not, as you all, that is not a brand, that is multiple private label brands within our structure targeted within different niches within our consumer marketplace. We feel we do a pretty good job there, John and it's been going up I think over each of the last four years so now, is it going to maintain that? I still would -- what I would still tell you is we don't have any hard targets that we set out there. Do you think you can get to a 20% range over the next five or six years, I think it probably can, but we don't have any hard target, we're going to go with -- we're a branded business. We're going to go with the cycles and if its a hot brand cycle, then we might even see private label decline. So if we move higher up towards a larger target, it's still going to not be a straight line. It's going to be ups and downs along the way.

Also, with the really good success you had in the junior's side in the fourth quarter and I know you don't like to tip your hand in this regard, but can you give us any color about the areas of success behind that, either in terms of classification or -- what was really driving the strength of that business, because it's a great number.

We're happy with it. You have to remember, it was an easier comparison from the prior year so that is a factor in the strengths of the number. It is still a small part of our overall mix, our junior's business, about 15, 16% of the mix. But no John, I'm not going to tip our hand on what we're doing there. You can -- you're so smart, John, that you can figure it out just by walking in the door.

Stop. Let me just also finally ask Trevor, you were giving us the characterization for inventory plan for the full year in response to the earlier question. In the context of the guidance that you talked about first half versus back half, I'm wondering is that consistent across the course of the year, that positive low single digit comp or is there a difference in terms of your inventory plan here as you head into the spring season?

We ended the year slightly less inventory than we had the previous year on a -- both a per store basis and per square foot basis. We are focused in on bringing the spring product inventory and I think the team is doing what they think is right to drive the business and we've not given quarterly guidance on that type of metric in the past and I don't think we will. There could be certain quarters that it's higher and certain quarters it's lower, just based on the product flow. But on average, we would not expect that number to grow at a rate faster than sales.

All right. Great. Good luck, guys.

Thanks, John.

Our next question comes from the line of Jennifer Black with Jennifer Black and Associates. Go ahead.

Good afternoon. I've kind of a different question. In talking with kids, there seems to be a movement going on from snowboarding to skiing on these fat skis. And I've heard that it's a completely different culture with brands that appeal to this young crowd, like Armada and Line and Forefront and I've heard they're really big into accessories as well and I just wondered what your take is on that. Is that something that you'll participate in? Thank you.

Thanks, Jennifer. There is that movement. You can see -- you're absolutely right, Jennifer. You can see it on the mountain and it's essentially, everyone knows what's going on, we're talking about a bit fatter twin tip skis with side cut and it's essentially a lot of snowboard technology applied to skis, so it allows kids to go into the trained parts of the mountain and use skis in a way they couldn't two or three years ago. So that may be a factor, Jennifer, in some of our business.

But what I would tell you, if you look from what I'm hearing out there about the kind of segments within the snow business, it sounds like some of the independent shops had pretty good seasons this last year. And it sounds like some of the bigger players, ourselves and some of the broader sporting goods chains had a bit tougher seasons in snow. And so I look at that and say well, one of the big players, because of course snowboard shops aren't selling those products, and of course the sporting goods stores are. So I'm not quite sure what to make of that. I think you're definitely seeing more -- there is a slight movement to that but I don't think in the end it's going to make a big dent in what I think is a pretty solid snowboarding business.

These kids that I'm talking to brought up there's no place to buy videos and all kinds of accessories for this sport and so I was just curious if it was an opportunity for you guys.

Yes, videos are really interesting, as you might imagine. The video business is moving to one that's entirely being delivered via the Internet now too. So there's a technology shift related around that particular category of product.

Okay.

Now, let me maybe even answer your question more directly. Do we intend to sell those products at some point? No. Because there is a distinction between the action sports business and the snow business and the ski business and there's not a line Jennifer that we're probably going to cross.

Okay. Thanks so much.

Thank you.

Our next question comes from the line of Rob Wilson with Tiburon Research. Go ahead.

Yes, thanks for taking my call. Trevor, could you speak to your accounts payable? It seems to be lower as a percentage of total inventory, maybe you could talk about your inventory aging?

Yes. So there's nothing unique there. We've not changed the terms with any of our vendors. It's just a matter of the timing when our receipts came in the fourth quarter this year versus when those receipts came in the fourth quarter last year and the function of when we pay or bills. We pay our bills on time, we don't pay them early. We don't pay them late. It's really just a timing issue based on the receipts we got this year versus last year. There's nothing too odd about it.

As business got tougher, Rob we tended to push inventory out, cancel inventory, move inventory around. That's probably some of it too. Receipts that would have been in January got pushed out or cancelled.

Okay. One other question. Trevor, on your monthly sales call you said your average unit retail declined in February. I believe that's your first decline since being a public company. Could you speak to that, what the reason was for that?

Yes, we tried a few things in the month. We wanted to see if we could do some things to stimulate business so we got aggressive in certain parts of our shoes. We got aggressive for short periods of time in the snow business as well. So I think just as we were seeing what we could do to see if we could stimulate business, we tried a few things but again, it was a very minor tenths of a percentage point on the negative, just over 2% comp that we reported in the month of February.

Should we expect to see further declines as the year progresses?

I mean, we're not going to comment on the future looking statements around that because then we're starting to talk about comp sales and things like that and we're not going to address those.

Thanks for taking my call.

Thank you.

Ladies and gentlemen, that does conclude the time that we have available for question and answer today. I'd like to turn the call back over to Mr. Brooks for any closing remarks. Please proceed, sir.

All right. Thank you. Again, we just really appreciate everyone's interest in Zumiez and we are going to look forward to getting back with you here in May as we discuss our first quarter results. We appreciate everyone's interest and we'll talk soon, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.