Zumiez Inc (ZUMZ) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Zumiez, Inc. third quarter fiscal 2008 earnings call. I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). The following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please note that actual financial results of the Company for the period being discussed may differ materially from the financial results projected or implied in the forward-looking statements. Additional information concerning factors that could cause actual financial results to differ materially from projected results 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 rebroadcast of this call is permitted without the Company's expressed written permission.

I would like to introduce your host Mr. Rick Brooks, Zumiez's CEO. Please proceed, sir.

Thank you. Good afternoon and thanks for joining us to discuss the Zumiez's third quarter fiscal 2008 results. Joining me today is Trevor Lang, our Chief Financial Officer. Following my opening remarks Trevor will review our highlights and then we'll turn the call over to the operator to conduct the question-and-answer portion of the call.

We are in unprecedented times and schedules are lacking confidence which is having an impact on spending. We are not immune. Similar to the second quarter, we started off the quarter relatively strong with a .2% in August. This was up against our toughest comparison of fiscal 2007 when we comped up 17.4%. We have historically performed at our best during peak volumes. And our team repeated this in August. However as the quarter progressed, we saw marked deterioration in both our sales and product margins especially in apparel. At the same time, September marked the first month when our stores in Pacific Northwest and Rocky Mountain regions, which makeup approximately 30% of our comparable store base, experienced same-store sales declines in the mid teen range. This pattern continued into October and combined with the housing state of California, Arizona and Nevada created a very challenging sales environment for us created a very challenging sales environment for us in the western half of the United States where more than half of our comparable stores are located. Our team continued to find ways to offset the worse than expected product margin by cutting costs.

For the quarter, footwear posted a positive comp. This has been our strongest performing department in 2008 and continues to be an important part of differentiation for us. Our ski business which performed well during the first six months of the year was down in the first quarter as consumers cut back on higher ticket purchases. As we head into winter season, our snow hard goods which consists of snowboards, boots and bindings becomes more important and represents about 8% of our sales while snow jackets and snow pants represent another 10% of our sale. Our assumption that these categories will be challenging for us as they are discretionary, high ticket items and the consumer is showing a lot of caution in spending on these types of products.

Apparel which constitutes 50% of our sales continues to be the most challenging area of our business. In order to remain competitive in this in this environment we have become more promotional. We continue to do well with new and smaller brands that are more exclusive to our stores in the mall. However the more national brands continue to impact our overall sales and product margins.

In August, I stated this was the most difficult retail climate I have seen. Unfortunately the environment has since deteriorated by recent headlines and our performance in October which represented our worst monthly comp in the history. Obviously the world we operate in has changed significantly. That said, the original philosophies, goals and ideals on which we build this business remains the same and are intact. We believe Zumiez is the destination store for sports apparel, footwear and accessories for teens and young adults and our merchandise selection is unmatched in the industry. This serves us well in the past and will continue to do so in the future.

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

Thanks Rick and good afternoon everyone. For the third quarter net sales totaled $112,200,000, an increase of million $8,200,000 or 7.9% compared to $114 million in last year's fourth quarter. The increase reflected the opening of 57 new stores since the third quarter of last year offset by a decline in same-store sales of 5.8% compared to an increase of 13.2% last year. Our third quarter comps were in line with the guidance we gave you in August and were driven by negative transaction and into a lesser extent a decline in average unit retail.

From a product perspective, our footwear department led the way with a positive low double digit comp increase. Our accessories comp decreased in the negative low single digits and our hard goods and apparel comps were in the negative mid teen range. We opened 55 stores since the end of fiscal 2007 and are on plan to open 58 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. In addition during the third quarter the Pacific Northwest and the Rocky Mountain became challenging as well, while the Northeast and the Midwest performed relatively better.

Gross profit for the third quarter increased by $800,000 or 2% to $39,300,000 or 35% of net sales compared to gross profit of $38,500,000 or 37% of net sales in the third quarter of last year. The decrease in gross profit margin was driven by an increase in store occupancy cost and to a lesser extent lower product margins. Within our product margins lower apparel margins was the driver of this decline.

Moving to expenses, in total SG&A expenses increased $3,100,000 or 12% to $28,900,000 or 25.7% of net sales compared to $25,800,000 or 24.8% of net sales in the third quarter last year. We managed the growth in SG&A to 12% on a 21% increase in square footage growth. We deleverage and other store expenses due to the negative comp and are focused on trying to make the consumer experience a good one, but we leverage our home office expense particularly in incentive based compensation and stock-based compensation. Operating income was $10,400,000 or 9.3% of net sales compared to $12,700,000 or 12.2% of net sales in last year's third quarter. Net income for the third quarter was $6,800,000 or $0.23 per diluted share compared to $8,100,000 or $0.28 per diluted share in last year's third quarter.

Turning to our year-to-date financial results, for the nine months ended November 1, 2008, the Company reported net sales of $283,200,000 an increase of 11.2% over the $254,800,000 and sales for the first nine months of fiscal 2007. Comp store sales decreased 3.2% compared to an increase of 12.2% in the first nine months of fiscal 2007. Gross profit increased $5.5 million to $93,900,000 or 33.2% of net sales from $88,400,000 or 34.4% of net sales in the first nine months of fiscal 2007. The decrease in gross profit margin was driven in store occupancy cost due to the negative comp of 3.2% and the 57 new stores added since the third quarter last year. SG&A expenses increased $9,200,000 or 13.4% to $78 million or 27.5% of net sales compared to $68,800,000 or 27% of net sales in the first nine months of 2007. The slight decrease in SG&A as a percent of sales is due to store operating cost deleveraging on a negative comp and 57 new stores added since the third quarter of last year. Somewhat offset by lower home office cost as a percent of sales. Operating income totaled $15,900,000 or 5.6% of sales compared to $19,600,000 or 7.7% of sales in the first nine months of fiscal 2007 and net income was $10,900,000 or $0.37 per diluted share compared to $12,900,000 and $0.44 per diluted share in the first nine months of fiscal 2007.

Turning to key balance sheet highlights. At November 1st, 2008 cash and marketable securities increased to $67,300,000 from $37,600,000 at November 3, 2007 an increase of over 79%. Inventory was $81,800,000 at November 1st, 2008 versus $67,900,000 at November 3rd 2007. Average retail inventory during the quarter on a comp store basis was down about 1.6%. Also on November 1st, 2008 the Company had no long-term debt including no outstanding balances on revolving credit facility.

Now to our guidance. For fiscal 2008 we expect sales to be between $406 million and $410 million compared to our previously guidance of $418 million to $425 million. This is based on our target of opening 58 new stores in our recently revised expectation that the negative would be in the negative mid teen range. We recently updated our outlook for diluted earnings to be in the range of $0.52 to $0.57 for the fiscal year ending January 2009. This assumes that fiscal 2008 operating margins will be in the 5.5% to 6% range driven primarily by lower gross margin due to lower product margin and higher occupancy costs a percent of sales. Our current expectation is that SG&A will grow about 11% for the year, almost half the growth rate in our square footage. In 2008 we plan to spend approximately $29 million to $31 million in CapEx down from our projection of $33 million to $35 million. Weighted average diluted shares for fiscal 2008 are expect to be approximately $29,400,000.

Despite the recent economics events and their impact on our business, we continue to be optimistic about the long-term growth prospects and the future potential of our concepts and our brands. Over the near term we will continue to focus on controlling costs, capital and investments until the visibility improves. To that end we announced that we will slow our new store expansion to no more than 15% square footage growth and reduce our capital expenditures to approximately $28 million in fiscal 2009. I know many of you have questions regarding our preliminary fiscal 2009 projections, we are now not ready to share any specific details until we finish the fourth quarter of this year, which represents approximately 40% of our annual earnings.

That being said, our current believe is that our comparable store sales are negative next year we will have lower earnings than we had this fiscal year. We are completing the planning process and we'll update you on our thinking regarding 2009 in March after we finalize this fiscal year's results. We remain confident that we have one of the most talented groups of people in the business and their hard work passion and dedication to Zumiez is more important and more evident now than ever before. We have seen everyone across the board step up during these tough times and I am proud of our team. We believe welcome through this extremely difficult retail environment more unique and we'll be stronger than when we entered it.

Francine, I think we will now turn the call over to questions.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Sharon Zackfia of William Blair. Please proceed.

Hi. Good afternoon.

Hi.

I have a few questions. Let me start with the merchandise question first and then I have a question on SG&A. On merchandise, it sounds like you are worried about the higher average ticket items, and I guess I'm wondering if you have an opportunity as we go into the holiday season to try to I guess minimize the exposure at a higher price point item or what you can do on the fly at this point?

Well, you did hear that correctly as it relates to snow hard goods business as we addressed in our comments, we are concerned about it. We are doing a couple of things. We are doing the things you would expect us to do. The first thing we are working closely with our suppliers. The condition of this business at this point in time. We are also more aggressive on a price perspective and trying to drive product out the door with price promotions and you have probably seen that in our stores already. So those are really the two thing we are doing working closely with our vendors and driving it's from a price perspective on trying to move the product out the door.

To follow up on that, the guidance that we gave a couple of weeks ago obviously had that we were planning our product margin to be down pretty substantially, more than they've ever been since being a public company. The orders are very clear to our teams that we are to in this season clean inventory. The team has done an amazing job over the last five years under Lynn's leadership to keep inventories clean. If you look at the level of inventory that is aged over four months, it's a pretty low percentage. If you look at the flexibility we've given ourselves based on the guidance we've given and the orders that we are marching to from a merchandising perspective, our expectation is that even though we are not happy about the environment we are in and snow is an important piece of what we are doing, our goal is to get clean on inventory and we have given ourselves enough room as we see the world today that we will execute against that goal when we get to year end inventory.

Are you seeing snow off to a slow start or are you just worried about it because of what happened last year?

It's off to a slow start.

And Trevor implied on your SG&A guidance for your full year, is it a slow down in SG&A I think to 5% or 6% clip year-over-year in the fourth quarter. Can you kind of talk about, are there things you are doing? Is that reversal bonus accruals? What is going on, see it grow at that clip?

Yes. There's a number of things. There is no reversal of bonus accrual this year. We are accruing substantially less than what we accrued last year. We accrued our incentive based compensation as we earn our net income so historically roughly half of our net income came in the fourth quarter. So last year for example roughly half of our bonus would have been accrued for. This year our bonuses are much lower as performance suffered. We have cut expenses you are right in a number of areas. We mentioned on the prepared comments that our SG&A is growing about half the rate of our increase in square footage and it is one of the things that we are happy with what the team has been able to do in a difficult environment.

I'm just give you few things. We have hedge down our store labor. We are deleveraging on the store labor but we have brought it down to a level that we are comfortable with. Our percent rent has come down as business has gotten tougher. Our merchandising cost as a percentage of sale has come down. We negotiated new credit card fees, better logistics costs. Just across the board we have lowered our costs and incentive based expenditure situation and stock-based compensation are a large driver of that.

So it's a broad across the organization where we've had those savings and just to follow that thought, we mentioned that the CapEx would be lower. We again have done a pretty good job of reengineering some of our cost structures. Our stores are costing just over $20,000 less per store this year. We've done six less remodels and relocations because we felt there wasn't as much need as business had gotten tougher and we put not necessary IT projects and fixture upgrades. So nothing that we believe will hurt the long term of the business but cost that we thought were produced to make when we saw business to be tough in this part of the year.

Thanks. Good luck.

Our next question comes from the line of Mitch Kummetz of Robert W. Baird.

Thank you. I have a few quick questions. I was hoping you might be able to comment on your month to date comp or at least whether the snow, it's turning in line with what your revise Q4 comp guidance is.

We are not going to do that Mitch other than say we are at this point sticking with the guidance we put out there.

Okay. And then Trevor you mentioned that pressure on the gross margin line in Q3 was occupancy, some was product margin and within the apparel in the product margin, how are you looking that in Q4? I would guess that you would expect pressure as well on the snow side of the business. When you think about as much gross margin pressure as expected in the earnings guidance, is it more so on the snow side that you expect it or is it still more so on the apparel side or where do you think that pressure is expected to come from?

Let's talk about the third quarter first and then we'll talk about our projections. So in the third quarter our gross margins were down 200 basis points, roughly 80% of that deleveraging in the margin that 200 basis points came from the deleveraging of occupancy. The remainder of that came in lower product margins, and then within the product margins all of the deleveraging or the lower product margins came out of the apparel business. There was a little bit of snow hard goods in there but it is less than 1% of sales in the third quarter. It's been driven by apparel really since starting about the June time frame of this year. For the first five months of this year our product margins were up. But as people got more promotional, the apparel parts of the team retailing space got very promotional, we felt that pain and we've reacted to some extent to keep clean on the inventories.

If you look towards the fourth quarter and the product margins that we have intimated in our guidance, our margins for the fourth quarter at the high end of the guidance would intimate some portion of 670 basis points of lower gross margin. We are assuming the vast majority of that will come from lower product margins. There is going to be some deleveraging but the bigger piece is going to be due to lower product margin and from within that you are thinking right. The snow hard goods piece of our business as well as the higher priced snow jackets and snow pants in our apparel, those in aggregate, those types of categories last year represented 18% of our sales. So apparel and snow hard goods are going to be the drivers of the significant decline in gross margin for fourth quarter '08 relative to fourth quarter '07.

That's helpful. And two other quick questions. One for you Rick. I know it's probably hard to kind of separate the macro from merchandise trends, but when you look at what's happening merchandise wise in the stores today, do you feel you are being hurt by a lack of trend? Do you feel leak the hoodie business has gotten a little soft maybe on that trend having run its course and there was a pretty strong skinny denim trend out there for the last couple of years. Do you think you are being hurt to some degree?

Mitch, as you know, our business is always been leading that trend, leading a by of that skinny denim and I think what we've seen is there's been a lot of changes. We got closer to us on the trends. Now why I say that, that is all pales relative to the macroeconomic environment. That is really the key driver of what we are seeing here. We just have fewer people coming in the doors to buy things.

Okay. And then one last question. You talked about bringing down the square footage growth in 2009. When do you start cutting deals for 2010? Have you started that process yet? I am thinking how are you thinking through the process as you look into 2010? I'm guessing you are going to start that pretty quickly here.

That's correct, Mitch. And at this point in time we are putting new deals on hold for 2010. And we are going to wait to see how this season comes out before our team, before we make any commitments. So we have very few commitments at this point for 2010, and we want to see how we go through the holiday season before we start making any commitments for next year.

Thanks guys and good luck.

Thanks Mitch.

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

Thanks. Hello.

Hi Jim.

Hi Jim.

A question for you guys. Within your vendor base, are you finding any key vendors that are having challenges to find access to the capital needed to support your business?

You know at this stage of the game Jim, I won't comment on any of the public companies because their information is public and you guys can draw your own determination. As it relates to our smaller vendors, in most cases we are their biggest customers. So if we are, we have a lot of cash, then we are the big driver of their liquidity. So at this point we have not seen much of a, we have not had many if any issues that I am aware of with any of our smaller brands.

One follow up on that that is important. People who are not as familiar with the story, we are very brand diverse. Our largest single brand represents less than 7% of our sales and as you get pass those top ten brands, like our number 11 brand represents 1.8% of our sales. So it certainly would not be a good thing for any of our vendors to go away, but we are not so confined to a certain number of vendors that if one brand did go away that it would be catastrophic for us and we have had a good record in the industry for a long period of time working with brands that we think have a long future in front of them. And so I think to the extent if there was a brand that we thought was relevant and needed some help, we might help out in that regard. But again I think it's important for people who aren't as familiar with our stores we are not someone who only has 20 or 30 brands. We have a lot of brands that mitigate some of that risk.

That leads into my next question. Historically you guys have done things to help brands out where needed. I mean, do we possibly get into scenario here where there are so many brands that need help that it becomes difficult to do so? Or we are not there yet?

Again I don't think so, Jim, and partly because of diversification we are at. Again we are not hearing from, I'm not hearing and I've asked this of our buyers. They are not hearing at this stage. From our brands there are issues out there, so we are not seeing it at this point in time, and I don't believe that's the case as long as we are going to be financially healthy because for these smaller brands we are their biggest customers. With our financial strength as you can see from our cash position, I think we provide a lot of security for those brands, and again you have to remember the majority produced by these smaller brands are t-shirts and hoodies and things that are screenable in nature so it can be a quick reaction product.

Okay. That's helpful. Thanks. And then a couple of questions on the leases. With regards to the lease structure, are there out clauses, things like co-tenancy agreements or occupancy rates and so forth that could possibly afford you the ability to slow growth further in '09?

We have Jim, in virtually all of our leases we have co-tenancy requirements as well as kickouts in almost every lease deal we do usually around year three or four. We are looking to those kickouts as they come up as well as the co-tenant units. We are not looking only now but any that come across our portfolio.

Okay. And for older deals I presume it's a matter of whether the store is four wall cash positive that makes it continue to operating it?

And how it's trending and our strategy and belief in that market and a number of other things too.

And then a final question on the leases. A couple of quarters ago you talked about for the first time seeing offers of down rent. Have you seen the landlords get even more aggressive? Are the rates falling off sharply?

I would not say it has changed much from what we talked earlier.

Thanks so much and good luck in the holidays.

Thanks, Jim.

Our next question comes from the line of Crystal Kallik of D. A. Davidson. Please proceed.

Good afternoon, everyone. Trevor, so it sounds like you've been aggressive in addressing the cost structure. For '09 with all the adjustments you made do you still require a single digit comp to leverage costs?

The year the answer would have been no, but we have taken some pretty tough, tough cuts, and we've had the ability to do that. We've had a significant pay for performance model historically where we had a large piece of people's compensation being in the form of commission and bonuses. That number has come way down, and the other expenses that I mentioned that we had the ability to cut, we have cut. We don't feel like we cut anything that is going to be detrimental to our long-term growth. We are still investing in our IT organization. We think we can, we need a little improvement there. We are investing in our e-commerce business because that is a business that has continued to grow for us and we can continue to fund that growth as well. But the rest of the expenses, there's been a lot of things where we've taken a different approach as things have gotten more difficult. So as you look out into next fiscal year, we will not be able to make on a relative basis the same level of cuts because in a number of cases those expenses are gone to almost zero.

From a comp leverage perspective it sounds like you would be able to leverage than you had previously based on the cuts you made?

Yes. Again if you look at what our expense structure growth, occupancy expense is the second largest expense by far. Then our store labor is our next largest expense and then depreciation and our stores is our third largest expense and those expenses follow square footage growth. To some extent some of those expenses are going to grow at a faster rate in case of occupancy grows at a faster rate that increases as well. I would not change that 3 to 5% leverage structure. I would characterize this year as the year where we really just got more strenuous and focus and difficult with the team on cutting costs.

Okay. Great. And then are you still projecting about $80 to $90 million per year end cash?

Yes. We said on the release a couple of weeks that we expected to have at least $75 million in cash by the end of the year and a lot of that has to do with how this year turns out and whether we hit our guidance or not. But base you had on current expectations we said we would have at least $75 million by the end of the year.

Wonderful. Could you tell us as far as the actual impact of the California, Arizona, Nevada, Florida, and the Pacific Northwest and Rockies, can you give us the magnitude of the drag?

All of those regions they comp down at 11% range. So had those markets been flat, we would have comped out under 1%, and of those markets really the Pacific Northwest was the most difficult followed by the Arizona market. Really the rest were pretty close in the low double digit negative comping range.

Okay. Great. One more question. I think you had mentioned that initially at least a few weeks ago and someone changed in that time frame, November comp you were looking to benefit from a shift of a snow event by about 100 basis points based on how things are starting out slowly, how do you feel about that?

What we said was we had a snow event that moved out of the end of October into the second week of November. Now November is a much more meaningful month than the month of the October because of the week of Thanksgiving. That event did have a negative 1% drag on the month of October, but it would not have the opposite effect of that in November because November is a higher volume month. So you might get half a point improvement out of that. That event did happen. It is behind us now. But it won't be a one trade because of the fact of November is a much higher volume month for us.

Okay. Great. And then finally I notice a significant amount of email that you are sending out. You are getting pretty good customer response from that new marketing initiative?

We increase it at this time of the year, sometimes it's relative to the time of the year, and as Trevor mentioned earlier in his comments, we've also continued to make investments in that arena too. So it's a function of both those things.

Okay. Great. Well thank you and good luck.

Thank you.

Our next question comes from the line of Stephanie Wissink of Piper Jaffray. Please proceed.

Thank you. I have just a few questions. You mentioned that your national brands was impacting apparel sales and margin. Can you go back to those vendors and get help as you progress through the holiday season.

Those conversations are steady and constant, Stephanie. So we are working very closely with those brands.

Have you had any luck thus far?

I am not going to getting into commenting specifically, but we view this as a long term partnership in terms of working with these brands and our approach with them and we believe we have great partners.

Okay. And two follow up clarification questions for you, Trevor. You said your goal for inventory was to be clean at the end of the fourth quarter. Does that imply a down year-over-year on a comp store basis?

Our current expectation is that we will be down on a per square foot basis in the low negative single digits when we get to year end. The reason it's not in mid single digits is we know we rely on inventory on a few stores and we know there was some transitional product between the winter season and the spring season that we under invested in. So we are going to make small investments there because we know there's opportunity to drive a little bit of sales there. Year end inventory is seasonally adjusted by the lowest inventory levels we have. Because of the fact that it's really the lowest level of inventory we have on a per square foot basis, as we look out into the first quarter, we would get back closer to negative mid single digit inventory on a per square foot basis.

Okay. That's helpful and then the last one. You also stated that in reference to next year if you were to comp negative your earnings would be down year-over-year. Can you give us some insight as to what that implies about your new store performance?

I think it has to do, I would say not as much as our new stores. Our new stores will continue to be difficult. Our new stores have been pretty consistent, I've been here for over a year now. They've been consistent at running about 65% of mature store volume. Sometimes it's closer to 60, and then we have some stores that are getting close to 70%. I think one has to do with the structure of the number of stores we brought in in the last few years, the growth and some of the expenses on those, and the number of cuts we made this year. So again more to come on that. We are continuing to evaluate it. We are not done with the planning process. We will continue to go back with the team and look for opportunities but we are assuming that it is going to be a tough year going into the first part of next year so we wanted to share that information with you guys based on our preliminary review of how fiscal '09 looks today.

Thanks.

Our next question comes from the line of Linda Tsai of MKM Partners. Please proceed.

Yes. Hi. Have you given any thought as to how you might plan the snow related goods business for next year should the current environment persist?

It's too early for that at this point Linda. We will wait on those decisions. We have seen, we are going to wait on booking that product, we don't have to book it now. We will see how this season turns out in its entirety and push that decision as far as out as we possibly can relative to seeing how this year turns out.

What is the furthest that you can push that out?

We are into late January.

Okay. And then how are skate hard goods holding up?

Skate hard goods have been comping up for us up until the last three months or most of the last three or four years. It's been a very great part of our business for a long period of time. Skate hard goods is one of the more expensive things you can buy in our stores on a relative basis. Fortunately there is not a lot of competition, but I think it has been a recent phenomenon that it has comp down. But of all the departments we have and the five major departments, it is up against the toughest comparison by far. So it's a built of the overall macro picture has gotten more difficult, it's more expensive thing to sell, and it has comped up over the last four years, it's sort of grounding out a bit and we are very careful not to let skate take over the business as well because we don't want to be viewed as just pure skate shop. We are an action sports lifestyle. So we are careful not to let it state too much of the square footage as well.

What categories do you have the easiest comparisons? Is that still apparel too? In terms of being easier?

Well, I guess we comped up last year I think in the 4% range for the fourth quarter, and I I don't think that there was any of our department other than snow that comped down just a little bit. We don't really have any lay ups if you will when we are looking at the fourth quarter that we are up against.

And then as you are buying for next year, are you trying to shift your buys into some lower AUR item?

At this point I don't want to get too into that because then we have to start talking on a category by category basis. Suffice it's to say that our job is to meet the needs of ours and that's what our buyers do and we have a long history of doing that fairly well.

And one last question. Some of the retailers having commenting on strong online growth. Are you seeing similar results in your direct business?

For this year, our online business for the quarter I think it was up about 56% year-to-date. Our web business has been up slightly over 60%. So yes. Our web business has been strong for us. It's smaller relative to our entire business than most of the public companies you are viewing. It's just over 1% of our sales last year. So we have a smaller base to grow from but that business has been difficult for us. As of that business has gotten more difficult for us. Yes, it has grown at a much faster rate but even that business has gotten a bit difficult in the more recent time frame.

Okay. Thank you and good luck.

Thanks.

Our next question comes from the line of Betty Chen of Wedbush Morgan Securities. Please proceed.

Good afternoon.

Hello.

I know you don't want to comment too much about 2009. But Rick you had mentioned that you are seeing better traction with the smaller brands or perhaps less pricing competition. How should we think about that for 2009? I know that a lot of these brands are long term relationship but is there some flexible for to you view more fors the smaller brands for next year?

Again Betty our approach is to do what our customer tells us is the right thing to do. These brands are that are regional in nature. Where we are meeting the need of a consumer in each region relative to the brand. It's a very individualized approach. And the customer is what drives that decision for us, which is if the customer is demanding more, then we are going to buy more. So we always view it from the perspective of how is it performing based on what the customers tell us.

And then in terms of the 2009 store opening, have you been able to adjust sort of what are the expected sales volume to think about the ROI for the new store openings given the environment and the expected year one trend?

Yes. We mentioned earlier for the class of '07 and class of '08 stores. Class '07 have all anniversaried and then have done about 65% of our mature store volume. You are projecting a substantial amount on the class of '08 because they haven't been through the holiday season but our projections is that class of '08 will perform similar to the class of '07. When we get into the class of '09, we have evaluated the items that we evaluate and our expectations is that they will continue to performance similar to how the class of '07 and the class of '08 performed. It's different geographically. Stores in the Midwest and Texas and part of the Northeast are performing better than stores in the West Coast. So we are very cognizant of that and generally speaking the A malls are performing better than the B malls and the C malls. So we are cognizant of those things as well. So we are evaluating most of the deals that we are going to open in '09 that have already been signed, those deals were done well before things got really really tough in the last three months. So again we are factoring all of that and that is part of what we have given the high level guidance today and we will give you a further update in March.

And then Trevor you have mentioned I believe for 2008 we should anticipate 11% growth.

Yes.

How should we think for '09? Some of those savings controlling payroll and all that, can that continue into next year as well?

Yes. We are not going to give you any specifics on that, but we are going to look at all the variable costs and the discretionary costs. We made investments in people and infrastructure and we plan to garner those investments and next year there are continued savings that we think we can do in our distribution center, continue to focus on the discretionary expenses at the store level, but that being said we have a really good job this year and it's going to be hard to take the same level of cost savings out of the business next year the way we have done it this year.

Okay. Fair enough. And I guess lastly in terms of the inventory, it was clearly down again for the third quarter and I know you talked about expectations for the end of Q4. Could you give us a sense of the split of that composition between shoes and apparel because it seems like footwear has been holding up or outperforming the other categories and I was wondering how you feel about the composition of your apparel inventory.

You are thinking about that right. As you would imagine our shoe business is doing well, so we are investing in that business. It's comping up in the double digit range. And we are doing a really good job there. Our accessories business is up a bit on a per square foot basis but not meaningfully so. Accessories is becoming more unique to us as other people are spending less and less time on accessories. The places where we have made substantial decreases on a per square foot basis is in the snow hard goods and the apparel side of the business.

Well thank you and best of luck for the holidays.

Thank you Betty. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Jeff Van Sinderen of B. Riley. Please proceed.

Hi. Just to clarify, did you guys say that you are fully committed on your 2000 leases at this point?

The 2009 leases.

I'm sorry. 2009. Yes.

We are not fully committed yet.

We are limited to no more than 15% but we can come in less than that and are continuing to evaluate the deals that haven't been signed yet.

Okay. And then any other color you can give us in terms of how you are planning your promotional day dance for holiday maybe this year versus last year?

If you look at our business in two distinct businesses. You have the shoes that we are very unique in and doing very well in and there's really not much of a need to promote them. You have our accessories and we are unique into that. We are pretty unique. There are not a lot of reason to be highly promotional in that atmosphere. And on the hard goods that we sell elsewhere in the mall, those things makeup about 15% of our sale. So there's not going to be as much pressure for us to be highly promotional in those arenas of our business because we are very unique and it's hard to get the product offering. When you move into the apparel side of the business and even within apparel on a private label stuff as well as the brands that are more ubiquitous in the small setting, that's where we will get more promotional.

And I would add to that Jeff that again for us we manage it on a fairly fine level. As we think about promotional our guidance indicate that is we are going to be more promotional in terms of having to drive the business here in this fourth quarter, but it's really done at a fine level relative to how our inventory is positioned and relative to sales rates on a fine category brand analysis. So it gets very detailed in our view and very focused on how we attack the promotional, how promotional is relative to the brand combinations.

Got it. Thanks and good luck.

Thanks Jeff.

Our last question comes from the line of Nadine Francis of Roth Capital Partners. Please proceed.

Actually most of my questions have been answered. Just one question. For the signed leases for 2009, how many of those are in the kind of challenged area like the pacific northwest or California or Arizona, what percentage of those leases?

It's currently based on our contemplated leases, less than 20% of our stores will be in California, Arizona. We have no deals in Nevada or Florida.

Okay. Thank you .

I am showing we have no further questions.

All right. Well, then thanks everybody. On behalf of Trevor and myself and from the team here we really appreciate your continued interest in what we are doing here at Zumiez and we look forward to speaking with you when we report our fourth quarter results in March. Thanks.

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