Zumiez Inc (ZUMZ) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Zumiez Incorporated first quarter fiscal 2009 earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Before we begin, I would like to remind you that everyone on this 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 this Company for the periods being discussed may differ materially from financial results projected or implied in the forward-looking statements. Additionally, information concerning factors that could cause actual financial results to differ materially from projected results is contained in this Company's annual reports on Form 10-K and the 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 express, written permission.

I would now like to introduce your host for today's conference, Mr. Rick Brooks, CEO of Zumiez. Please proceed.

Thank you. Good afternoon, and thanks for joining us to discuss Zumiez's first quarter 2009 results. Joining me today is Trevor Lang our Chief Financial Officer. And following my opening remarks, Trevor will review our financial and operating highlights.

Not a lot has changed since we reported our year-end results back in mid-March. The ongoing recession continues to pressure our sales as our customers are shopping less frequently and spending less versus a year ago. That said, we did witness a few periods of better than expected store traffic and higher than anticipated transactions during the first quarter which contributed to a comp performance that was towards the better end of our guidance range. However, the volatility has resumed as we have begun the second quarter. We continue to do a relatively better during the peak volume periods but during nonpeak periods the reduced traffic affects our transactions and sales.

When we spoke to you in March we assumed that the difficult trends that began in September of 2008 would continue into 2009 and we planned our business accordingly. During the first quarter, we did a good job of managing the areas of the business that we can control, namely inventories, expenses, and capital expenditures. This allowed us to report a loss per share that was considerably better than our initial outlook and continued to have a very strong working capital position.

Some key operational highlights include SG&A growing just over 10% while our average square footage growth throughout the quarter was up 19%. Total inventories at the end of the quarter were down nearly 8% compared to the same period last year and down 24% on a per square foot basis. And product margins were down about 20 basis points in the first quarter versus the same period last year. This is a significant improvement to the fourth quarter of fiscal 2008 when our year-over-year product margins declined by over 300 basis points. The better margins are primarily due to our aggressive efforts to manage our year-end inventories and improved trend right assortment and the conservative receipt plan during the quarter.

At the same time we remain very focused on our customer, ensuring that those who walk in our doors continue to see the unique brands they are looking for and have come to expect to find at Zumiez. During this period, when consumers have less discretionary income and customer's are more selective with their purchases, it becomes even more important that our merchandise assortments reflect current trends and provide a range of compelling products so we can continue to serve all customers who are interested in action-sports.

Before I turn the call over to Trevor I want to quickly touch on a recent court filing. We are currently in the process of evaluating the assets of Active Ride Shop, a southern California action-sports, off-mall retailer that filed for chapter 11 bankruptcy back in March. Active is a concept that we have admired for many years, but like many small retailers, it has struggled in the current recession. Because this process is ongoing and we are in the early stages of our due diligence, there can be no assurances as to the outcome and we will not be answering any questions until it is completed.

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

Thanks, Rick. Good afternoon, everyone.

For the first quarter, net sales totaled $76.8 million, a decrease of 2.4% compared to $78.7 million in last year's first quarter. The decrease in net sales was driven by a comp store sales decline of 15.3% somewhat offset by the opening of 252 new stores since the end of the first quarter last year. Our sales in the western half of the United States, which represent about 55% of our comp store sales, comped down approximately 20%, while our stores in the south, Midwest, and the northeast comped down about 11%. Our web comped up about 40% for the quarter. From a product sales and margin perspective, footwear continues to be our best performing department, while our apparel departments are our weakest.

Gross profit for the first quarter decreased to $21.9 million, or 28.5% of net sales, compared to a gross profit of $24.6 million, or 31.2%, of net sales in the first quarter last year. The decrease in gross profit margin of 270 basis points was driven by deleveraging on a negative comp primarily in store occupancy expense.

Moving to expenses in total. SG&A expenses increased $2.4 million, or 10.5%, to $25.3 million compared to $22.9 million and increased as a percentage of net sales to 33% from 29.1% of net sales in the first quarter last year. The increase in SG&A as a percent to sales was driven by deleveraging on a negative comp and increased store expenses associated with 52 new stores. We had an operating loss of $3.4 million in the first quarter of fiscal 2009 compared to an operating profit of $1.6 million in last year's first quarter, a decrease of $5.1 million. We reported a tax benefit of $1.4 million during the first quarter compared to a tax provision of $900,000 in the first quarter of 2008. As we mentioned in our last call, our tax rate is expect today be a bit unique this year as we believe we will be in a loss position for the first six months of this year. Our net loss for the first quarter was $1.7 million, or $0.06 per diluted share, compared to net income of $1.4 million, or $0.05 per diluted share, in last year's first quarter.

Turning to key balance sheet highlights. At May 2nd, 2009, cash and marketable securities increased $14.9 million, or 22.5%, to $81.1 million from $66.2 million at May 3rd, 2008. Inventory was $54.1 million verses $58.7 million a year ago, representing a 7.8% decrease from the first quarter of fiscal 2008. At the end of the quarter, inventory decreased by about 24% 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. Also at May 2nd, 2009 the Company had no debt including no outstanding balances on this revolving credit facility.

Now let me outline our guidance. On our year-end call in March we stated we were going to discontinue providing specific annual guidance, at least until conditions normalize. But we do plan to give quarterly sales and earnings guidance for the current quarter. Although we are not giving specific annual guidance, we wanted to share with you our thinking about the remainder of fiscal 2009. First, we are planning our sales, including our same-store sales, down for fiscal 2009. With regard to our store opening plans we expect to open approximately 36 new stores versus our previous expectation of about 37 stores. 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 the door and operate with fewer promotions and store transfers relative to last year. We continue to make strides in lowering our cost structure relative to the downturn of business, as evidenced, again, in the first quarter where our SG&A increased by just over 10% but our average square footage growth throughout the quarter increased by about 19% compared to the same time last year.

As we finished the first quarter of 2009, we have a strong balance sheet, record cash levels and inventories on the square foot basis below sales trends. We are planning our future inventory receipts to be in line with our lowered sales plan which currently assumes that sales trends in the second quarter will worsen relative to the first quarter, but will improve in each of the third and fourth quarters. We are planning positive cash flow from operations for the full year, albeit lower than fiscal 2008. We also expect our depreciation and amortization of approximately $21.5 million versus $19.5 million in fiscal 2008. As we said on the last call, we believe our full-year earnings will be below last year to the extent we see a same-store sales decline.

Based on recent sales trends, we are currently expecting fiscal 2009 second quarter sales to be in the range of $78 million to $82 million. This assumes a comparable store sales decline in the low to mid 20% range for the second quarter of fiscal 2009. Based on these assumptions, we expect to report a loss per share of approximately $0.17 to $0.14 and our operating margins will decline by a full 13% to 15% points primarily due to deleveraging our cost structure on the negative sales. We expect our second quarter tax rate to be in the low 40% range. To give you additional color on the current outlook we are expecting the third quarter of 2009 operating margins to be between 0% to 2% assuming Q1 comparable store sales trends continue in the third quarter.

With that I would like to turn the call back to Rick for closing comments.

Thank you, Trevor. Clearly the consumer environment is still very challenging and visibility remains limited. While we are not pleased with our current -- with our recent results, I am confident we have the right plan in place to maximize productivity, protect cash, and preserve the uniqueness of the Zumiez concept during these difficult conditions. This should allow us to end the year well capitalized and in a strong position to increase our share of market once the economy improves.

Operator, we would now like to turn the call back to you for questions.

(Operator Instructions) Please stand by for your first question. Your first question comes from the line of Brandon Ferro with Keybanc Capital Markets. Please proceed.

Good afternoon, guys. I wanted to start off on the guidance. Can you guys kind of just walk me through what appears to be some conservatism there to the extent that you would be -- your 1Q operating margin guidance by probably 400 basis points and then sequentially, obviously 2Q is stronger, store growth should decelerate. I would think the operating margin contraction would be similar to 1Q? Can you guys walk me through that?

Yeah, Brandon. This is Trevor. The vast majority of the sort of new view of where we are seeing it is based on the lower sales. We had said on the first quarter earnings call that our expectations were that the negative mid to upper teen comp that we were projecting back in March would continue throughout the -- essentially, the third quarter. As you can tell from my prepared comments, we now expect those same-store sales trends will be a bit worse in the second quarter based on what we have seen to date in the quarter. The second quarter through May. So the vast majority of the reflection that you are seeing in the second quarter is the fact we are going to take a slightly more conservative approach on sales based on what we have actually seen through the first three weeks of this month. That's really the biggest change in the sales and earnings guidance as we look at the second quarter.

Reflecting back on the first quarter, I think what I would say is that we obviously did do a bit better on the sales, both on the top line and on the comp store sales. We have really got our call structure reigned in very tightly here and we actually had a few other expenses that came in better than we had anticipated. So, there was a bit of favorability in the first quarter that we were not anticipating and I don't think it is prudent, at this point, to assume that level of savings will continue.

So the key takeaway from this is that the sales trends have worsened a bit since the end of the quarter, and we are just not ready to assume that that's going to get better throughout the rest of the second quarter.

Okay. And I know you guys can't comment specifically on Active. Rick, I was just wondering, qualitatively, maybe to the extent those court documents are public, would you care to comment maybe strategically -- when you look at Active, what do you see in that business that potentially validates it as a national concept? Relative to, or in the context of, what are supposedly pretty strong growth opportunities for the Zumiez concept?

You know, Brandon, we are not going to do that. We are talking about, again, a relatively small chain here relative to the Zumiez effort. So I am not going to get into that at this point. Again as we said, we have a long way to I don't to get there. As we get further along, I think we will be prepared to share more with you if we continue to make progress.

Okay. Lastly, just footwear. Have you guys noticed any change in May, to date, in your footwear comps to the extent you have now lapped PacSun's exit from the business last April?

You know, what I would tell you, Brandon, there is we have seen, as Trevor just commented, relative to current May trends we have seen everything decline, including footwear. So it is not just footwear. It is every department has gone down, relatively speaking, relative to the comparison to the first quarter.

Thank, guys. I appreciate it.

Thank you.

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

Hi. Good afternoon. Can you hear me okay on this phone?

Yes.

Okay. Great. So I guess a quick question on the comp guidance for this quarter. Are you actually running at that right rate now or are you giving yourself more cushion for late back-to-school for comps to maybe be even weaker as we get into the July corridor?

Sharon, this is Trevor. We are running at the guidance that we have given you through the first three weeks.

Do you expect July to be an issue with the late Labor Day or is it kind of a lesser factor for you?

You know, I don't think it is going to be big. It is just a timing issue for the quarter, regardless. I think as we do look at the quarter, May is the strongest of the three months that we had last year. So we are up against our toughest comps for May, but that being said, I think what Rick spoke about in his previous -- in his prepared comments, which we have talked about for a number of quarters now, at least since I have been here, is that during the peak volume times we seem to do better. May, for the most part, with the exception of the one holiday weekend, is a nonpeak time and during the nonpeak times we see these dips. And the second quarter, for the most part, until you really get into the end of July, there's a lot of nonpeak volume in there. And so, I think, that's what we are seeing. The consumers, from our perspective, continue to come out during the peak times. They spend a lot during those peak times, but then they go away. We are seeing some of that now.

Are you seeing the tide lower again? Is it happening everywhere or do you have some disproportionate Texas impact there?

No, I think everything has come down proportionally. The west continues to be our most difficult part of the country. We have almost 60% of our sales that comes from the west. But everything has abated a bit in this environment. But the proportion of the business of how much is coming from the four different geographic locations has not changed meaningfully, even in the May timeframe.

Okay. And then on the guidance, for the earnings guidance for the quarter on those comps. Are you anticipating that you are going to have to take a higher mark down cadence than what you saw in the first quarter? That seems to be implicit in some of the numbers you gave out? It wouldn't seem that way given your inventories, but you really can't get to the earnings guidance unless you have higher mark downs I don't think.

You know, I think, Sharon, what -- I will let Trevor address this too. My concern is relative to the seasonal categories and, as you know, in this recession so far and going back for probably a year and a half, no matter what season it is, whether it is the winter season, spring season, hasn't mattered. Seasonals have tended to perform -- tend to be pretty difficult relative to the rest of the business. We are seeing those same trends here relative to our spring seasonal categories.

Now, I can tell you that we planned things like our short business -- we anticipated that based on previous trends and we planned our short business to be down significantly and, unfortunately at this point, the short business is down more than even what we planned. And I think we need some conservatism in our numbers relative to the fact that some of our competitors are, I think, must be in a worse position than we are and they may not have anticipated this seasonal business and have much steeper mark downs currently running. In fact, it looks to me like items marked below cost than we are at this point. I continue to be very concerned about all of those seasonal categories across all departments of the business.

Hi, Sharon, this is Trevor, just more specific on your assumption. As Rick has said in his prepared comments, our product margins did do a lot better in the first quarter relative to the trend we saw in the fourth quarter. You will remember on the March earnings call we talked about product margins running down over 300 basis points Q4 '08 versus Q4 '07. We were very fortunate in the first quarter through some good management by the team here, specific trends at the appropriate product, I think relative mark downs to the same period in the first quarter of last year. Our product margins were only down 20 basis points in the first quarter. So, pretty quick response recovery on the product margins in the first quarter relative to how the business trended in the fourth quarter.

As we look forward to the second quarter. you are correct. We had given ourselves a little more room on the product margin. We are assuming slightly more than 100 basis points degradation in product margins. And just so you guys can have it for your models, the overall product margins we're planning down depending on where we come in the guidance, somewhere between -- the gross margins coming in about 650 to slightly over 700 basis points. So if our gross -- our product margins are only going to go down slightly over 100 basis points, you can tell the rest of the gross margin is due to the roughly 50 new stores we will have, plus the deleveraging on a low 20, mid 20 comp, and then we're also going to deleverage in the SG&A of somewhere around 700 to 750, maybe 800 basis points on the SG&A line. So the vast majority of the loss in the productivity at the operating margin line is due to the fact that we are deleveraging on a comp that none of us were pleased with.

Okay. Best of luck.

Thanks.

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

Boy, Trevor, you answered a lot of my questions on that last one. As I try do the math as you've given those numbers, it looks like the SG&A's you would expect to all be down about 10% or so like it was in the first quarter? Is that accurate? And can we see that percentage drift lower as we move through the year, as your year-over-year store comparisons start to ease?

Yeah, I think our thinking, Mitch, is that the SG&A is going to grow on a constant total dollar basis, some portion of 8% to 11%, but we'll have close to let's say 14% increase in square footage by the end of the year. I'm sorry, by end of the second quarter. So our SG&A will continue to grow at a lower rate than our square footage growth, but we will have a growth in our SG&A of some portion of 8% to 11% as we look to the second quarter.

All right. That's helpful. Maybe just to drill down a little bit on your Q2 comp outlook. Can you maybe talk about what your expectations are by category again? It sounded like in the first quarter footwear was up or at least that was your best category. Apparel was fairly weak. Are you expecting -- is your comp guidance assume -- I know, Rick, you made the comment that everything is expected to be weaker than what was previously expected. But would you expect footwear to be trending positively in the second quarter or do you expect that to be negative, but still the best performing category?

Hey, Mitch, this is Trevor. Quick history. We did comp double digit positive comps in footwear last year in the second quarter. So we are up against some pretty tough comps in footwear. Our -- as I said in our prepared comments and really what we have seen for most of the last year, is that our apparel continues to be the weakest department for us. And even within apparel, the juniors business continues to be the most difficult even within the apparel. So I think our assumptions are that everything has weakened a bit and that is what has caused us to believe what was our comp of a negative 15% in the first quarter will be something in the low 20s to mid-20s in the fourth quarter. I'm sorry, in the second quarter. But there's no meaningful deviation, I believe, in any one of the major departments as we see where we are today, as well as we look out for the remainder of this quarter.

What about your Q2 comp outlook by geography? You have broken out stores west of Texas versus the balance of the chain on your monthly calls. Is the expectation those stores west of Texas will continue to underperform the rest of the business?

I think that's right, Mitch. If you think about our business, in California, Arizona, Nevada and Florida -- which is obviously not in the west -- but those were the markets that took a big step down starting in September '07 and those markets have continued to be negative for us, you know, going on almost a year and a half now. And then in September of last year, we saw a big step down when all the financial crisis hit in the rest of the west, the Pacific Northwest and the rockies. Now we are running down more in the Pacific Northwest -- it is probably our toughest region followed by the rockies and some of the other western states -- but they continue to be the biggest impact on our comps because it is the most material piece of our sales at 60% of our sales. And unfortunately, yes, they do continue to run down. As you know, the unemployment rate for a lot of the states in the west is over 10% now and the housing issues are still there. So with our west coast roots, it is still impactful.

Okay. Last question, Trevor. You made the comment on the last earnings call that you guys would expect the current comp trend to continue through August, which I guess the the comp trend at that point was negative mid to high teens. Obviously expect that to be worse now in Q2. Do you expect that to kind of revert back to a -- the similar of Q1 level through August? Or do you expect that to now continue past August? I don't know if I'm asking the right way but previously you were expecting negative mid to high teens through August. Do you now expect negative mid to high teens beyond August or how should we be thinking about that?

Yeah. Our current expectation is that our third quarter comps will do better than our second quarter comps and we outlined that we would see them hopefully around the -- what we did in the first quarter. I do want to emphasize this is a very volatile period. We are not through this consumer recession. Certainly consumer discretionary spending is tough and consumers were focused on really low value price point and that is not necessarily plays to our strength.

I think the things that will work in our benefit as we get into the third quarter, as we outlined on the year-end earnings call, we have made some changes on what we are doing with our product assortments. We are focusing in on making sure that the customers see the value that we have to offer. That doesn't mean price alone, but that there will be a value message to the consumer. We mentioned again on the earnings call, just to reiterate again on the year-end earnings call, that we plan on having a better IMU and that will give us more opportunity to be flexible as we get into those periods of time. And to be frank, I think last year the consumer panicked, as we all did in September, and it does appear to us that there's less of that panic in the air today.

Okay.

So that will not be as tough -- and the peak, it will be a peak, obviously, with back-to-school. We have historically done better in the peaks and we have no reason to believe we won't do that again in the back-to-school period this year.

Okay. All right. That's helpful. Appreciate it.

Thank you, Mitch.

Your next question comes from the line of Steph Wissink with Piper Jaffray. Please proceed.

Hi guys. Thanks. Three quick questions. First back to Mitch's question on footwear, I want to make sure that I am clear. Has footwear turned negative into May on the difficult comparison -- I think you said it was up double digits last year -- or has there been more distinct change in the performance of that category that is signaling something different?

Again you have to parse that question a bit, Steph, into seasonal categories which have been very difficult and, as you might guess, become a bigger part of the mix as we move into the summer months. So you have to parse it into what's going on with footwear. But the seasonal sandal category is performing -- is definitely performing tougher than than necessarily our men's footwear business.

So your core sneaker business is still trending positive?

I believe that's the case, yes.

Okay. And then secondly, Trevor, I just want to go back to your last comment on your intent to increase IMU. I think you said more on a value priced approach. Are you getting support from your vendors in that initiative or are there specific categories, maybe at a private label basis, that we will see you expand in the store?

The answer is both. We are working with our vendors and, again in terms of structuring value by price point, as well as our private label.

Okay. And then the last one. Once you open your 36 stores this year, Trevor, can you give us the split between west of Texas and I guess east of Texas? How that will break out once those stores are open? And then, Rick, any store opening plans in the 2010, what level are you committed that the point? Thanks, guys.

This is Trevor. I will take the first one. So of the 36 stores 7 or 19% of those will be in the west; 6 or 17% will be in the south. We have 10, or 28%, will be in the Midwest. And we have got 13 or 36% in the northeast.

And in regard to 2010, Stephanie, we have -- to say what we said in our March call, which is we have a handful of commitments for 2010. And I don't see us ticking up the growth again until we see the economy start to tick up. So we are going to be conservative.

Okay. Thanks, guys. Best of luck.

(Operator Instructions) Your next question comes from the line of Jeff Van Sinderen with B Riley and Companies. Please proceed.

I was wondering if you could talk a little more about how you are planning your back-to-school business differently this this year versus last year? I know you touched on it a little bit. In terms of the assortment, inventory, price points, concentration changes, promotional cadence, things of that nature?

Jeff, we would have to take that into a number of different pieces. So, I am not going get too specific because it gets into some of our competitive strategy for the back-to-school cycle. So we are approaching -- and in our business, being a branded business, we are approaching it based upon how each brand is performing. So different brands will have different strategies with. And as Trevor said just a few moments ago, we expect that, at our multi-tiered price structure, we are going to try to engineer value relative to the price structure, working with our brand as well as with our private label product. So at this point we aren't anticipating a significant difference in the promotional cadence. That will depend upon the market and our competitive -- what our competitors do. But we have given ourselves the room to maneuver is, I guess, the way I'd say that. And overall we planned our inventory pretty conservatively.

Okay. So, but should I take away from that you probably have a little bit higher concentration of kind of the opening price point or lower price point items this year?

I think it would be safe to assume that the mix -- we are adjusting the mix a little bit in that direction.

Okay. And then can you just touch on new store performance? Any changes happening there out of the ordinary?

This is Trevor. So the class of '07 has now, you know, has fully anniversaried. Those stores are doing just about a million dollars in their first year of operation. We have only got slightly over 20 of the 58 stores that have opened last year that have anniversaried, they're doing closer to the $850,000 to $8 -- in the $900,000 range. But we have a lot of that class still to mature. As you would imagine, when the economy took a step down starting in September of last year, we have seen that performance, not only in comping stores, but in our new stores. So yes, I think that our new stores first year sales have come in lower than the previous year, but that is to be expected because of the fact that the overall economy, again, took a big step down in the last part of last fiscal year.

Okay. My last question is in terms of the seasonal business being so weak. What are you all thinking is really behind that? Do you think it is just more discretionary or how are you looking at that?

Again, Jeff, we had planned it. We have learned our lessons in the seasonal category. We had planned it down, relatively speaking, but it is, again, performing even worse than what we planned. Again, I think there's some competitive pressure there. But we planned it down because our experience has been that, I think, those are the categories that are by nature more discretionary. If you have a pair of black board shorts from last year you can certainly wear those board shorts this is year. I think we are seeing those kinds of purchases delayed and pushed out.

Okay. Got it. Thanks very much. Good luck this quarter.

Thank you.

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

Yes. Hi. Relative to instituting more of a value strategy for back-to-school, how will you get the word out so your customer knows about the better values?

You know, again we are not going to radically shift our multi-tiered price strategy, Linda. I don't want you mislead that. It is more of a mix shift of product, I would say. And so we are going to do, traditionally, what we have always done which will communicate with our customers via our e-mail campaigns as well as through our signage campaign and our in-store sales pitches that is we'll coordinate through our sales teams.

Okay. And then with regards to the better IMU opportunity, you mentioned, that starts in back-to-school increases into holiday, are you also seeing a continuation of IMU opportunity as you look out further to next year?

I think if you look at Q1, one of the main reasons that we did better in Q1 and then our product margins were only down 20 basis points was a focus on IMU with the merchandising team and how that gets executed at the floor. So yes, I think we are very focused on that. We do -- are seeing some excess capacity in the Asian markets and so, yes, we are seeing some improvement on the costing side of things and we are focused on -- when we say value, we don't mean price. We are talking about what the consumer tells us they want. And so as we are designing our products and our merchandising floor sets, we are thinking about what those are.

So last year for example, we, like everybody I think, was a bit surprised at the quickness at which the market deteriorated. So we were in a position where we had a lot of promotions that came up later in the process and were not planned as far ahead as we would have liked. We had to be reactive to say it bluntly. This year we have designed strategies that is we think are executable that will purvey a message to the consumer that will be more clear that there is value to be had there. And I think that the one big caveat that Rick called out in the March earnings call and again in this earnings call, the one difficulty about that is it is hard to participate when we have other competitors who are selling things below cost and acting irrational. So that is a piece of difficulties that is always hard to compensate for but we think with the time and benefit and now the operating under of this environment, again we think started in last September, we have got a plan that will be easier for the consumer to understand and we will have the price points correct to start with.

And then just one final question. Do you think -- would you ever consider exiting some of the brands that your competitors are discounting heavily in?

That's a function of the marketplace. The market will tell us what we need to do in those regards and sales follow our buy. So if sales are bad, our buy declines.

Great. Thank you. Good luck.

Your next question comes from the line of Betty Chen with Wedbush and Morgan Securities. Please proceed.

This is Ellen calling on behalf of Betty. I had a question about new stores. Are the new stores concentrated in the better performing regions?

So the class of '08, the stores we opened last year, 22 of those were in the west, again almost 40% of those were in the west, 12 or 21% of those were in south, 8 or 14% were in the Midwest and 16 in the northeast. So that, if you go back to the numbers I quoted earlier on the call, we do have a higher proportion of our new stores that are in the markets that are performing better for us. So our highest percentage of new stores, as I said earlier, 13 or 40% of stores in the northeast -- and the northeast is, I think, our best performing region of the country. And so yes, as you look at the class of '09, we have a higher proportion of those stores in the markets that are performing relatively better for us.

Okay. And would they actually be applied to the old stores then to maybe pick up and revive some sales for the old stores as far as what you are doing with these better performing regions?

I'm sorry. I don't understand the question.

Are you -- will you be doing anything differently in the stores that can be applied to the old store?

The issue is not the stores. The issue is the market.

Okay. As far as back-to-school goes, would you be able to provide more color as far as the hard goods categories? And how much more important it could be for back-to-school?

Hard goods is probably the least important during back-to-school. Because during back-to-school what kids are buying are clothes and shoes and hoodies and jackets for going back to school. I think our hard goods penetration as a percentage of our total sales is its least amount during the back-to-school period because, again as you would imagine, kids are more focused on what they're going to wear when they go back-to-school. There's no major changes.

The snow does not become material for us until the end of September and into October. And the skate-goods is pretty constant throughout the year. It doesn't change a lot as a percentage of overall sales. So there will be no major differentiation in the hard goods in the third quarter.

Okay. And you may have already answered this, but is the comp guidance based on the current trends in May?

Yes.

Okay.

(Operator Instructions). Your last question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed.

Thank you. We had a group of questions. First of all, would you please remind us what the demographic is of your customer? And I am not actually referring to the teen, but income categories that you view the -- where the money actually comes from? And secondarily, at what point do you feel as though your inventory per square foot has declined to the point that it actually has a negative impact on sales?

Okay. In terms of the income demographic, Bill, I think, again, our strategy has always been to appeal to all levels of socioeconomic demographics. I mean, we are a lifestyle retailer. That's the reason that we have historically performed well in A, B and C malls. So I think we have a broad appeal to the income demographics. And I don't have a lot of detailed research that I could tell you specifically how each is income demographic is performing. I just don't have access to that data.

And then the second part of your question --

-- Was on the inventory per square foot. I think -- we watch many metrics to evaluate our inventory per square foot. Certainly, we look at it relative to last year and how we do but we also keep a tight eye on what our sell-through rates are. So when we evaluate where we are in this economic cycle, we evaluate what our consumers are telling us on a daily, on a category basis and even down to a SKU basis in certain levels of detail. We do think we have made prudent decisions. And what is important to us, and we have outlined this for a long time, but what is important to us is the quality of the business and the connectedness to the consumer and that the message be clear.

When we believe retailers have only one message which is price -- especially when you are running a branded shop -- that is a failing model that will not work over the long term. So we are very focused on the fact we want to have prices that are appealing to consumers. We do not want to be known as a shop that comes out and -- let's say board shorts, for example, because that's the season we're in, that originally has board shorts at $45 to $50, and then a week or two later sells them for $20. We think that's a losing strategy. So we are managing our inventory and are open to buy processes so that we don't have that level of radical shift. So we train our consumers to come back only when we have good deals. So we are managing our business differently than what you see out in the marketplace today.

That is helpful. One final question. Given the weakness in the comp store growth, would you please provide an update on the store manager retention, given that the incentives have historically been based off of store growth?

We have not seen a significant up-tick and, if anything, it has improved a little bit this year relative to where it was in fiscal '08.

And are you feeling that that is a function of the fact that those store managers, frankly, have fewer options as to where they could go so they're just happy to keep their job even though they're making less money?

No, no. I think it is a function of we invest heavily in our people. We, for example, just had one of our three national events of the year where we bring everybody up to Winthrop, Washington and spend a week training them on life skills, and selling skills, and leadership skills. We have a lot of touch with our district managers to our individual store managers and we are an appealing retailer to work for people into this lifestyle as well. I think it is a function of the strength of the culture and the amount of investment that we make in the strength of the culture. And we have not cut back on our training in this difficult environment because we think it is important to what we do and it makes us very different.

That's helpful. Thank you both.

With no further questions in the queue, I would like to turn the call back over to Mr. Rick Brooks, CEO of Zumiez, for closing remarks. You may proceed.

Again, thank you everybody. We always appreciate you taking the time and your interest in what we are doing here at Zumiez. Trevor and I look forward to speaking to you again when we report second quarter results in August. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Great day, everyone.