Zumiez Inc (ZUMZ) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Zumiez Incorporated fourth quarter and fiscal 2008 year-end earnings call. I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode, and we will be facilitating a question-and-answer toward the end of the presentation.

Before we begin, I would like to remind everyone of the Company's Safe Harbor Language. 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 periods 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 now like to introduce your host for today's conference, Mr. Rick Brooks, CEO of Zumiez.

Thank you. Good afternoon, and thanks for joining us to discuss the Zumiez fourth quarter and fiscal 2008 year-end results. Joining me today is Trevor Lang, our Chief Financial Officer. Following the opening remarks, Trevor will review our financial and operating highlights.

2008 was marked by a number of unprecedented events in the US economy which created the most challenging retail climate that we have ever dealt with. When the year began, there were signs that the US consumers were starting to pull back on their discretionary spending and we reacted accordingly, implementing a plan to manage and grow the business in a choppy environment. Needless to day, starting in September the market deteriorated much faster and further than we or anyone had projected. As the year progressed we took additional measures to improve our position without sacrificing the level of service and unique store experience that our customers have come to expect from Zumiez.

While 2008 was clearly challenging, we reacted swiftly. Our actions included driving sales where opportunity existed. For example, footwear comped up double digit for the year, and our sales team drove an increase in units per transaction which helped offset lower traffic levels. We controlled SG&A which grew at about half the rate of square footage growth, and we maintained a strong working capital position. We managed inventories which were down 13% on a square footage basis, consistent with our same-store sales decline in the fourth quarter. This allowed us to preserve cash. We ended the year with nearly $79 million in cash and current marketable securities, the most in our history, no debt, and our working capital position has never been stronger. On balance, I believe we acted quickly and prudently in 2008 to the changing retail environment.

Unfortunately, as we began 2009, the difficult macroeconomic trends from last year have continued and the near term outlook for the industry remains clouded. Under these circumstances, we continue to focus on the areas of our business that we can control in order to the maximize productivity while add adhering to the principles that have made Zumiez the destination for the action sports oriented consumer.

Before Trevor discusses our forward-looking guidance, let me tell you how we are going to manage our business in 2009. First, we will continue our focus on our customer. This includes having the best sales force, the best sales force on our retail floor, the most unique brands available, a full presentation of lifestyle which includes hard goods and footwear, and we believe that our customer wants the best brands, categories and styles that represent their lifestyle. As a lifestyle retailer, we will continue to offer a multi-tiered price structure on many categories of products, so we continue to serve all customers who are interested in the action sports. We are still focusing on the same customer and our consumer strategy has not changed.

As macroeconomic conditions have materially deteriorated over the last 18 months, we are responding with prudent changes to our growth plans, product offerings and cost structure. We are assuming the negative trends that impacted our business in the second half of 2008 will continue into 2009, and have planned our sales and inventory receipts accordingly. We have executed disciplined cost reduction strategy throughout 2008 and will continue those efforts in 2009. We reduced CapEx plans for 2009, which along with our conservative management of inventory, should leave us with a strong cash and working capital balance throughout 2009.

While the short term may be challenging, I'm optimistic about our long-term future. We believe our peers are becoming more and more homogenous, and by simply staying true to who we are, Zumiez has become even more unique in the mall. Our balance sheet is a competitive advantage in this macroeconomic time as others in this space do not have the financial flexibility we have to take advantage of opportunities. We believe the true long term value to the action sports consumer is presenting the lifestyle which includes broad brand diversity and broad category diversity.

As just defined, we are the largest action sports lifestyle retailer, and we believe our strategy and well capitalized balance sheet will continue to further distance us from other mall retailers. We will continue to support the best brands in the industry and cultivate new ones, which we believe is what our customers want.

Finally I want to say I am confident in our position and believe that our strength, the strength of our culture, our great team of retailers and our strong balance sheet leave us well positioned to gain market share over the long term as we have done over much of the last 30 years. And with that, I will turn the call to Trevor to discuss the financial results in greater detail.

I will first talk about fiscal 2008 and then discuss 2009. In November, we laid out how we planned on managing the significant downturn the retail industry experienced in the second half of fiscal 2008. While we are not happy with our financial performance, I am proud of the execution and discipline our organization mustered in fiscal 2008. We ended the year with clean inventories, a lean cost structure and our cash and working capital positions have never been better.

In the fourth quarter net sales totaled $125.5 million, a decrease of .9%, compared to $126.6 million in last year's fourth quarter. The decrease in net sales was driven by a comp store decline of 13.4%, offset by the opening of 58 new stores since the end of the prior year. Our sales in our stores west of Texas, which represented about 54% of our comp store sales, comped down in the negative high teen range ,while our stores in the South, Midwest, and Northeast comped down in the high negative single digits. Our web comped up about 50% for the quarter.

From a product perspective, footwear continues to be our best performing department, while our apparel departments are our weakest. Gross profit for the fourth quarter decreased to $40.6 million or 32.4% of net sales compared to gross profit of $48. 6 million or 38.4% of net sales in the fourth quarter last year. The decrease in gross profit margin of approximately 600 basis points was driven by lower product margins worth about 370 basis points, while the rest was deleveraging on the negative comp primarily in store occupancy expense. The decline of product margin was due to our apparel business which is about half of what we sell in the fourth quarter.

Moving to expenses, in total, SG&A expense increased $2.7 million or 9.2% to $31.9 million, compared to $29.2 million, and increased a percentage of net sales to 25.5% from 23.1% of net sales in the fourth quarter last year. The increase in SG&A as a percent of sales was driven by the deleveraging on a negative comp and increased store expenses associated with our 58 new stores.

In addition, we took noncash impairment charges of approximately $800,000 included in SG&A or approximately $0.02 per diluted share related to five underperforming stores. Operating profit decreased $10.6 million or 55.1% to $8.7 million or 6.9% of net sales compared to $19.3 million or 15.3% of net sales in last year's fourth quarter.

Our effective tax rate for the quarter was 30.6% compared to 37.4% last year. Our tax rate was lower in fiscal 2008 when compared to fiscal 2007, due primarily to having a higher proportion of tax exempt interest from municipal bonds as a percentage of our pretax income fiscal 2008 relative to 2007. This was a benefit of approximately $0.02 per diluted share.

Net income for the fourth quarter was $6.3 million or $0.21 per diluted share, compared to $12.4 million or $0.42 per diluted share in last year's fourth quarter.

Turning to the full year , fiscal 2008 financial results, for the year ended January 31, 2009, the Company reported net sales of $408.7 million, an increase of 7.1% over the $381.4 million in sales in fiscal 2007. Comp store sales for fiscal 2007 decreased 6.5% compared to a 9.2% increase in fiscal 2007. Sales per square foot were $424 for fiscal 2008 compared to $488 last year. Gross profit decreased 1.8% to $134.5 million or 32.9% of net sales, from $137 million or 35.9% of net sales in fiscal 2007. The 300 basis points in lower gross margin was a result of lower product margins, worth about half of the 300 basis points and higher occupancy costs as a percentage of sales were the other half.

SG&A expenses increased $11.9 million or 12.1%, to $109.9 million compared to $98 million, an increase as a percentage of net sales to 26.9% from 25.7% of net sales in fiscal 2007. The 120 basis points increase in SG&A as a percent of sales was entirely driven by the 21% increase of store square footage and deleveraging on a negative comp, somewhat offset by lower home office expenses due to lower in incentive and stock-based compensation as a percentage of sales.

Operating profits decreased $14.3 million or 36.8%, to $24.6 million compared to $38.9 million in fiscal 2007. Full-year operating margins were 6% versus 10.2%, due primarily to lower gross margins and, to a lesser extent, higher SG&A as a percentage of sales. Net income for the full year decreased to $17.2 million or $0.58 per diluted share, from $25.3 million or $0.86 per diluted share in fiscal 2007. Our effective tax rate for the year was 35.6% compared to 37.7% last year.

Turning to key balance sheet highlights, at January 31, 2009, cash and current marketable securities increased to $78.6 million from $76.5 million at the end of fiscal 2007. Inventory was $52 million versus $48.7 million at the end of fiscal 2007, representing an 7% increase over prior year, with 21% more square feet. At the end of the quarter, inventory decreased by 13% on a per square foot basis from the same time last year. We believe we have an appropriate level of inventory for future sales and are comfortable with our seasonal stock and aged goods. Also at January 31, 2009, the Company had no debt, including no outstanding balances on our revolving credit facility.

Now let me turn to our guidance. With regard to the full-year sales and earnings, the current environment has made it very difficult to accurately forecast annual sales and margin trends with any real degree of certainty. Therefore, we have made the decision to discontinue providing specific annual guidance, at least until conditions normalize. We currently plan to give quarterly sales and earnings guidance for the current quarter. Although we are not giving specific annual guidance, we want to share with you our thinking about how we plan fiscal 2009.

We are planning on our sales, including our same-store sales, down for fiscal 2009. We are making modifications to our product assortment, mix and value equation to reflect the current environment and pressure on perceived price and value by the consumer. Our goal is to have cool, fresh, new product at the right price when the customer comes in, and operate with fewer promotions and store transfers. We have already made great strides on aligning our cost structure throughout 2008 as evidenced by growing our SG&A to about half the growth in square footage. As we enter 2009, we have a strong balance sheet and inventories are in line with our sales trends. As you would imagine, we are planning our future inventory receipts to be in line with our lowered sales plan which currently assumes recent comp store sales trends will continue through the fall season. We are planning on positive cash flow from operations for the full year, albeit lower than fiscal 2008.

We plan to open approximately 37 new stores, invest in our e-commerce infrastructure and merchandising systems. Our plan calls for $23 million in CapEx versus $28.3 million in 2008. We also expect our depreciation and amortization to be about $21.5 million versus $19.5 million in fiscal 2008. As we said on our last call, we believe our full-year earnings will be below last year to the extent we see a same-store sales decline.

For the first quarter of fiscal 2009, we currently expect our sales to be in the range of $73 million to$ 76 million. This assumes a negative mid to high teen comp decline. Based on these assumptions, we expect to report a loss per diluted share of approximately $0.17 to $0.13, and our operating margins will decline by about 10 full percentage points. To give you additional color on our current outlook, we are expecting to experience an operating margin deterioration during this second quarter, similar to the level forecasted in the first quarter.

The current economic climate is difficult and will continue to impact consumer discretionary spending. But we enter 2009 well capitalized and have built an operating plan that should allow us to finish 2009 well capitalized. Our business model is more differentiated today than ever, which we believe will leave us in a great position to continue to take market share as we get through this current economic cycle. Ann, I think we will now turn the call over to

(Operator Instructions). And the first question is from the line of Jeff Klinefelter. Please proceed.

Yes. Thank you. A couple of questions. One, Rick, I know you don't like to get into a lot of brand discussions, but given the ongoing weakness in the apparel business, can you talk directionally or generally about where you see opportunities?

I think you have mentioned before that over distributed brands or multipoint distributed in brands in malls tend to underperform versus your more exclusive type or smaller niche brands. Can you give us any more color on where you see your opportunities to go after share in a shrinking market.

Let me give you -- a couple of areas I can give you some flavor around just in general product, Jeff. The first thing is is I think one of our objectives as we said throughout the country is to continue to differentiate our mode,l and small brands do that for us. So I think you going to see us continue to focus on developing the small brands, we're working very closely with them and it is -- so that is one of the areas we think we have an opportunity is continue to work with those small brands and help them develop their business.

I'd also say one of the things we are doing generally as it relates to product is we're really trying to work with all of our brands very closely, we're trying to give them more information about how we're thinking about planning the year further out so they can plan their business as effectively as possible also. So, those would be a couple of things I think Jeff. We are also looking at relative to product how we are thinking, again, about the multitier price structure, how brands fit into it, where it makes most sense based upon a brand by category combination.

I think you're going to see us do things like really try to clearly delineate what product goes at what price point, and what the value proposition is at each of those multi-tiered price points.

With that, I think it is fair to assume that we are going to try to push for a higher initial mark up at each of those tiers of prices. I mean, we are doing a number of things with our brands to try to foster the partnership we have with them, help them build their business while we achieve our objectives, too, in this process, both in terms of sales and margin.

And Jeff, this is Trevor, just a couple of follow up things on factual information that I think is interesting for those that have followed us is, we have continued the trend of having diversity within our top ten and top 20 brands. Again, we think that's a good thing. '07 to '06 we had about three brands enter our top ten. That changed again '07 to '08 where brands have gotten more relevant and more hot. So again, we think that's a good thing because that means there's freshness and newness that is exciting to consumers and they're buying more of it.

Also, those of you who followed us for awhile have heard us say that we're agnostic to individual brands, what we put out there is what the consumer tells us. As part of that, our private label for the first time in a very long time has actually gone down just a bit from 15.4% last year to just right around 15% this year, which in our mind, speaks to the strength of some of these small brands that are coming up and taking market share. We think that differentiation and that change in the marketplace is a good thing, because it always means we should have something fresh and new that that kid is looking for.

So just to follow up on that, in terms of price points or if we think about -- maybe not a matrix but a continuum of pricing, good, better, best or opening price point up to higher price point, are you and the brands together working on a more compelling mix shifted down toward opening price point, are they coming to you with ideas? It seems like the retailers that are converting right now are really just very focused on price points even more so than percent off promotions.

Again, for us, Jeff, it is literally a brand by category process. And working with our brands in that. There's some brands that we would not want to see discounted any way, shape or form. We can sell them at full price, we want to sale them at full price. So again, it depends on each brand's positioning, what their goals are, if we can help them add categories that they're not currently serving, we're going to try to help them do that.

Okay. One other question on real estate, I mean really two part. One, your new stores. Are those stores essentially locked in or do you feel like you know, in a perfect world would you be opening fewer stores in this environment, or are you getting better deals and that is helping to change the four wall model, even with lower volumes when you open. And then as just another part of that question, is there a thought here that there might be some off mall opportunities for you given what is likely the disruption in the independent community.

Okay. Let me just, I will back up a bit on your real estate question, Jeff, and talk about a little more last five, six months of last year and where we are at with what we are seeing is 37 new stores this year. And I will start with saying last August we had -- when you get the real estate pipeline going, we had a lot more deals done last August than these 37. As we got in September, we started trimming deals relatively dramatically. So we tried to trim it down into locations and the geographies that we felt were the best geographies for us, and it is kind of how we got down to the 37 number. So, and that was a process again, like always trying to be a good partner, work with our landlords, particularly those landlords that are really key for we think our future growth.

At this point our real estate team is kind of retasked to focus on working with landlords and focusing on our lowest contribution stores, highest occupancy cost stores to see what we can do on, in terms of improving the cost structure. So we are doing that, while we are continuing to talk to landlords and build our relationships with the landlords. At this point as we look beyond 2009, I would tell you that we are really going to wait for a tick up to do any major deal making as we see the market today. So, another way of saying that for, as we have said in the comments and then even looking at 2010, we are trying to maintain our maximum financial flexibility, and real estate deals being a part of that. So that is kind of to give you a little background as to how we get to 37.

Why we think we are at those 37, I would say in this environment, also I would just add I don't think anything is ever totally locked in. We will make the adjustments we need to make that we think are necessary to make. As it relates to the off mall stuff, Jeff, as you know, we have a few off mall locations today in different configurations. Historically, they have performed well, and as you are alluding to, there are some off mall players that have struggled. I'm not saying we are not going to that at some point, but it is clearly not on our radar screen for this year. We will stick to what we know and what we think we do best.

Great. Thank you very much.

Thank, Jeff.

And the next question comes from the line of Sharon Zackfia. Please proceed.

Hi. Good afternoon. Rick, of the 37 locations you are going to continue to open this year, can you give us any idea of kind of where the emphasis is, geographically or by age of market? And what kind of stores did you cut out of the original pipeline? I mean, is there any commonality among them.

First, I'll make a couple of opening comments and let Trevor talk more specifically about the geography of the stores themselves. First, it is well beyond before '08 we had, we had adjusted to the reality of the types of centers that weren't working. So we didn't have any planned in '09 that were the more difficult centers for us, those lifestyle center, new centers, all of those got pretty much trimmed out before we got into the '09 pipeline.

So from that perspective, we were focusing on regional malls we felt had good potential for us. So with that, then I will let Trevor talk about the geography and location.

So the stores we are planning on opening for next fiscal year, seven or 19% of them will be in the West, seven or 19% of them will be in the South. We will have about ten or 27% in the Midwest, and we will have thirteen or 35% of them in the Northeast. As you followed our sales guidance, that follows where we have had our best results, and if you -- an interesting thing, I think if you look at our results for the year, we would have comped down about flat for the year, and had the West just been about flat. So, obviously we are paying close attention to that.

The western part of the country especially California, Arizona, Nevada and Florida had been difficult for us in September '07. And so we obviously were aware of those, we were cutting these deals for the first part of the year. So we focused more of our stores around parts of the country that were doing the best for us.

Okay. And then secondarily, I think you mentioned, you might try to push for higher IMU this year. I guess I'm curious as to what kind of opportunity you might have there and when you might be able to recognize that benefit, and maybe a corollary to that is if you can give us some sort of perspective on your mark down cadence so far in the first quarter versus the fourth quarter?

So on the IMU, you know, we are taking a hard look across each category within the departments, and identifying what the consumer is willing to pay, and designing the garment whether it is our private label or working with our vendors to try to hit those price points under the auspice that we are going to have probably a little bit less product in our stores, and we need to sell through to improve from where they were last year.

There's probably more opportunity in the back half of the year than there is in the first half of the year, and that has been an ongoing effort we started in the late fall, early winter season of last year. So we are hopeful that that will be fruitful for us.

And then on the mark down cadence so far in the first quarter?

You have to look at it by department. As you know, we have the five major departments, the footwear, accessories, the hard goods, and the apparel, and I would say, obviously, the footwear department is comping nicely for us. So the mark downs are, materially below where they would have been last year. We actually were comping negative for most of the first quarter in footwear last year, and accessories and shoe, the mark downs are a bit higher than last year. And accessories, I'm sorry, accessories and apparel. And in the hard goods, no meaningful difference.

My question wasn't versus last year, it was more versus the fourth quarter. Your inventory is obviously higher as you exited the fourth quarter. Are we seeing some mitigation of the mark down activity sequentially.

Yes. Sorry. I was doing year-over-year. Yes, if you looked at the mark down cadence of how we operated during the holiday season versus where we are now, I would say our mark downs are not as high as they were in the fourth quarter.

Best of luck.

Thanks, Sharon.

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

Thank you. Hello, everyone. I just had a question on your thoughts on the outlook for merchandise margins, with some of the direction that you are taking with higher IMUs versus maybe your need to compete with other promotional activity in the mall.

Again what we are talking about here, Jeff is again our -- is the broad approach of trying to hit a multitiered strategy. We are trying to hit the price points we believe we need to hit to be competitive on the mall. That's the first place to start. And then we are saying we will try to build in additional IMU into that strategy.

Presumably you should be able to do it at better margins than you did in fourth quarter when you were reacting to the price points in the mall.

That's is the expectation we are laid out for our buyers, and I think that as Trevor said, the opportunity there is bigger in the back half of the year where we have more time to plan and react than the first couple of quarters of the year.

The second thing I have to say relative to this, is that we are also -- why we think we are doing a pretty good job of planning our inventory levels, of how we are planning to execute our strategies around product and margins as we moving into '09, we still are at the mercy of the marketplace in terms of competitors that may not be rational in their pricing strategies.

That's a big caveat we have here as we talk about what we are planning to do is we also have to be realistic that we need to be come competitive on the marketplace relative to what our competitors are doing, because the overall governing strategy for this year, to be absolutely clear, is to come out of this year in a very strong, equally strong cash position as we are in today. We are not going to -- you are not going to let us see inventory back up in the system.

Another thing, just to be clear, higher IMU does not necessarily mean higher price. IMU is a calculation off of the cost. So we can have a higher IMU with a lower retail. So I want to be clear about that that we are not, when people hear higher IMU that they shouldn't expect that meaning higher average unit retail.

Again, I will add a last thought there. We have some brands selling at full price and that's the real mission we have here. We want to sale those brands at full price, and so those brands that have those strategies, have that limited distribution are selling. We have some brands doing quite well.

I follow. So near, term you expect to be still a little bit in reaction mode. However, towards the back half of the year you intend to have some merchandise strategies in place which help you to be competitive but presumably make better mark up.

That's correct.

Okay. And then Trevor, a question for you, I was just looking at SG&A per average door, down about 11% in the fourth quarter, which is a meaningful drop from the improvements that you had been making. What is the outlook for that on a go-forward basis? Is that because you are not paying bonuses and so forth, or how much more opportunity is there on a metric like that.

That's a good question and you mentioned a few times that we believe we reacted very quickly in '08 and pulled out costs. We have talked about that on some of the previous calls, on things like new hires and bonuses and other costs that were discretionary in nature, we pulled those out.

I will tell you, the biggest reduction in the fourth quarter was in the things you mentioned and we have paid a substantial lower amount of incentive-based compensation in the way we structured our equity based compensation in '08 versus '07 was a benefit to us in fiscal '08 as well.

So when people are thinking about fiscal '09 and the 10 full percentage points we talked about in operating margins coming down in both the first quarter relative to the first quarter of last year, and the second quarter relative to the same quarter last year, the biggest majority of that decline is not necessarily in product margins, but it is deleveraging on the comp.

Our product margins, I think, will probably be down 100 basis points, maybe 150 basis points, but the bigger issue is that we had 21% more square footage at the end of the year. That will come down as we open fewer stores. But as you think about our rent structure and depreciation which is our second and fourth highest costs, those expenses don't go down as you have a negative comp.

The bigger deleveraging event that we have for the first half of the year is that we have a lot of new stores, and they're going to be paying rent and depreciation and store expenses on that. That's the bigger driver of the negative operating margin is just the cost structure. The margin is not the biggest -- the product margin is not the biggest driver of that deleveraging event.

Through the first three quarters of the year, is there opportunity for store labor, or are you as lean as you want to be there.

You almost need to break it between the first half and second half, Jim. If you look at the first half, we have to build our store labor by week. We're still small enough we can do that. Almost 80% of our stores will be operating at minimum hours in the first six months with the exception of a few peek weeks like Easter and things like that. But we will not have much opportunity at the store cost level until the back half of the year. So yes, I would say we did a pretty good job managing those costs last year.

A substantial amount of our store also be operating at minimum hours through the first six months. There's a few malls, I think at like 30 to 40, that have changed the minimum operating hours. We will take advantage of that, but I don't see that there's a lot of costs to be leveraged in the first half of the year considering the fact that we have, again, ratcheted those costs back in '08, and a substantial amount of those stores will be operating on minimum expenses in the first half of '09.

The next question comes from the line of Mitch Kummetz. Please proceed.

Thank you. Sorry for cutting Jim off, I guess.

I am sure Jim had will get back to us.

I wish I knew his questions. Trevor, on Q2, did I hear you right, did you say you expect the operating margin to be similar to or a drop in margin similar to that in Q1?

Yes.

Does that by default imply that the comp will be down as much in Q2 as Q1, or is there something else happening on the margin side in Q2 that we should be thinking of.

No, I think our current expectation is that at least we are planning the business, right. We are being cautious about what we think is going to happen because it is such a unique environment for all of us. Our plan would assume those comps would continue maybe even a bit higher in the second quarter. We certainly hope things are better than that and our results will be better to the extent they are, but we think it is prudent to plan for the worst and hope for the best.

Just to clarify, when you say higher, you mean maybe a bit worse?

Yes.

And then on your Q1 comp assumptions negative mid to high teens, that's worse than the trend you'd seen this past month, and also in the fourth quarter. Is there something that you are seeing over the last week and a half that would suggest that business will be worse over these last two months of the quarter?

Well, as Trevor said, Mitch, what we are trying to do is just be prudent because when you plan, I think, to operate a business in this environment you have to plan conservatively. You have to make sure inventory is positioned appropriately, and you have to be able to have a baseline, a conservative baseline for planning your costs. We have done, we believe, that for all of 2009.

So there -- we are not going to comment on anything relative to the last week and a half, and I will remind everyone, too, that we have the Easter shift is going to take place. No matter how you look at March, you can't look at March -- as we say this every year, you can't look at March on a stand alone basis, you have to look at March and April combined to get the real trend we're going to see. So we are not prepared to talk anything other than the numbers we have released.

Sure. That's my next question, how should we think about the impact of the Easter shift on those two months.

As you guys know, Easter is moving from week 4 of March to week 2 of April. The biggest piece of that change is going to be the lead up week. Obviously, people will buy more and that lead up week will move from what was week 3 of March to week 1 of April.

Our assessment is there will be a slight detriment to the month of March and a slight benefit in the beginning part of April. But don't think it is going to be overly meaningful.

And then the margin assumption implied by your Q1 comp and earnings guidance, how should we think in terms of the deterioration between gross margin and SG&A.

Good question. It is actually about equally split. You will have about 500 basis points come out of gross margin, and then about 500 basis points come out of SG&A . And then within the gross margin, probably 70 plus percentage of that is going to be due to the deleveraging effect. The rest of it will be to lower product

Okay. Then you guys were kind enough to say your footwear comp was up double digits for the fourth quarter, I believe it was, or maybe that was for the full year. Could you say what the apparel comp was for the full year. Obviously, you comped negatively, apparel is the biggest part of the business. Could you say what it was.

I think, Mitch, I am flipping here. They were down, looking at them independently. It was down in the low teens.

A couple of last items, when you think about your outlook by department, footwear has been your best trending business, but pretty soon you are coming up against anniversarying when that turned positive in '08 and also anniversarying some of the merchandise changes at PacSun. Is that a business that you expect to maintain momentum in and continue to comp positive? I assume your Q1 comp outlook assumes a positive comp in footwear. Is that correct?

That is correct. And let's just talk a little longer, Mitch, about the cycle here. As you might imagine -- again you're particularly knowing, having been around us a bit. We have been pushing footwear the last few months and accelerating our push because it is a category that has been working. You are finding a broader presentation, we are shifting mix relative to the brands that are the hottest and we're expanding our wall presentation of the footwear. So I think our estimations are that the comp will moderate as we start cycling up against last year's positive comps. We still anticipate we have opportunity there as these trends typically run longer than a 12 month cycle.

Have you also seen higher ASPs as being part of the comp improvement there?

We are seeing a mix shift, Mitch, away from our sale footwear to full price footwear. So yes.

Okay. And then last question, obviously a of pressure on the business in the first half, maybe some opportunity in the back half, particularly, Q4 but it sounds like irregardless of comp on the margin side of the business, it sounds there's opportunity there maybe for some higher IMU in the back half, less pressure from occupancy in the back, or just the impact of fewer stores hitting the P&L in the back half, and then some opportunities to cut costs in the back half, especially on the store payroll side. Am I hearing you correctly on those? Is that a fair way to look at it?

Yes, and with the one caveat , again, that we have to assume our competitors are not irrational in terms of their price and their inventory

Understood. Thanks.

Our next question comes from the line of Brandon Ferro, please proceed.

Hey, guys. I had a question on footwear. I know you guys are going to start lapping comps there, you have Pacsun's exit which has helped. Trend wise as you think about what's going on with your various vendors in footwear and then as you analyze in-store activity, are there any trends in category that make you more or less confident in its ability to continue to perform.

I will reemphasize from the comments with Mitch, and that said, again, I don't think we look at it, we don't see trends run a year and then fade. I think we are seeing a good footwear trends we're seeing lots of variety in silhouettes within footwear.

We have the advantage, again because of our position in the marketplace that we have uniqueness to the brand selection compared to most of the mall-based retailers. And so I think that gives us some position. We have in our plans, again, as Trevor said, you plan conservatively in this environment. We have assumed that the comps moderate as we come up against last last year's is kind of when this category took off for us. But also the fact that we are chasing that with product, we're chasing it with bigger presentations within the stores.

Okay. As far as store growth goes, just philosophically, Rick, you talked about improved retail fundamentals or needing to see them for an up tick in store growth again. When you think about that, how long will retail fundamentals need to persist in an improved fashion for you to feel more comfortable in raising store growth expectations again, and then maybe on top of that, should fundamentals improve and you raise your store growth expectations, do we assume a step function back to 20% annually, or are we talking about a more gradual increase?

Great questions, Brandon. I don't have a clear answer for you. It is kind of I think we will know it when we see it kind of answer. And revolving around seeing an up tick in transactions for a period of time, which I'd love to see that be a driver of our comps, rather than a decline in transactions being a driver of negative comps. So it's one of those things where I think we will know it when we see it kind of things. Now, I think you are going to see us be more gradual as things up tick.

Again, I think the game today is going to be -- the winning formula today is not so much a growth formula as it is managing the balance sheet. So I think we're going to make sure that we are cautious around that, and even once we see what we feel is a up tick, Brandon, it is not like our pipeline is sitting here full. It's going to take some time to fire back up the real estate pipeline. And that could take anywhere from three to six months.

Okay. On the product differentiation front, just the tiered pricing strategy, is that a by-product of just needing to be more price competitive in a more differentiated fashion,and then just generally weak retail trends, or do you actually see yourself adhering to the strategy, even if the operating environment improves going forward?

To be clear we have done this multi-tier strategy for a very long time, the entire time I have been here at Zumiez for 16 years. This is nothing new to us. It is really the intensity, I guess, that we are managing it with. And as I said to respond to Jeff's comment earlier, it is about how we are trying to clearly delineate the value proposition now at each price level and making sure we're working closely with the brands to make sure that the make is right at each level for the value, the price point we are selling it at. Those combination of things are how we are trying to drive IMU at each price point.

I would tell you going forward we will continue with this strategy. This is not something new. We believe that the whole action sports lifestyle resonates at all socio-economic levels. It is the smart way for us to serve every customer constituent we have no matter what socio-economic level they're at.

Okay. As far as just a follow up on the second half of '09 discussion, following up with what Mitch said, I get the sense there are opportunities in the back half of '09, first half is going to be weak. Is there a potential offset to those opportunities to the extent that -- and you have already booked your snow category. You potentially booked it conservatively and it is a big portion of the business in the back half of '09. Is that an offset?

Are you saying the snow business -- I mean snow business is defined as snow hard goods, snow jackets and snow pants in the fourth quarter is about 17% of our sales. So I mean, it is still less than 20% of our sales at its peak.

Sure .

And you're right, we booked some of that, not all of our snow goods. We have booked probably some of the hard goods. But the rest of the fourth quarter is still under evaluation and that will be our next big booking that we'll make over the next few months.

Again, the same, again for us it is a brand category combination of what the strategy is for that brand in that category of product. And you should assume this discussion around our ability to build margin and IMU into those categories holds true for snow also.

This is another good point. We talked about this in one of our conferences. When you look at all the retailers, we all have a different stand on how '08 worked out for us. If you look at our business, our business through August which is the peak selling period of back to school.

Our same store sales were down about .8 of one percentage point, and if you look at our earnings through the first six months of fiscal '08, they were only down $0.02 a share in EPS, and that's up against a 50% increase in '07. So we did pretty well through the first seven months of last year. Then September hit, had Lehman and all of that stuff going on and our business along with everybody's business kind of fell off a cliff. I mean, we started from comping up in August on top of a 17 comp the year before, our business starting comping down very significantly in September and,again, we all saw that and then we saw the panic that hit retailers in the promotional environment.

We think our first half is going to be much more challenging because we are up against much higher numbers over the last five years. But as we get into the back half, assuming as Rick said now two times, there's a rational approach to how the other retailers price their products, that there is a lot more opportunity and really starting in September for us.

Did you get all after that?

And the next question comes from the line of Linda Tsai with MKM partners. Please proceed.

Yes, hi. Could you talk about marketing plans, are you doing anything differently this year, maybe in terms of communicating some of the value you are focused on, does it make sense to spend more or marketing in the second half in terms of rational spending or the rational pricing environment you have spoken about?

Well, to comment briefly. First, our marketing business has never been huge, a general comment to start with. As we looked at what we are doing in marketing, I'll break it down into two components. There is the in- store piece of it and there is kind of the consumer focused piece of it. On the consumer focus piece, we are going to maintain doing some of the big events we've done historically, like our cash tour event including the amateur skate competition that we do through that event. So those things that touch the consumer that we felt were absolutely critical to our brand position, we are going tobe maintaining throughout the year is our current plan.

As it relates to in-store promotion, you will see us be very selective about what we do there, and turn on the promotion and appearance based upon the time of year, how we feel. We are going to evaluate the time of year and season and when it is time to drive some volume, as well as relative to those commodity categories versus those brands that are being driven more by full-priced selling and distinctive product. So it is going to be a mix ,I guess is what I would tell you. We are going to respond to the marketplace and our competitors as we need to.

Thank you.

The next question comes from the line of Jeff Van Sinderen. Please proceed.

What are your latest thoughts on visual merchandising or presentation for apparel? Are you guys thinking about that any differently in this retail climate?

Yes, we are. As you might imagine, as you know, Jeff one of our hallmarks has always been the great sales talent that we have out in our sales force. And with that has been our stores have always been relatively dense in inventory levels to meet the high productivity of our stores. So with the inventories coming down, I think youi're going to see us try a number of different things. Not to diminish anything -- we are not going to do anything to diminish the quality of our sales efforts and we're going to encourage our sales people to be better than ever on that front, to sell multiple units, drive dollars per trans. Those things are all going to continue.

But because w'ere bringing inventory levels down, I think we have the opportunity through working with our close partnership between our product team and and our field team, to take a look at how we're merchandising stores, feature more product, feature more brands, more selections of products. And I think you'll see more of that, particularly as we get towards the back half of the year.

And then I wonder if you can update us on new store performance in recent months. Is there any change there in terms of trend relative to your more mature stores?

Yes, the class of '07 obviously finished its full year anniversary throughout '08 ,and we watched that very closely. The class of '07 did actually over 70% of total store volume. That is better than -- we thought it would be doing in the 65% range. That's obviously a function of comps coming down 6.5% for the full year. Our new stores performed at maybe slightly below our expectations but our comping stores coming down brought that ratio up. Historically, the Company has been anywhere from 60% to 70%, that new stores first year volume would be 60% to 70% of mature store volume. Regarding class of 2008, it is too early to tell.

I don't think we feel comfortable giving projections based on what where we are in the cycle and how much guessing we would have to doing, because a lot of these stores have only been open a few months. We are reasonably pleased with the class of '07. I should also mention the class of '07 had EBITDA margins of close to 20%. Those things are flowing a lot of cash in the first year, but again the business has changed so substantially in September. Depending on how things work out this year in the September on time frame, that will have a lot of reflection on how the class of '08 performs when you get through those peak selling periods.

Got it. Thanks very much and good luck.

Thank you.

And the next question comes from the line of Connie Wong with Wedbush Morgan please proceed.

Thank you. Most of my questions have been asked already, but really quick, are you guys making changes to recruiting and training ,given this prolonged deterioration in the macro environment.

No major change, Connie. I would tell you that clearly recruiting has become a lot easier in this environment. I think there are a lot of people seeking us because of our profile and our history. So I think from -- the feedback from the field team has been that it is easier in this environment to be out recruiting. So we are looking at -- we view that as an opportunity. This is Trevor. Just one follow up on that, as we have gone through like every business in America, and have cut costs pretty substantially from our historical trend rate. I think the senior team, as well as the Board, have are been adamant that training is one of the areas that will be the very last to be cut and things would have to be pretty dire.

We are one of the only retailers I'm aware of that brings the senior store leadership together four times a year, we bring our store managers together three times a year. It is hard to explain unless you experience those events ,the comeraderie and level of education we are able to deliver on that. I would characterize that as not one of the areas that we have cut substantially. We are done things smarter and got some cost out of it that way. That's not an area we are willing to sacrifice at this point, because we think that's one of the top four pillars of our organization that makes us unique. And if we had to make that severe of a cut, things would have to be pretty tough.

Okay. Great. Just a housekeeping question, what tax rate should we use going forward for fiscal 2009

That's a fun one. The tax rate for the first six months of the year is going to be closer to historical rate. It's going to be high 30% range. And we are not comfortable giving a rate beyond that until we see how the year progresses. The reason it is going to be a little interesting is just due to the level of interest-free income and that's a permanent difference on our tax return, which is part of the reason as I mentioned in my prepared comments, that our tax rate was lower this year. As people are modeling, I would for now use a rate at or slightly higher than historical 38%.

Okay. Great. Thank you and good luck.

The next question cops from the line of Jennifer Black with Jennifer Black and Associates. Please proceed.

Good afternoon, thanks for taking my question. I have a couple of questions. I wondered first, and I apologize if you answered this already, what kind of a comp do you need to get leverage?

Still Jennifer, that's around 3% to 5%. We are not as focused on that considering the comp guidance we are giving, but our cost structure is such that we pull back costs when things get tough. We invest in the business when our comps are ahead of plan. So we have the ability to manage that, but we need a minimum of 3% to 5% to get leverage on the SG&A.

Can you update us on your plans for e-commerce?

As I think Trevor said in his comments, our e-commerce business comped up 50% in the fourth quarter. So we are making good progress there, Jennifer. I think we are clearly viewing that as an opportunity for us and ,again Trevor said in the prepared comments that is an area we are investing in in terms of capital dollars, in terms of trying to get ourselves more capabilities on our platform than we have today. We have made some talent investments in that area over the last year. So it is an area that not just as we look at '09, but as we look at '09 and beyond, we see that as a real opportunity to continue to build a distinctive business, and particularly as it relates to us being a lifestyle retailer and a multichannel lifestyle retailer, I think it really makes a lot of sense for us to make significant investment there is.

Great. And I know we talked about your store associates. Has there been any change in the way you incentivize them, and I also wondered -- you talked about the events and I wondered if you, if there were any more incremental events you added, maybe grassroots, and are there any timing shifts with like the cal store.

There was a lot there. Let me try to pick up and get each one of those. So we will start with the events, Jennifer. There is no major timing shift relative to the cash tour, we are going to do the same number of stops as we did the prior years and we are having some of -- we're very excited.

We have some of the best teams in action sports industry, participating in our tour this year, and I think it has a lot of excitement out there in our field, within our field team because there's some we haven't had previously, that are coming out to join us this year. So we are going to maintain again those consumer facing events, that we think are so important to reaching out and giving back to our consumer. No change on that front. Trevor commented on the training events. That's one area that is the last thing we touch. We have adjusted costs around it, taking costs out of those events, but the integrity of those events remain intact and the power relative to the training education that goes on and giving back to our employee, those things all remain in place.

So the incentives for your employ employees, those are still there, and then --

Yes, you are absolutely right. They're still in place relative to our commission structure. That is absolutely in place, Jennifer. We may refocus things for our particularly our managers relative to what they can control and impact so you are going to -- these kind of environment that means we will focus more on dollars per trans and years per trans and combination of those two, and look for those stores that are struggling around that and try to drive performance on those areas.

On the events, what I was trying to get at is would you do anymore grass roots event that don't cost money, that aren't expensive events, is there anything that is creative that is, do you know what I'm asking?

I mean, I think if we found events, that were right now, let's just say we are maintaining our same cadence relative to our process throughout the year as last year. Now, if we find events that we can do relative to working with our brands that were low costs for both of us and in this environment it has to be low cost for both of us, then yes, we would take a look at expanding it. But at this point the cadence is basically the same.

All right. Great. Well, good luck.

Thanks.

And the next question comes from the line of Rob Wilson with Tiburon Research. Please proceed.

Thanks for taking my call. Why would a management team looking at operating margins drop the 1% to 2% range want to continue growing stores as aggressively as you are?

Again, as I said earlier, Rob. I mean this has been a process where the, our pipeline was full, much more full than the current store count we have talked about. So we have actually trimmed back significantly starting from last September, post August, we started trimming back the growth significantly. And so we worked closely with our landlords to do that, and as I said we will continue to adjust it as we need to relative to the needs of the business.

But at this point we are comfortable with the number and as Trevor said in his prepared comments, we believe that even with that we are going to end this year with a positive cash flow from operations and equivalent stronger working capital position that we where in now.

Okay. Fair enough. And one more question, have you adjusted your pay structure for your store managers, I know they historically have been paid based upon comp store sales?

No, we have not adjusted it. It is a really good question, Rob. Again, as you are right that is how we have done it and as you know our entire organization is structured around those same measures as we move up and down comp store sales, product margins, the earnings power of the company. So you have seen, we are just all making less money is frankly what it is. At this point.

And the last question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed.

Thank you very much a couple of questions. Actually I want to circle back to the last question before on the compensation relative to same-store sales. The same-store sales are down and we are annualizing that as we get into next year, is there essentially a reset button that is pressed or is it the high water mark of the same-store sales that this is based off of? I'm not sure I asked my question clear enough.

I understand what you are asking, Bill. Our goal has always been that whatever, however we perform the prior year, that becomes the baseline for the next year.

Relative to increased unemployment that the country is experiencing and the recession, what impact, if any, do you view that as having on the number of skaters, number one, and number two, broadly speaking on the skaters' lifestyle.

Yes, we do a lot of analysis around these things, or at least read what's coming out in the press and pay close attention. And the metric you're mentioning in unemployment along with probably the housing and the consumer discretionary spending and consumer confidence, those are the top of our list. So I think it gives us lots of concern, the unemployment rate that we have all been seeing the last year and the acceleration we seen the last four or five months. Is a major concern to us.

So I think we have seen a pretty strong correlation in our business, too, as unemployment has grown and consumer confidence has declined, that had a big impact on our business.

The other thing for us that is much more relevant, somewhat related to your question is our roots are in the West coast, and the West coast I think generally speaking is having a much harder time, I say West coast, west of Texas really because the Rockys and Pacific Northwestern included in this you know, 60% of our sales come from stores west of Texas and the comps there are really what is weighing on us. They have some of the bigger unemployment and housing issues. So it is just a function of the West is getting it first and hardest and we will see how the rest of that plays out, but unemployment is an important factor.

As it specifically relates to the skate consumer, skate is a better performer. So that's a high replenishment business Because those kids break skate decks and need replace it. It has been a fairly good --one of the better performing department. So again, that is such a powerful life style that we have not seen as much of a drop there as we have in the broader apparel categories.

That's helpful. One additional follow up relative to the West coast or the western half of the US, given that they went into the recession first or the housing issues, anyhow, are you seeing or sensing the other areas in the country are following and then that the West coast in fact is showing signs of bottoming and potentially even turning up while other parts of the country are still working their way down?

I think that we have not seen any improvement. Fortunately for us, we have not seen the level of deterioration that the western half of the states, we have not seen that level of deterioration in the south, the Midwest and northeast, even in the fourth quarter. Everything declined a bit relative to the first nine months of the year, but nowhere near what we saw in the West.

Thank you both.

Thank you.

Ladies and gentlemen, thank you, that concludes our question-and-answer session. I would now like to turn the presentation back to Mr. Rick Brooks for closing remarks.

Thank you very much. I want to close by saying as always we appreciate your interest in Zumiez and understanding where we are going in the longer term and our position in the marketplace. Thank all of you for that, and we look forward to talking to you again in May as we release our first quarter results. Thank you.

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