Zumiez Inc (ZUMZ) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez incorporate second quarter fiscal 2008 earnings call. My name is Amanda, and I'll be your coordinator today. (OPERATOR INSTRUCTIONS). The call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please note that actual financial result Zumiez for the period being discussed may differ materially from the testimony result Zumiez rejected in the forward-looking statements. Additional information which could cause financial results to differ materially is contained in the Company's annual report on form 10 K and other documents filed by the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements. No reporting or broadcast of this call is permitted without the Company's express written permission. I would you like to introduce your host, Rick Brooks, Zumiez's President and CEO.

Thank you. Good afternoon, and thanks for joining us to discuss the Zumiez's second quarter 2008 fiscal results. Joining me is Trevor Lang, our Chief Financial Officer. Following my opening remarks, Trevor will review the financial highlights and I'll provide closing comments before I turn the call over to the operator to conduct the question and answer portion of the call.

We are pleased that we once again exceeded our earnings projections for the quarter, primarily driven by our ongoing focus on cost controls and effective inventory management. We started off with a positive comp in May and our comps were up 2.5% at the time we reiterated our guidance at the end of May. At the time of the of our first quarter earnings release, we felt very comfortable guiding comps down based upon the early read we had for the summer season. Our skate hard goods and footwear business, two departments where we have a significant advantage, remains strong. However, as the quarter progressed the competitive environment became emotional with a number of teen retailers discounting their spring and summer apparel. This had a negative impact on the quarter end and July apparel, which were in the negative and high single digits.

As you look to the rest of the year, we do not expect any improvement in the macro-economic conditions or the promotional environment that began in the summer and has remained weak through back to school. Therefore, the original assumptions we shared in March and again in May that assume we would produce a low single-digit sales increase in the back half of the year needs to be adjusted. I've been with Zumiez for 15 years now and this is the most difficult retail climate I've seen. We remain keenly focused on providing our customer with the unique Zumiez experience regardless of the economic conditions. While the short-term may be challenging, I'm very optimistic about our long term future.

We believe there appears to be more and more homogenous and staying unique to who we are our shopping experience is becoming more compelling to our customers. We believe that true long term value to the action sports consumer is in presenting the lifestyle which includes broad core brand diversity and broad category diversity. As just defined, we have the largest national sports and lifestyle retailer and we believe our strategy will continue to further distance us from other mall retailers. We have a strong balance sheet and our business model has produced strong cash flow. We have almost $70 million in cash and marketable securities and no debt and will continue to invest in our infrastructure and technology and most importantly our people. We believe the competitive advantages I just mentioned will deliver long term sustainable shareholder value.

Now I want to turn the call over to Trevor to discuss the financials in more detail. Trevor.

Thanks Rick. Good morning everyone. For the quarter, net sales totalled $92,300,000, an increase of $10,300,000 or 12.5%, compared to $82 million from last year's second quarter. The increase in net sales reflected the opening of 58 new stores since the second quarter of last year, offset by a decline in our same store sales of 1.7%, compared to an increase of 11.6% last year. Our second quarter comps were in line with the guidance we gave you in May and were driven by negative transactions somewhat offset by higher average unit retailer. From a product perspective our footwear comp led the way, followed by skate hard goods, and our accessories and apparel departments comped negative. We opened 39 stores since the end of fiscal 2007 are on plan to open 57 new stores this fiscal year. As we discussed for a few calls now our stores in California, Arizona, Florida and Nevada continue to be particularly challenging for both new and comp stores, however other markets such as Texas and Illinois, and Wisconsin to mention a few, performed nicely for us.

Gross profit increased $1,900,000 or 6.8% to $30,100,000 or 32.6% of net sales compared to gross profit of $28,200,000 or 34.4% of net sales in the second quarter last year. This decrease in gross profit margin was driven by an increase in store occupancy costs as a percent to sales and to a lesser extent lower product margins. In total SG&A expenses increased $2.7 million or 11.5% to $26,200,000 or 28.4% of net sales compared to $23,500,000 or 28.7% of net sales in the second quarter last year. We managed the growth in SG&A to 11.5% on a 23% increase in square footage growth. We deleveraged in store labor and other store operating expenses due to the negative comp and are focused on trying to make the customer experience a good one, but we leveraged our home office expenses particularly in things like stock based compensation. Operating income was $3,900,000 or 4.2% of net sales compared to $4,700,000 or 5.7% of net sales in the last year's second quarter. Net income for the second quarter was $2,700,000 or $0.09 per diluted share compared to $3,100,000 or $0.11 per diluted share in last year's second quarter.

Turning to our first half, 2008 financial results, for the six months ended we reported net sales of $171 million, an increase of 13.4% over the $150,800,000 sales for the first six months of 2007. Comp store sales for the first six months of 2008 decreased 1.3% compared to an increase of 11.4% in the first six months of fiscal 2007. Gross profit increased to $4,800,000 to $54,700,000 or 32% of net sales from $49,900,000 or 33.1% of net sales in the first six months of fiscal 2007. The decrease in gross profit was driven by an increase in store occupancy costs as a percent of sales due to negative comp of 1.3% and the 58 new stores added since the second quarter of last year.

SG&A expenses increased $6,100,000 or 14.2% to $49,100,000 or 28.7% of net sales compared to $43 million or 28.5% of net sales in the second quarter of last year(Sic-see press release). The slight increase in SG&A as percent to sales is due to store operating costs deleveraging on a negative comp somewhat offset by lower home office costs. Operating income totaled $5,500,000 or 3.2%(Sic-see press release) of sales compared to $6,900,000 or 4.6% of sales in the first six months of fiscal 2007 and net income was $4,100,000 or $0.14 per diluted share compared to $4,700,000 and $0.16 per diluted share in the first six months of fiscal 2007.

Turning to key balance sheet highlights. On August 2nd, 2008 cash and marketable securities increased to $68,400,000 from $33,400,000 on August 4th 2007, an increase of over 100%. Inventory was $72,100,000 on August 2nd, 2008 versus $61,800,000 on August 4th, 2007. Average inventory during the quarter on a comp store basis was flat to last year. As Rick mentioned, our team did a good job of managing inventory during the quarter and we ended the quarter with 6% less inventory on a per square basis relative to last year. Also at August 2nd, 2008, the Company has no long term debt including no outstanding balances on this revolving credit facility.

Now to the guidance. Due to the challenging macro-economic environment and promotional activity in teen retailing, we believe it's prudent to adopt a more conservative outlook for the back half of the year. For fiscal 2008, we are lowering our previous sales guidance from $430 million to $445 million to $418 million to $425 million. This is based on our target of adding 20% square footage growth and opening 57 new stores. Our current expectation is that third quarter comps will be in the negative mid single digit range and fourth quarter comps will be in the negative low single-digit range. And we expect diluted earnings Zumiez per share for $0.80 to $0.82 compared to our previous earnings rate of approximately $0.90 to $0.93. This revised guidance assumes that fiscal 2008 operating margins will be in the mid 8% range driven by lower gross margin due to higher occupancy cost as a percentage to sales and lower product margins. Our current expectation is that SG&A as a percent of sales will be about flat to last year. Weighted average of diluted shares are expected to be approximately 29,600,000.

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

Thank you, Trevor. Before I open the call to questions, I just want to reiterate a couple of key points that highlight our competitive advantage. First we continue to offer consumers the best brands. Nowhere in the mall will you find such a diverse merchandise relative to today's action sports lifestyle. This not only included national and global brands but brands specific to the region and locals. Second, we continue to attract and retain the best talent in the industry. Our people are central to our success. And third, we'll continue to open new stores and still have significant growth potential ahead. Given our historical new store unit economics and associated returns, we believe opening new stores continues to be the best use of cash in order to return long term value to our shareholders, despite the current environment.

And now, I'd like to turn the call back to the operator for questions. Amanda?

(OPERATOR INSTRUCTIONS). Your first question comes from the line of John Morris with Wachovia. Please proceed.

It's actually Eddie John's associate. Just a question quick question. You talked about managing inventory better. You can break it out better how your managing apparel relative to the hard goods which are doing better and where you see that going for the balance of the year given the environment and how your planning to do it? Thanks.

Sure Eddie. And I'll take the part and let Trevor address part of this too. There is no secret to this, our business model is the strength of branded business model so we work very closely with our brands at managing inventory positions. I think we demonstrated that we've done a pretty good job through the first six months of this year. So it's about a brand partnership with us. And that means we work again very closely based on the what is selling, not selling, switching things out, moving things around, pushing orders out, pulling orders up. It's a very dynamic process that our buyers are working on every day as we balance out the best of what is working with the stuff that is not working and that's fundamentally what we do. It's dynamic and on going.

This is Trevor. Just to follow-up on the projections and again this is where the merchandising team I think has done a really good job for a long period of time. As you know, the Company was double digit comping for the last five years until the 4th of last year and we've been able to do that on moderate and less inventory per square foot and they've been able to rack very quickly as business has gotten tougher in this macro economic environment. Our inventory was down 8% on a per square foot basis on the first quarter, down 6% on the second quarter. Our current expectation as we look at to the third quarter is that total growth in inventory will sort of be in the low to mid teen range, but with a 21% increase in square footage growth you would expect the inventory per square foot would be down to somewhere where we were in the second quarter, which again was 6%. As we look out to the end of the year, when we get to January, we are currently showing a modest amount of inventory per square foot decline and the reason for that is there are certain parts of our business where we think we can do a better job of providing for our customers. We know there are some transitional product between winter and spring that we can do better with and we know there are warmer weather doors that we have opportunities to do things as well. So pretty consistent at the end of the first quarter relative to the second quarter and as we get to the end of the year there will be a modest decline in inventory per scare foot but not the sort mid single to high single digits you've seen for the last two quarters.

Got it. Thanks guys. Good luck.

Thanks.

Our next question is from Brad Stephens with Morgan Keegen. Please go ahead.

Good afternoon. I know you typically do not, but given the reduction of guidance, you can talk about what we've seen so far in August?

I think we typically do not do that, Brad. But what I've said at this point is, as Trevor said, the guidance for the third quarter is in the mid single digit range. And here today we're doing significantly better than that.

Okay,

But we believe this is an environment that it's important to be conservative it and this is the peek period and we think it could get tougher as we get into the off peak period in the this environment so it's prudent for us to take a conservative position.

Absolutely, I appreciate the color and my second question is your SG&A controls are pretty amazing given the square footage growth. What steps are you taking to make sure that you're not starving the business in order to try to put up a number to try to appease Wall Street that may compromise the future growth of the Company.

Brad, this is Trevor. Let me give you a few things here. Let me start with the things that we have not cut back on and then I'll talk about the areas where we have made reductions. We are still investing heavily in our information technology organization and growing that at a much faster rate than sales because we believe there is strategic investments we need in that organization. We are leveraging things like new credit card contracts with our vendors. We're doing a better job of operational expense controls at store levels for things like cash over short and things of that kind of nature. We are deleveraging at the store payroll at a faster rate than growing the sales because we think that would negate the customer experience. The biggest place where we're getting leverage from a SG&A is here at the home office. If you look at our SG&A structure we spend about 80% of the SG&A at the store level with over 20% spent at the home office level and we are going to get some level of improvement at the home office level. Unfortunately instead of compensation it's one of those areas that will be lower this year relative to last year as you might imagine with our current projection that earnings would be down. We've spoken a couple of quarters about stock-based compensation and the way we've structured the program slightly different with more restrictive stock and less stock options, so the vast majority of our leverage that came in the first half of the year as well as the leverage we expect to come in the back half of the year, is not coming out of the 80% of the field where we spend our money, it's coming really here in Everett, Washington in our home office. And so we feel pretty decent. That's obviously the piece of the business that is easier to predict than revenue and margin and we have not cut back on the areas that we think are important to continue to grow. Again IT and marketing and store labor and things like that. But there are other areas that we can put the brakes on things here that we think are important to do so in the difficult environment, but again I don't think we've cut anything so severely that it will impact our ability continue to open stores in the future.

Thanks. And last question, just you can talk about the snow business and how your approaching that going into Q4?

Sure. Again, Brad, from a strategy point of view, we're going to -- we've been doing this a long time the snow business. And as you know, snow business is a risky part of the business because you buy it and you own it. So we've, over the last number of years, we have taken the strategy that we always buy snow well below what he expect the sales projection to be because as I said many times, it always doesn't snow somewhere. So the goal of snow is -- of our snow product strategy is to chase the weather. So where it snows is where the product gets moved to. The other thing we have done this year, from a strategic direction with snow, is that we have, based upon the results last year, is we've taken a two-prong strategy to position our inventory and we're going after the high end, we're going after the technology driven products for our kid who really wants the latest and greatest in technology and premodel boards and at the other end we've gone after and shifted the mix of our hard goods product to more of a price point business and working with our brands on doing that so we can provide packaging to our consumer as we get into the season where we have some -- we can move on some of the price issues.

Brad, this is Trevor. Just one other piece of information to give you guys a sense. Certainly the snow business is very important for us. Really about October is when that business becomes more important for us and so the way we define the snow business is the hard goods component as well as things like Snowboards, snow pants, the mens and junior side of the business. And so in October, that piece is about 11% of our sales and into the fourth quarter, those categories represent about 18% of our sales. So I just want to make sure that people understand that snow is important and very relevant to the action sports consumer, but it doesn't get above 20% of our sales at really any point throughout the fourth quarter.

All right guys thanks for the candor. Best of look.

Thanks, Brad.

Your next question comes from the line of Jim Duffy with Thomas Weisel Partners. Please proceed.

I have a couple of questions. One is a follow-up to Brad on the snow. You had a tough year in snow last year. With you doing to de-emphasize is it from a merchandising point at all. Make use of the space in other categories?

The simple answer, Jim, is no we're not. Snow as Trevor said is a central part of the action sports lifestyle. So we do not anticipate deemphasizing it. We're going to continue to provide the training to our team for our salespeople. And we're going to try to push that business as it makes sense. And again to let the product chase the weather conditions. So no, I think it would be counter productive to the what the Zumiez's brand is about to deemphasize it.

Okay. And with regard to some of the promotional activity that you're seeing from your competition, you can talk about Zumiez's strategy to address that and pain counter some of that. And then if so, does that have any impact on the margin outlook?

I'll let Trevor again kind of talk about the margin outlook relative to the guidance we've just given, Jim. But let me address the first part of your question, I like to start off by just reminding everyone that on a -- as painful as this environment is, on a relative basis, we think that we're doing a pretty good job relative to our competitive set. That's particularly true from a comp store basis where we have the toughest comp store sales of just about anyone. So let me tell you with a we're going to do and I'll give you our strategy both from a strategic perspective and a detachable perspective and I'll let Trevor address the margin piece of this.

The first thing strategically for us is we really want to focus on the maintain the integrity of the Zumiez's brand. And you've heard me say it a number of times. We want to partner with the best brands in the industry. We want to have all of the right core brands and a broad diversity of them and we have a broad category diversity representing everything in lifestyle and we have to have great people. We have to make that investment in our people on training them on the product knowledge to sell technical snow product as an example of that.

Now as you said, implied in your question, this is very promotional environment and there are things that go beyond our ability to control. The first obviously is the macro-economic set. It's tough. And again the guidance we put out there assumes it doesn't get any better here in the back half of the year. And clearly that's making it a much more price point promotional environment. And again, I'm not going to comment on specific brand performance, Jim, I do want to kind of make a couple of comments about how we see this from a brand perspective.

The first is that those brands that we're carrying that are focused on distribution in core shops like Zumiez's are generally doing very well in our environment. We're having a good experience with those brands and we're working hard to help those brands build their brand integrity, including maintaining the price integrity with the brand strategy. Now on the other hand there are brands that have broader distribution in the mall outside of the core retailers and generally those are the brands where we're finding that is really price promotional driven. And unfortunately we're being forced in those situations to be price promotional by the competition with those same brands. So as we look at where we're being priced promotional in a brand perspective, it's where we cross over with the noncore retailers in the mall environment.

So let me kind of summarize then and I'll let Trevor talk about his piece of this, but strategically it's really important I think for everyone to hear us say this, but we're going to stay true to who we are and stay true to the Zumiez's brand experience. While tactically we're going to do what we've done here in the first six months. We're going to focus on managing inventory and shift product to the best brands that are working for us and also going to tactically focus on controlling our costs and managing our expenses. Trevor.

Hey, Jim. Trevor. So if you look at the guidance that is implicit that we've given for the back half of the year, it intimates when you guys go through and do your modeling that we're going to have some 170 basis points of the deleveraging at the operating margin. All of that is going to come from gross margin. And when you break into the details of gross margin, the vast majority of that, again I would expect gross margin to be down about 200 basis points for the back part of the year, the vast majority of that is going to come from occupancy cost, deleveraging on a negative comp. But we are also assuming that our product margins will be down somewhere between 50 and 100 basis points. As you know as read through our 10-K and our significant accounting cost there's are a lot of other things in our accounting other than product costs but the operating margin degradation of 170 basis points and 200 basis points will come through gross margin, the vast majority coming through store occupancy, deleveraging and product margin 50 to 100 basis points and a modest amount of SG&A which gets you down to the 170 basis points reduction in operating margins.

Okay. Very helpful. And then Trevor, if I look at your expense structure and some of the savings you've been able to deliver on SG&A, does that imply a different comp hurdle to lever expenses than maybe you had talked about at the outset of the year and as we look out to '09, what kind of comp number should we be thinking about you would need to lever expenses.

Would not change the 3% to 5% which is what we've historically given. You're right, we have done better this year. I think the home team have done a good job of reigning in expenses but there are things like compensation and other areas that we need to fund next year. And so as business gets better you're going to have to add more expense to the bottom line which will impact the flow-through. So you're correct. We have done a better job on the expenses and the way we plan the business. But I would not lower that 3% to 5% comp under the auspice that we're going to continue to add 20% square footage growth.

Very good. Thanks so much, guys.

Thanks, Jim.

Your next question comes from the line of Sharon Zackfia with William Blair. Please proceed.

Hi. Good afternoon. Rick, I'm wondering what your thoughts on the cadence of growth at 9 at this point. I know you've stuck with the 20% expansion now and was curious if that's being rethought internally.

As I said a number of times Sharon and I think over the last year is we reevaluate as part of our planning process which is in the beginning stage now. At this stage I'm not ready to comment on what our plans are in regards to that. So we'll get back to you more later in the year on that.

One thing, Sharon, that I think is worth mentioning, this is Trevor, we have done a very thorough analysis of the stores, the new store openings over the last four years. We looked at the entire class of '04, '05, '06 and '07 and have evaluated our costs from a buildout perspective and a working capital perspective. We've looked at how the stores have trended for the stores that now have four years worth of operating data versus the class of '07 where we're have a full year's worth of data and it's still quite amazing the amount of cash that those stores generate. So we are being cognizant that the business has gotten tougher for us. But we are still generating very nice returns on the stores. Even when you look at more recent classes of stores. We're generating returns that are in with -- within the realm we've set out. Now we did have amazing returns for the class of '04, 05, 06. Those returned have moderated a bit when you look at the class of '07 but that's more related to the macro environment. When our comps were up 13% and 14% when you have those returns on the stores when the comps were up really high. I just want to be clear with the investment community here today that we feel very good about the returns we have on our stores and but we are going to be cognizant of the operating environment that does exist today as we look at the deal environment into '09 and '10.

And we continue to feel that opening stores is the best use of our cash resources. So as we said in the prepared comments. But again I think it's prudent as we evacuate and plan for next year, which we're beginning that at this point, that everything gets on the table and you look at it and evaluate it. But again I believe this is the best use of our cash.

And can I add one clarifying question for Trevor. I know you're expecting SG&A leverage in the back half of the year. Are you expecting that in the third quarter as well on the negative mid single?

That's a good point, Sharon. Our current expectation is that all of that leverage comes in the fourth quarter. Because we're doing more like of a mid negative single digit comp for the third quarter, our current expectation is that we deleverage some portion of 50 basis points on SG&A in the third quarter but then we would do a lot better in the fourth quarter is where we get that leverage. So we would have some deleveraging of SG&A in the third quarter but a pretty fair amount of leveraging of SG&A in the fourth quarter.

Great. Thank you.

Your next question comes from the line of Mitch Kummetz with Robert W. Baird. Please proceed.

Yes, thank you. I was hoping get more outlook on the balance of the year. You've split it up between the two quarters and talked about assuming a prudent stance given the environment that you're in. But when you look at how you comped in the second quarter and footwear and hard goods and apparel and accessories were down, are you assuming a similar trend over the balance of the year given to what you said, Rick, you have a competitive advantage in footwear and hard goods right now. Would you expect those categories to continue to trend positively and the promotional environment on the apparel side to be where the big drag continues to be?

Yes, Mitch. That's what we've assumed in putting this -- in adjusting the model, is exactly that.

And Mitch, just another point I want to give you a quick little bit of history. We comped down negative 8-10ths of a percentage point in the first quarter versus a positive 11.3 in the second year. Here in the second quarter we comped down negative 1.7. Again, almost a 12% comp last year. Our toughest comp last year was in the third quarter when we comped up 13%. We're now telling you we're going to comp down in the mid single digits but business is getting tougher for us in mid-October. So as we get into the fourth quarter, we're certainly not on an even playing field because I think the macro environment is even tougher than last year but we're up against more moderate comp as we come into the fourth quarter and to your point and what Rick just mentioned is we think the competition in the mall setting is getting more and more different. I think a little bit more private label focused and price point focused and I think the kids who are into cool unique brands that you cannot get elsewhere in the mall will bode well for us and we are hopeful that we'll do slightly better in the fourth quarter than the third quarter and we have do have a slightly comparison.

And I know part of the drag in the fourth quarter was the snow business and it's had it's highest percentage in the fourth and can you give us the hard goods and soft.

I think it was in the mid single digits. Negative.

And it sounds like you will continue to be invested in that category and you're you have a two-pronged approach to be bringing lower price points from some of your vendors. It sounds like part of the expectation in Q4 would be to expect better results out of your snow business. And I was just curious, on the soft good side of snow, if I'm not mistaken, you guys made a big push last year into private label there and I want to say that inventory is harder to get rid of where you can't push it back on your vendors, what is your approach to the soft goods side of snow this year.

A couple of points and I just will -- that you're raising there. And one of them is just in general, looking at the season and how we think we're going to do relative to the comp, you know just as well as anyone, Mitch, when we're talking about the snow business, a couple of things matter. The first is when it snows, which is -- it is important in the snow season it get early snow. You want to see it in that November, early, mid-November time frame. Last year it was late in a lot of markets. So it's not -- you have to get snow but it's also important when you get it. So again, you kind of understand I think pretty well. And that's why we kind of try to risk manage our inventory position by the way we buy, letting the product chase the weather conditions. As it relates to private label, and the penetration of outer way business, we've always had a significant penetration in private. There is nothing unique or different year to year relative to that expectation.

Okay. And then one last question. I know you've talked about this and other retailers as well, there's definitely been some weaknesses in certain park markets, California, Arizona, Nevada, Florida, you can remind us what the impact from those particular regions was on the second quarter and does the outlook assume a continued drag from those markets? I know that the softness begins to be anniversaried I want to say starting October but I guess I'm assuming that you're not expecting some improvement in those markets, maybe less of a drag although I'm not sure that's assumed?

Yes, Mitch, this is Trevor. So the drag for the quarter, the negative 1.7 comp we did would be a positive one comp if those markets had just been flat. So those California, Arizona, Nevada, Florida, they're comping down in the high negative single-digit range. And our negative comps of 1.3, would have been negative 1.6. Though those markets have not changed materially this year. When you start thinking about Q3 and Q4 this year relative to where we were last year. You're right, Q3, most of Q3, those markets were good for us. Especially California, Arizona and Nevada. Florida is kind of a new market for us. Those markets were pretty good for us up and through, you're right, September and then we saw a pretty precipitous fall. But they were not at the level they are now. Meaning we will not be on apples-to-apples comparison when we get into the fourth quarter. Those markets will probably see some drag on our business. We hopefully, assuming everything doesn't continue to get worse, we would not know until Q1 of '09. But it has stabilized this year. It's been about a 3% to 2%, right around 3% drag on our comps.

Great. Thanks. Good luck.

Thanks.

Your next question comes from the line of Stephanie Wissink from Piper Jaffrey. Please proceed.

Thanks. Hi guys. We would like to drill down on the mix of sales given the strength in hardware and footwear. Can you give us a general breakout even on an annualized basis the contribution to sales.

I've got that Stephanie. If you look at our business on an annualized basis for last year. Footwear represented about 18% of our sales, accessories another 18% of our sales, hard goods which we define as both skate and snow hard goods, represents about 14% of our sales. Men's apparel is 33% of our sales. Juniors apparel is 15% of our sales and the boy's apparel is 2%.

And when you're looking at 2008 thus far or even through the back half based on your comp guidance, any shifts in those percentages?

Yes. Footwear is going up. We could easily be above 20% in footwear. Hard goods will go up a very modest amount, it might be 15ish percent and those will come at the detriment of apparel.

And following up on that, does that change the carriage on inventory balances or the balance of merchandise margins as you reported or what you're planning for the back half?

We've already spoken about the inventory so yes, we've taken that foo account and the decline in the inventory per square foot that we're projected for most of the rest of this year and it certainly does have an impact on margin. It has a modest amount of deleveraging on our product margins because the shoe business is a little bit under margin than the apparel business and the skate hard goods is slightly below the shoe business. I just want to be clear, we're not talking 1,000 basis points in between, we're talking about increments of 300 to 500 basis points. So I won't get overly concerned that there will be a massive impact because the mix of shoes and skate is going up.

That's very helpful. And on the second one for us. Coming back to the housing states, have the declines started to moderate or are you continuing to see acceleration in the declines.

Nothing is -- I guess I would say it's been consistent. It's not gotten worse but it certainly hat those gotten any better.

Okay. And a last one for us. Looking at the comp guidance for the second half, does that assume consistent declines in traffic and improvements in the transaction value where there are different assumptions to what you've experienced through the second half of the year.

I think that's right. I think we'll have an increase in averaging retail more than offset by a decrease in transactions.

Okay. Thanks a lot guys. Good luck.

Your next question comes from Betty Chen with Wedbush Morgan Securities.

Thank you and good afternoon.

Hi, Betty.

I was wondering if you could talk a little bit. I know that a lot of retailers are talking about perhaps getting some better real estate deals. Could you talk a little bit about what you're seeing out there and I know maybe there is a difference between A or B-level malls. And then longer term, how should we think about the ultimate store base opportunities of Zumiez. I think in the past you had talked about an 800 store opportunity. I just wonder if there is any update to that.

We are continuing to focus on our 800 store target. It's one of the things that the real estate team go manually looks at and updates of which stores make up that target or pool of stores. So no, we're staying focused on the 800 store target. Currently in the real estate market, I think I've said it previously, that it's a landlord by landlord specific case as to what we're seeing in terms of whether or not the deals are getting better or not. I would characterize it that those landlords that want to do more deals with us are getting a bigger share of open to buy market and as you know, one of the few growing retailers out there today. Many people are shrinking. So and we're not only growing but I think as we commented in the prepared comments is our balance sheet is very healthy. So I think we're a very attractive tenant for the landlords. So we work at this close with the landlords in terms of again trying to approach as a partnership. And some landlords, as you could guess, are more willing to do the kind of deals we think are warranted in this environment than others and those that are with the landlords that we're doing more deals with. And because of our size, we can do that. We can focus in and target our efforts with the landlords that value the quality of our financial position and our ability to generate sales.

Okay. That's very helpful. And as we start to think about next year and I know you work very closely with the partners. What are you hearing in terms of pricing to ensure as some of the product costs are obviously rising? How should we think about that in 2009?

Yes, so I think there's no doubt product costs in Asia are going up. The cost of fuel, what they're doing with the Juan, the cost of debt in Asia is certainly being impacted. So we obviously have pretty good view into how the rest of this year is going to come out. Next year there probably will be costs increases and we're currently in the process of evaluating what those mean to our in crease and our vendors are doing that too. And I think one of the benefits to the Zumiez's model is historically speaking when cost increases, moderate cost increases have come up or features and attributes of the product have been enhanced, we've been able to raise our prices to reflect that. Now this is again a very different economic environment that what we've seen probably for at least the last 15 or so years to be more as we do the planning process and we can update you on that in November but everything as we've seen as we're dealing with our vendors over there, our sales, and private businesses as well what we're hearing from our customers with the cost of oil and other inputs into cost of making products in Asia, there are likely going to be some cost increases coming through.

Now to add to that Betty, I would say again we're one of the few growth retailers out there so we're certainly minding our vendors that our volumes potential to increase with them and we evaluate their pricing structure with our business. The other thing I would add too is that in some cases again we carry many brands. As you know we're very brand diverse. That you have to come to our shop to buy in the mall setting. So there tends to be less price issues from the consumer perspective when the brand is a great brand and cool brand and kids want to have it. As I said earlier, those brands are more unique brands and tend to perform very well for us and in those cases it may give us pricing power relative to the more unique brands.

Great. Then lastly, how was the e-commerce business and I think it had been a very small percentage but obviously a tremendous amount of opportunity going forward. How has it done so far in the first half and are there any initiatives to kind of accelerate the growth of that channel?

Good question, Betty. Our e-commerce business is very, very strong. So we are doing quite well in that area. Now that being said, you are correct in that's still a very small part of our business. So we believe and we're working on a detailed business plan, that there is a big opportunity to build that business over the next five years. So it is on our key list of things to do. We're starting to do a number of things on that front. And our business is very strong today. Although it's still a small percent of the business.

Rick or Trevor, could you tell us what was the growth in the second quarter?

In the e-commerce business?

Yes.

Fine. Go ahead, Trevor.

75% growth in the second quarter.

Okay, great.

65% year-to-date.

Thank you very much and good luck.

Thank you.

Your next question comes from the line of Crystal Kallik with DA Davidsons. Please proceed.

Good afternoon, everyone. Trevor, could you talk a little bit about just the sales per foot target you're looking at now. That would be helpful to start out as we start thinking about the store profitability model. Has it changed at all or where you feel that you are right now?

Yes, so last year our sales per square foot was just under $500 a square foot. Our trailing 12-month sales per square foot I think is about $470 today. And so it is down a little bit as we've had the negative comps. The other thing that we are cognizant of is we look at total flow-through on the business. So we will take stores that do over $800 a square foot and expand those stores because we can drive more volume through them. So we spend a fair amount of time discussing this subject and we think sales per square foot is a good indicator, but not the indicator. Because if you can take a store that is doing let's just say for example a thousand dollars a square foot, you can double the size and get that store to do 50% more volume but you're going to do less sales per square foot and that makes for more operating profit for flow-through. So I think that's a good metric for people to monitor when they're looking at our business but it's not a single metric that we drive. What we try to focus on is what is the amount of operating profit we can drive-through that box and in some cases some of the highest volume stores in the last three or four years the sales per square foot has come down when we expanded the size of the store. Take a store from 2,500 or 3,000 square feet to 4,000 square feet but will drive more operating profit.

Would your focus be on the four wall return or the payback period of a store versus the sales per square foot.

Yes.

Okay. And are you discussing what a goal or what a reasonable target that would be for you when you look at the stores?

Are you talking about when we -- as we evaluate renewing deals or new stores.

Or just in general. A lot of retailers would say they like to be around $500 a square foot but it sounds like you look at it differently and I'm wondering what your business model or goal four wall return or payback period is for your store productivity.

We look for a 4% IRR between years two and three and that will generally give us a total cash payback of everything invested in the store between 12 and 18 months.

Great. Thank you. And then I'm sure people are jumping on and juggling multiple calls today but you covered a lot of territory. But a big question on a lot of people's minds is when you look at no doubt the earnings growth has been phenomenal for many years and when you look at earnings expansion resuming for your business model, what are you really planning on? How much of that is California getting going again or just driving the total accumulative comp or just business recovery in the men's area, what is the big folks for you -- focus for you guys in getting earning expansions beyond the macro piece.

I'm not sure we can separate it Crystal from the macro piece. I think that is a significant factor, whether it's the comp number or the new store number. That is for us the overriding factor from a product perspective, again, I think we're as diverse as we've ever been with unique and really great brands. So what we need is the consumer feeling better. And I think at that point, we see -- we see our business getting better.

Well good luck. The stores do look phenomenal.

Thank you.

Your next question comes from the line of Linda Tsai with MKM Partners.

Yes, hi. In light of softness and apparel as your moving around your records and working with merchandising teams are you there any categories within specific brands that are performing better than average.

Yes. There are. And there are others that are not. So we do not want to get into that level of detail because we would spend the entire call. Again, we have an incredible number of categories that again we're very category diverse, mens, womens, accessories, and it's our expectation that categories are always moving up and all moving down. So we don't want to get into the specifics of it because we would spend the whole conversation or call around that. But again, the issues with the apparel business at this stage of the game are really price promotional-driven from our competitors. The brands that are full price brands for us, the unique brands, the brands that are in core distribution channels like our stores are doing quite well. It's the brands that have broader distribution where we're feeling the price pressure from our competitors.

Okay. And then could we have an update on shrink initiatives. That's something you've talked about in the past.

Yes. We started really going on about a year now, probably one of the biggest things we did on the shrink initiative was to start putting in sensor pens in thigh theft garments. We've been doing that in a year. We only put it on the high-theft items and we think that's been working pretty well. Our head of stores has done some good things from training and from a people perspective to help hold people accountable and make sure they understand the areas that cause shrink so we've spent more time on training and so if you remember and you read our call from the first quarter earnings release, we did well on shrink. We had a decrease in shrink on the first quarter. We're about to start up our second large round of physical inventories that we do after the back to school period and before the holiday period and we'll see how it turns out. But we really do our physical inventories twice a year. We did better in the first quarter relative to the first quarter of '07 and we can update you on how we did on the second round once we get through it in the next few months.

Great. Thank you and good luck.

Thank you .

Your next question comes from the line of Jeff Vanderson from B. Riley. Please proceed.

Good afternoon. I know your negative basis -- if you exclude the bad geographies of bad real estate markets how do your apparel comps look.

We've not done that analysis. But I think it's been tough all over. If you look at our districts, we've got about 38 districts where we carve up our 324 stores. About a third of those districts are posting positive comps an about two-thirds of those districts are posting negative comps so there's no reason for me to expect when I look at the detail on them on a by district basis that we've seen any material deviation. I don't think you can assume that the apparel in just the tough housing market is really the drag. Think it's pretty consistent across most of the stores.

And I think again I would say Jeff, just it's the same issue of we have the same heavily-priced promotional competitors across the country that are driving that apparel business down.

Okay. Fair enough. And then let me ask you, as far as hard goods, were you guys more or less promotional in this quarter on hard goods and also are you planning to be more or less promotional on hard goods in the last half.

There is no change to the promotional change on hard goods in the second half of the year versus a year ago and we do not anticipate any going forward in the back half of the year at this stage of the game. And I might add we comped up against very tough, tough comparisons from the prior year. And we're still able to comp up I believe in the low single digits in the first half of in year. So Jo, Jeff, we do not -- we haven't had to take any different promotional cadence on our hard goods business and at this point we do not anticipate having to take any.

Okay. That's great to hear. Thanks very much and good luck.

Thank you.

Your next question comes from the line of [Maurice Stein] with General Management. Please proceed.

Hi, thanks. First thing I want to ask you is just broadly speaking how would you characterize the difference in the back to school merchandise assortment this year versus last year. Differences in brands and price points?

All right. Again, broadly speaking, from a brand perspective, we are again I think very, very diverse. That hasn't changed from the previous years so there are a number of -- now witch brands or how brands perform within the mix that has changed from a year to year-over-year basis. So there are a number of brands again characterized by the brands that have tighter distribution that are doing very well in our environment today and we think they will continue to do well in our environment and are selling at full price. Then there are those brands that are driven by price competition from our mall competitors that have broader distribution. So it's a mix there, Maurice, that is moving all over the board as brands. From a fashion trend perspective, I think at this point we're covering a lot of ground. You're definitely seeing I think like a lot of players, you're seeing a lot of color throughout the store, from the footwear wall to both mens and women's apparel and even what we're doing in accessories with a lot of color across the store because that is basically as we view it, the trend cycle at this point.

And you commented about brands, the more core ones doing better, being less promotional, to what extent does that lead you to want to tweak your assortment more, the cross over brands and try to integrate grate the core brands.

And that is a natural process here that is part of what our buyers do on a daily basis in terms of managing those brands across our chain. And again some of those as we said in our prepared comments can be regional and even local based kind of brands. So it's a very dynamic process again and we certainly do that and are certainly having those discussions with the brands that are doing well and the brands that are struggling.

Anyway to quantify the kind of mix shift that we might be able to see over the next six months?

No. Not really. And again, I would tell you, you can tell just by being in our store as to which brands are performing and how they are positioned.

Thanks. And last thing if I could clarify, I think you said in your statements or maybe in response to one of the earlier questions that it became more tougher June or July and single digit comps and I heard you say this trend continued into August. But then I heard your projection for Q3 is down mid single digit comps and that the -- currently they were running a little bit better than that so I'm confused because I don't know if the comp month to date is negative high or better than negative mid. Can you clarify?

What we said was the promotional environment has dipped into the second quarter and has continued to impact our apparel comps. What we said was negative high single digit was our apparel comps. Apparel represents about 50% of our business and that business continues to be difficult for us. And the shoe business and the skate business and the accessories business is not doing that. And to be clear, yes, we said comps our expectations in the third quarter would be down negative mid single digits and that we are currently doing a bit better than that.

Thank you.

And we cautioned you that this is the peak period. We expect it to be different in the off peak period and that's why we're taking the position that we are.

Thanks very much for clarifying. I appreciate it.

Your next question comes from the line of Amy (inaudible) from Noble Capital. Please proceed.

Hi, good afternoon. Rick, I apologize if this has been asked, I hopped on late. But a noticed at my local store out here in Santa Rosa that there were a fair number of signs splattered across the windows looking to hire an assist manager or manager. I know that promoting from within, just curious if there is a one off position and has there been a change in the pipeline to support your growth and it's been tough across the mall but again growth has been a hallmark of your culture with the more recent negative comps. Have you seen a increase in turnover? I know your results have been different relative to everyone else across the mall but I'm curious if you've seen any difference in turnover? Thank you. (technical difficulties).

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