Zumiez Inc (ZUMZ) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc., second quarter fiscal 2009 earnings call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). 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 re-broadcast of this call is permitted without the Company's express written permission. I would now like to introduce your host for today's conference, Rick Brooks, CEO of Zumiez. Please proceed.

Thank you. Good afternoon and thanks for joining us to discuss Zumiez's second quarter fiscal 2009 results. Joining me today is Trevor Lang, our Chief Financial Officer. Following my opening remarks, Trevor will review our financial and operating highlights. Today, we reported a second quarter loss per share of $0.10, which includes a charge of $0.03 a share associated with the previously disclosed lawsuit settlement. Our results were better than our previous expectations of a loss between $0.17 to $0.14. Comparable store sales for the quarter were down 18.8%, which was also better than our forecast for a comp decline in the low to mid-20% range. We were encouraged that each month during the second quarter our same store sales improved a bit. While we are not satisfied with comp declines or an operating loss, our team is doing a good job executing in what continues to be a very challenging environment, and we are pleased to have exceeded our internal projections.

At the start of the year, I outlined several operational and strategic priorities that would serve as the framework for how we would manage the business in 2009. We continue to believe that if we stay true to what makes the Zumiez experience special and focus on successfully executing the parts of the business that we can control, we will emerge from this economic slow-down with our position as the premier action sports lifestyle retailer intact, and a strong balance sheet to support and fund our future growth initiatives. Operationally, we have cut costs where it makes sense. But we are continuing to invest where we believe we'll have the highest returns and most opportunity for future profitable growth.

As a result of our continued efforts, in the second quarter inventory declined 3.5% in total and was down 16% on a square-foot basis when compared to the second quarter of last year. This well-managed inventory, along with delivering trend and value [right] assortments, led to flat product margins in the second quarter during our very price sensitive and competitive sales environment. SG&A increased at about half the rate of square footage growth again in the second quarter, excluding the legal charge. Controlled inventories and lower capital expenditures led to our current cash and cash equivalents increasing 23% over the second quarter of last year to $82.1 million, 31% of our total assets.

Strategically, we focused on offering our customers the best possible merchandise and service, including a full presentation of the action sports lifestyle with a broad selection of hard-to-find brands in every department. This has always been the hallmark of Zumiez, and our team continues to excel by delivering the unique brands and styles our customers are looking for. While we have always had a multi-tiered price structure, we have worked diligently with our vendors for our private label to offer products that are trend-right with compelling price points that are reflective of the current economic situation while maintaining the integrity of our brands. We remain committed to providing every visitor with unique Zumiez store experience.

Our sales, merchandising and marketing teams have focused on delivering messages we believe make us distinctive in the mall. This, combined with some of the best training in specialty retail, is the best platform for promoting our concept and is critical to developing both new and repeat customers for the long term. And, we launched a new website with improved functionality, and believe it will allow us to continue to grow this important channel. As I always do, I've spent a good deal of time visiting stores in the different areas of the country since the beginning of the year. And I can tell you that our store managers and sales teams are energized and motivated as we head into our peak back-to-school selling season. Our entire organization is focused on successfully navigating through the current economic downturn and committed to achieving our long-term objectives. With that, I'll turn the call to Trevor.

Thanks, Rick, and good afternoon everyone. We are not content with our second quarter and year-to-date financial results. However, we are pleased with our ability to deliver value to our consumers in an environment of constrained discretionary spending. We have reacted well to the recession, and in doing so, our performance has been better than we had planned for in the first half of this year. We have managed our inventory, cost structure and capital spending in a way that has allowed us to continue to remain relevant to our customers, invest for the future and continue to attract, retain and motivate retail talent. We believe our business model has become more differentiated in the marketplace during this cycle. This will be good for our business as we come out of this cycle.

For the second quarter, net sales totaled $85.2 million, a decrease of 7.7%, compared to $92.3 million in last year's second quarter. The decrease in net sales was driven by a comp store sales decline of 18.8%, somewhat offset by the opening of 45 new stores since the end of the second quarter of last year. Our same-store sales in the western half of the United States and the South, which represent about 55% and 12% of our comp store sales respectively, saw declines of over 20%, while our stores in the Midwest and the Northeast comped down about 15%. Our web comped up about 20% for the quarter. Transactions accounted for almost all of the same-store sales decline.

For the quarter we saw a nice lift in our units per transaction, which we believe shows the strength of our sales team. However, this increase in UPTs was offset in a decline in average unit retail. All of our departments posted negative same-store sales in the quarter. Gross profits for this quarter increased $5.5 or 18.1% to $24.6 million, or 28.9% of net sales compared to a gross profit of $30.1 million, or 32.6% of net sales in the second quarter of last year. The decrease in gross profit margin of 370 basis points was driven primarily by deleveraging store occupancy expense on a negative comp. As Rick mentioned, our product gross margins were about flat for the quarter due to well-managed inventory by the team.

Moving to expenses, in total, SG&A expenses increased $3.7 million or 14%, to $29.9 million, compared to $26.2 million in last year's second quarter, and increases of percentage of net sales to 35% from 28.4% of net sales in the second quarter of last year. As Rick mentioned, included in SG&A is a $1.3 million charge associated with the settlement of a previously announced lawsuit. Excluding this charge, our SG&A increased about 8%, which is half the growth in our square footage during the quarter. As a reminder, about 80% of our SG&A is incurred at the store level, and grows as our square footage grows. We have continued to find ways to lower our cost structure relative to the added square footage. The increase in SG&A as a percentage of sales was driven by the deleveraging on a negative comp and increased store expenses associated with 45 new stores opened since the second quarter of last year.

We had an operating loss of $5.2 million in the second quarter of Fiscal 2009, compared to an operating profit of $3.9 million from last year's second quarter, a decrease of $9.1 million. We recorded a tax benefit of $1.8 million during the second quarter compared to a tax [revision] of $1.7 million in the second quarter of 2008. As we mentioned on the last call, our tax rate is expected to be a bit unique this year because we reported a loss for the first six months of this year. Our net loss for the second quarter was $3.1 million or $0.10 per diluted share compared to net income of $2.7 million or $0.09 per diluted share in last year's second quarter.

Turning to our first half 2009 financial results. For the first six months ended August 1, 2009, the Company reported net sales of $162 million, a decrease of 5.3% versus the $171 million in sales in the first six months of 2008. Comp store sales for the first six months of 2009 decreased 17.2% compared to a decrease of 1.3% in the first six months of Fiscal 2008. Gross profit decreased $8.1 million or 14.9%, $46.5 million for the first six months ended August 1, 2009, from $54.7 million last year and decreased as a percentage of net sales to 28.7% from 32%. Again, the decrease in gross profit margin was driven by an increase in store occupancy cost as a percent of sales due to the negative comp of 17.2% and the 45 new stores added since the second quarter of last year.

SG&A expenses increased $6.1 million, or 12.4%, to $55.2 million for the six months ended August 1, 2009, compared to $49.1 million for the same period last year, and increased as a percentage of net sales to 34% from 28.7% of net sales. The increase in SG&A as a percent of sales is due to store operating cost deleveraging on a negative 17.2% comp and [the legal] charge already discussed. Operating loss was $8.7 million, compared to an operating profit for the first six months of Fiscal 2008 of $5.5 million. Our net loss was $4.7 million or $0.16 per diluted share, compared to net income of $4.1million or $0.14 per diluted share in the first six months of 2008.

Turning to key balance sheet highlights, at August 1, 2009, cash and current marketable securities increased $15.5 million or 23.2%, to $82.1 million from $66.6 million at August 2, 2008. Inventory was $69.6 million versus $72.1 million a year ago, representing a 3.5% decrease from the second quarter of Fiscal 2008. At the end of the quarter, inventory decreased by about 16% on a per-square-foot basis from the same time last year. We believe we have an appropriate level of inventory for future sale and are comfortable with our seasonal stock. Also at August 1, 2009, the Company had no debt, including no outstanding balances on its revolving credit facility.

Now let me turn to our guidance. Although we are not giving specific full-year guidance, we want to share with you our thinking about the remainder of Fiscal 2009. We are planning our sales, including our same-store sales, down for Fiscal 2009. Through the second quarter, we've opened 26 stores and still plan to open 36 stores for the full year. We believe our quarterly same-store sales losses will get increasingly better in each of the third and fourth quarters relative to our second quarter performance. We believe we've made good progress in modifying our product assortment, mix and value equation to reflect the current environment and pressure on perceived price and value by the consumer.

Our goal has always been and will continue to have, cool, fresh new products at the right price when the customer comes in, and operate with fewer markdowns relative to last year. This has helped us to maintain flat product margins for the first half of the year, and we believe we have the ability to continue that trend for the remainder of Fiscal 2009. We continue to make strides in lowering our cost structure and believe we can grow our SG&A at less half the growth in square footage for the remainder of the year. We expect our depreciation and amortization for Fiscal 2009 to be approximately $22 million versus $19.5 million in Fiscal 2008.

We are planning our inventory per-square-foot declines at the end of the third and fourth quarters to be in line with our projected same-store sales declines. We see no need to borrow on our new credit facility, and expect our year-end cash levels to be above last year. We are planning positive cash flow from operations for the full year, albeit lower than Fiscal 2008. Based on recent sales trends, we currently expect our Fiscal 2009 third quarter sales to be in the range of $104 million to $107 million. This assumes a comparable store sales decline in the low to mid-teen range.

Based on these assumptions, we expect to report earnings-per-diluted share of approximately $0.05 to $0.07, and our operating margins will decline to about 1.5% to 3% primarily due to deleveraging our costs on negative sales. As a reminder, Labor Day moved out a week in the retail fiscal calendar, from the first week in September of Fiscal 2008 to the second week in September this year. This has caused a number of states that we do business in to move their back-to-school starting dates, and therefore we anticipate our August results will be negatively impacted and our September results will be positively impacted, as we believe consumers will move their spending back to coincide with the later holiday and later back-to-school start dates. Operator, I think we're now going to turn the call over to questions.

Thank you. (Operator Instructions). Your first question comes from the line of Mitch Kummetz of Robert Baird. Please proceed.

Yes, thanks, and congratulations on the quarter. Question on your Q3 guidance. You're now expecting your -- both your comp and your operating margin to be a little bit better than what you were kind of previously indicating on your Q1 call. Is that largely just based on the trend over the course of Q2 just coming in better than what you were initially anticipating for the quarter?

Yes, I think that's right, Mitch. Quick reminder, as we came out of the fourth quarter last year, our product margins were down over 310 basis points. We had expected to get some of that back in the first half of the year and we've actually done a lot better than that, obviously. As Rick and I both stated, our product margins were flat through the first half of this year. Now that we've seen some trends and are planning for the back-to-school and the holiday periods, we do believe we have the ability to continue that flat product margin. And frankly, we have more opportunity in the back half of the year because our margins were down more in the back half of 2008 relative to the first half of 2008. I think in regards to comp, I think that's right, too. We explained on the year-end earnings call and again on the first quarter earnings call, that we were very focused on making sure that our consumers understood the value we had, and value meaning more than just price -- customer service, the products you can put together, unique brands, eclectic shoes, all those things that make Zumiez special. And I think we've done a good job with the merchandising efforts, the sales teams efforts and the marketing efforts to make a very poignant picture to our customers. And we have the feeling that that is going to do better for us as we move into the back half of the year.

And then on Q4, I guess I was expecting to be a little bit more color on the quarter. I know on the Q2 call you kind of gave -- of excuse me, your Q1 call you gave some preliminary kind of comp and margin parameters on Q3. And as I think about Q4, you guys made the comments that you expect the comp trend to improve from Q3 over Q2 and then continue into the fourth quarter. And then also on the -- on the margins, flat product margins over the balance of the year. I mean, how much improvement in the comp would you expect at this point to go from Q3 to Q4? And I know you're up against a pretty easy gross margin comparison in the fourth quarter, particularly on the product margin side. I guess you're not anticipating anything better than flat product margins by Q4? I thought maybe you would be thinking that you could recover some of that lost product margin from a year ago.

Yes, Mitch, this is Trevor. These next few weeks are just so important for us. The first two weeks of August are not nearly as meaningful as the last two weeks of August, which is the week we're in this week and next week -- or this week and the beginning of September. So our thinking is let's see how August and September play out. And we still are in an unprecedented time and think the prudent thing to do is just to wait and see how the back-to-school period comes out. And depending on how those periods come out. I think that will give us a better feeling as to how we should think about the fourth quarter. But we think just at this point that we're not sure we have enough visibility to give a lot more color or comfort around what we're expecting for the fourth quarter.

And then one last question. Within the next few months you'll be moving into your snow business. I know that's a -- I want to say that is high teens, 20% part of your mix by the fourth quarter. How are you thinking about the snow business at this point? I think last year you were trying to introduce some more -- or move towards more introductory pricing on some of your product. What are you doing from a merchandise standpoint? Or how will you approach the snow from a merchandise standpoint this year versus maybe prior years? And do you still think there might be resistance on the part of the consumer to that kind of level of price point?

Mitch, we are -- we are going to assume -- all our seasonal businesses, as you know for the last couple of years, whether it has been winter or spring, have been tough businesses. So we're going to do like we did this past spring. We're going to plan our snow business conservatively. And we are, as part of that, in terms of just the overall plan in terms of sales and inventory levels, we're also saying how can we, like we have going into the back-to-school period, how can we deliver greater value to the consumer again? And Trevor just described it for us there from the perspective of not just price, but unique brands, the right positioning of the product, and value in terms of services we provide. So I think that the overriding message is we think we planned it pretty carefully. We think we're going to continue to do the things we did last year in terms of breaking it down between those introductory price points and the higher-end technology-driven packages. You're going to see us continue those kinds of things. Of course, we want to have our great sales people well trained to sell and match the right -- the right rider to the right equipment. So that's -- we're being conservative, and hopefully, again, going to be delivering good value to our consumers.

All right.

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

Good afternoon. I guess you were making some changes for the back-to-school product assortment, and you had alluded to them earlier this year. Could you walk us through kind of big picture what you have done differently for back-to-school? And I know it is early, but maybe what the initial read is from the customer base is on those changes?

Again, just right off the top, Sharon, as Trevor commented, we're not going to give any sense of early read because we've only got the first couple of weeks behind us at this point. They are not the big weeks. We have two, three, four weeks to go in this cycle. The shift of Labor Day makes it very less certain in terms of our ability to predict where we're at, at this point. So we're not going to comment on trend-wise where we're at. I will be happy to review some of the things we said we we're going do relative to back-to-school in terms of doing them different. I will tell you, I think we've done that, and now is the time to see if the consumer is going to respond to them. We said that we were going to bring in key categories of product, AUR averaging of retail is down to [meet a] value consumer. At the same time, we're going to increase IMUs in terms of providing us more margin room to maneuver. We said that we were going to look at where we could use private labels strategically in our mix, in terms of, again, that value proposition. We said that we're going to work collaboratively with our brands at presenting both the value as well as style and fashion at the right price points to consumer. And I can tell you, Sharon, I think we've done a good job on all those fronts. Now we just have to wait and see how the consumer plays out here over the next few weeks.

Is the game plan -- I mean I know it's still early, I guess, to think about the holidays, but when you think about AUR and IMU and so on, can you talk about how you are thinking about that for the holidays, and maybe give us some perspective on what your [open-to-buy] is at this point for the holidays?

Sure, again -- kind of, Sharon, I think the way we just described our plan for the holidays, we just commented -- I just commented on regarding the snow business. We're going to try to extend that through all those key holiday categories of the business -- the outerwear, the gift-giving categories, and try to provide, again, value in all those ways, again, as Trevor described, at the top of the call. We are constantly, as you might imagine -- we still have room to adjust our holiday numbers and so we still have room out there from an open-to-buy perspective. And we are doing that as we see results almost on a daily basis at this point. As we move to through this back-to-school window, we can [inform] some decisions that we have room to make yet for holiday. We are doing that on, like I say, almost a daily basis. So we still have a lot of room to maneuver. Sharon, I would tell you, and in a lot of categories for holiday. And with the one exception, of course to that being the snow, [Hardgoods] categories, and the snow outerwear -- those areas have been fully committed for a while now.

Okay. Is the IMU opportunity then in the October quarter, just to be clear, is it materially different than what you saw in the July quarter?

You mean in the third quarter versus the second quarter?

Exactly.

Yes, it is, because of the -- as a function of both categories it's going to sell differently. We have less of a seasonal influence on our business from the spring categories. So we have more of a fall influence with the fall categories. So, yes, it is different. The volume level [is different] because of the peak season.

Okay. And then kind of a last question, just to be crystal clear on this. I'm assuming, given some of your commentary, that you expect August to be the weakest month of the quarter, is that a fair comment?

I would say between August and September we would expect it to be the weakest. I think as you get into October -- October is a pretty low-volume period for us. And what we've seen in this cycle has been even more concentrated sales during the peak volume times. And so I think -- fortunately for us October's low volume is a non-peak time. We do have -- I think that was our lowest comp on the third quarter last year. In fact, I know it was. So we do have more opportunity when we get to October. But the reason we're going to be a bit cautious about that is the fact that we've seen customers retreat after these peak volume times and that might be something that happens again in October.

And Sharon, I want to encourage everyone to think about the back-to-school cycle as the only really meaningful way [to be evaluated] is going to be because of the shift of Labor Day, is to think about August and September as a unit as opposed to individual months.

Okay. Thanks.

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

Thanks, and thanks for taking my question. To visit your store, the inventory reduction is visible. Is there any way to quantify the impact that less inventory in the stores is having on the comps?

I think, Jim, a few things -- I'm sure Rick will have a thought on this, too, is that it has allowed us to present our brands better. It has allowed us to merchandise our stores more effectively. I think it's allowed us to train our sales team in things that we haven't spent as much time with, which I think has been somewhat exciting and a very fruitful exercise for our store team. It's also allowed us to do broader brand presentations. Some of our brands have partnered with us in showing a whole collection of a brand, which is something that we didn't have the physical space to do in the past. So it has allowed us to try and do a lot of new things that we haven't done in the past. And so I think we view the job that the merchandising team has done very good for I would say almost four or five years now, where we've had a -- been in a trend of being able to have our inventories be at or around the same-store sales growth or decline. So we obviously see it as a good thing, and believe that we've done the best job possible at putting the right amount of inventory based on the demand we see.

And I would add to that then, Jim, also the idea that obviously, we're going to try to flow receipts closer to the time of the needed sales. So I think you will see that as a function, too, of better timing, better matching receipts with the need for sales.

Paraphrasing it, it seems like you don't feel like you're missing much sales because of it and you have made operational improvements of [streamlines] and working capital needs of the business on a go-forward basis, I guess?

I think that's a fair -- that has certainly been our objective.

Okay. Good. That sounds healthy. And then, Trevor, we begin to see sharp reductions in SG&A per store in the fourth quarter of last year. You made a comment, I think, you expect you can go SG&A at half the rate of square footage in the second half of the year. Does that hold true for the fourth quarter as well, or do we run up against more difficult comparisons?

No, it actually it holds true even a little bit more so for the fourth quarter than the third quarter. And we've been very focused on this ever since business got tough for us starting at the beginning of 2008, and we started comping negative, and we've continued to work with all of the teams here at the corporate office. And you guys have heard this in the past, and it's what you would want to hear from us, that we try to do as little as we can to take away labor and expenses, repairs and maintenance and things like that at the store level. We want that experience to be the best possible. But where we have embarked on cost reductions is in the home office here, and we feel like we've done a reasonable job on that, and we do believe we will continue to grow our SG&A at less than -- slightly less than half the growth in the square footage as we move into the back half of the year.

Okay. And then on that topic, are their major spending initiatives that you have delayed that are going to require some catch-up expense in future periods?

The only big one, Jim, and I say big, it's relative to our comps and when we start driving same-store sales it won't be that material. But I would say our incentive compensation has been meaningfully reduced in each of the last two years. That will be something that we're going to want to fund in the future. Other than that, we haven't meaningfully reduced our spending in areas that we think will impact long-term business. We're investing very heavily today in our website efforts. We are investing in merchandising solutions to help us better plan. We continue to invest in our information technology department which is, again, an area we think we have an opportunity to help everybody do their jobs better here. I think we've cut in areas that made sense. Our compensation structure, and as we've described in our CD&A and our proxy, is sort of pay-for-performance type thing. And since our business has been down for a year-and-a-half now, we have to take down our incentive-based compensation. So we don't feel like we've cut anything that is going to be a major need to be completely replaced, with the exception of probably incentive based compensation when we start running sales gains and earnings gains again.

That's very helpful. Good luck to you over the next couple of months here.

Thanks, Jim.

The next question comes from the line of [Steph Wissink] of Piper Jaffray. Please proceed.

Thank you. I just have one bigger picture question on transactions. I think, Trevor, you mentioned that was almost entirely the decline in [comps] due to transactions. Can you give us insight on how you're prioritizing your initiatives to improve traffic? Is it traffic and/or conversion? Thanks.

I would say that we don't spend a lot of marketing to bring our customers in. We have a very grassroots approach to marketing, our [couch] tour, industry publications, support of athletes sort of directly or indirectly to the brands and don't have a -- we believe that it would be an incorrect marketing philosophy to do broad based advertising, and we want to keep to that grassroots. We want to be known as the local [sports] shop that just happens to be in the mall. So we view marketing [tha]t has to follow that brand strategy that we've laid out. The way we are trying to increase our -- I wouldn't say conversions, but transactions, is to have the best product there and have sales people who are very knowledgeable and highly [incented] to drive sales. So I'd say we're trying to drive conversions when we get people through the stores.

And I guess I would add to that, and I really want to highlight this, Stephanie, and Trevor said this in his comments, is that we also had an AUR decline in the quarter, from again, why margins have -- product margins have held, we add an [AUR] decline around some strategy, around bringing down price points to meet the value consumers need at this point. And we made up that AUR decline off the strength of our sales teams in terms of actually selling more units per transaction, I think as Trevor commented. That is a difficult thing to do. So that is one of the other measures we're really focused on, is the quality of each individual sales transaction in our stores in terms of UPTs and DPTs, dollars per transaction. units per transaction and dollars per transaction. And I think that is, again, a significant accomplishment to be able to make up the entire decline in average unit retail through our efforts of just selling more in every transaction.

Fair enough. All right. Just my second one is on the retention of your store managers. I know you guys have a legacy of retaining excellent managers and promoting from within. With your square footage growth plans cut, have you lost any of your store managers? Are you still [incentivising] them as you have in the past? Thanks, guys.

No, we remain very, very encouraged, I think, by our -- the success of maintaining our key store managers that we have in place out there. We haven't had any significant trend line differentials there in terms of retaining store managers at this point, Stephanie, so that has not been any different I don't think in any significant way for us. In fact, I think our store teams are as good as -- managers and sales teams are as good as they have been in many years, as a matter of fact, from my perspective. Now, that being said, as Trevor commented in our pay-for-performance model, we have not changed that. Throughout our system, store managers throughout virtually every aspect of our business, people are making less. And so we, at this point in time, we have not gone back at any level of our organization and said we need to change that philosophy or that approach. We're going to stick with it. We believe that culturally it is the right thing to do for Zumiez.

[If I can] sneak in just one more. Given your history as a retailer, the last time the Labor Day shifted this late into the month of September, what was the magnitude of the shifting comp, if you can give us a sense of that?

What we've modeled -- the way we've modeled it, is we've looked at how much of the sales come in each week over that nine-week period of time. And that's kind of how we modeled that. I think our expectation would be that you would see some [portion] of a negative mid-single-digit comp on August, whatever the trend line you think for the business is, that you'd have a negative mid-single-digit comp for the month of August. And that you would have a positive high single-digit comp in September because of that shift. Now that being said, there's a lot of new dynamics. We have a lot more states open now that we didn't have the last time we saw the shift like this. But that's how the modeling for us, we're expecting it to see.

Again, those are all net changes relative to the trend line, right --?

That's right.

Great, guys. Thanks, a lot. Good luck.

Thank you.

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

Yes, hi. Relative to your 36 store openings in 2010, that seems like a nod to a more positive outlook for next year. And then related to that, how much better are rent deals versus a year ago?

Let me make sure I understand this. So we were going to do 36 stores this fiscal year. We have not commented on how many stores we're going to do in Fiscal 2010, and I think we've been at around 36 stores for at least the last two quarters. I think in regards to rent deals, it is the tale of the have and have notes. I think if you look at the A malls and B malls, there is some opportunity there, but much less so than sort of the lower-volume B and the C malls. I think there is a lot more opportunity in those malls. But the reason is, because I think there -- a lot of retailers were having trouble in those malls to begin with. So there is opportunity on rents. We are currently extracting costs out of our rents. Our rent costs, probably for the first time in a long time, have grown at a rate less than our square footage growth. And again, that's because the team has done a good job at extracting rent concessions and also -- Unfortunately, as our sales have gone down, our percentage rent has gone down as well. So I think that process moves a little slower than some of the other expenses in our P&L just because they're more contractual and long-term in nature. But we have made progress in areas tactically this year that we can affect. And we are strategically aligning ourselves with the landlords that we believe are going to be the winners in the future, and we believe we have good relationships with those. We'll continue to make sure we make good decisions as we move forward in that arena.

In terms of update to next year's store openings, when might you tell us that?

I think, Linda, that is something we will focus more on towards giving you some better direction in the third quarter call.

Great. Thanks and good luck.

(Operator Instructions). Your next question comes from the line of Eric Tracy of BB&T Capital Markets. Please proceed.

Thanks, good afternoon. And thanks for taking my questions. Maybe just a follow-up on the discussion around the AURs. Is it your sense -- is that sort of just flexing of the merchandising strategy now given the environment, or is that something that the AURs being down, more systemic in nature? And if so, is the higher UPT sustainable or should we expect some other kind of shift from a mix perspective, and thinking about increasing private label? Or how should we think about that?

Eric, again, you want to think about this in terms of our multi-tiered price structure. Again, as I think we said in the prepared comments, we've always tried to drive a multi-tiered price structure, particularly in all the major categories. So some of this is our buyers reacting to the drive, what the consumers are telling us they want, adjusting our buy [proportionately], so some of the mix shift in our business. Others are planned, where we've said these are key categories we believe we need to provide better value in, relative to the prior year. We brought down the average unit retails in -- again, we've maintained margin in doing that, or maintained or improved margin in many respects in doing that, but those are more targeted, key categories, volume categories where we think we need to protect our position in terms of market share, and while still protecting the image of our branded partners in terms of maintaining integrity about pricing strategy. Now private label, at this point again, it's been very targeted how we use private label as part of these initiatives. We are a branded retailer. We believe in the brands and we want to support the brands. Our private label mix relative to our total mix of business hasn't shifted significantly and we don't anticipate significant shifts for the rest of the year.

Okay. So not necessarily that we're moving to some new normal lower price across -- this is again just very much reflective of the environment, and any more stabilized environment to that should sort of revert?

I think it's both of it. But yes, I think that's exactly right both in terms of how we're planning the business and how we're reacting to what the customers are telling us through our multi-tiered pricing structure.

Okay. And then maybe just in terms of the categories, I don't think there is a ton of commentary that's sort of specific within. Maybe just an update there of things either sort of outperforming or underperforming relative to your expectations. Thinking about footwear in particular, how that has sort of progressed.

We don't want to get into individual category performance, Eric. But again, as Trevor said in his prepared comments, all departments comped negative. So there is not a lot to crow about in any respect there, in terms of the department performance.

Okay. Fair enough. And just lastly, any kind of changes or thoughts around sort of the new real estates strategy being geographic areas you were targeting more versus less, or anything on that front?

Well, I think as we've said in previous calls, we obviously, as we came to this year, we clearly tried to focus this year's set of stores on those areas where we're having the most success in terms of sales performance. So we did try to make all those kinds of adjustments you would expect us to make when we came into this year. And I think the same things, the same factors are being considered as you look at what the plan is for next year which again, we'll talk more about later this year.

Fair enough. Thanks, guys. Best of luck.

Thank you. Your next question comes from the line of Edward [Foruma] of Key Bank. Please proceed.

Hi. This is Char for Edward. I had a question about the product [reformat] and as you reevaluate or think about the pricing strategy of going to back-to-school, specifically looking at brand opportunities. I know you don't give too much color on that. But I guess when you look at the brand, how has that affected your buying decisions based on your pricing strategy? And secondly, when you're looking at more exclusive or smaller brands versus more widely distributed or more available brands in the mall, has that really made an impact when you're evaluating how you're going to provide better value?

I think I'll give you a couple of things, Char. This is Trevor. If you look at how the market is being segmented today, you've kind of got a lot of people trying to buy for that value price-pointed, very basic commodity item. And that exists in basically any market you want to go, any store you want to go. Somebody's got that. That is not necessarily the focal point of what we're trying to do, and -- What we're trying to make sure people have is that they see something unique and they're willing to pay for it. And we all know there's a lot less discretionary consumer spending to be had, especially in the teen category. And so what we're trying to make sure we do, is be something different in the mall, not be the same and not have the same commodity-based colored, price-pointed products right when you walk in the door, which is most of what you see when you shop specialty teen retailing. And so what we're seeing in the market and what we're hopeful will gain momentum, is that people will want that special piece or that special shoe or that special brand or silhouette. And I think that is the strategy that we've decided to stay true to and not massively change our business strategy just to try and follow this, what is hopefully, a short-term trend on complete value. I'm not sure if that answers your question exactly but that is is our merchandising strategy as we evaluate this.

And let me add to Trevor's comments, Char, that we are continuing to see the trend we've seen for a number of years now, where we're getting less concentrated in our top, for example, our top 10 brands, than we have been in previous years. So I think it supports what Trevor is saying, is that we're trying to work with our brand, provide the right products whether it be for a subset of stores, whatever is relevant for that brand, and trying to maximize results for all those brands. And we're seeing those smaller brands absorb a larger share of our overall mix of our business.

Got it. Okay. That's very helpful. And then just kind of a housekeeping question on the new store -- the 36 stores that you're planning on opening. I think before you mentioned that, I think, over 50% would be in the Midwest and Northeast where you [have] seen, I guess the most [success] in terms of performance. Is that still accurate?

Yes, there has not been a major change. We're going to do seven stores in the West, six stores in the South, 10 stores in the Midwest and 13 stores in the Northeast. And as we said in our prepared comments, the Midwest and the Northeast have been the best parts of our performance, and that's where we're opening the most stores next year -- this current year.

Okay. Great. And then just lastly, if you could just touch upon -- I guess just on the eCommerce business. You talked about how that's been doing. Have you seen any improvement there in terms of driving traffic at all, or is that completely separate? [So can] -- can you talk a little bit more strategically about that business?

We have clearly, as I think most of you know, been investing in that business. As we said in the comments, we hired a new leader there a year ago. We are still relatively young, I would say, in terms of thinking about this as a direct channel business. And so we have a -- we're in the development phase, I guess is how I would characterize it. And we have a ways to go in getting [our specifications] down of what we're doing in that business. So we're not doing anything unique or distinct. At this point we have got the new platform in place, and now it gives us a launching point for really developing that business.

Got it. Okay, great. Thank you.

Your next question comes from the line of Liz Pierce of Ross Capital Partners. Please proceed.

Thank you. Couple questions on the online or -- I guess that's [called internet] marketing, as well. Have you stepped up the frequency in terms of when you're sending your e-mails out to customers?

No. No change in frequency.

No change. And Is that something that is because you're still kind of in this early stage? It's a much more -- it doesn't seem to me it's as frequent as I get from others. I guess that's the basis of my question.

Again, we are -- remember we just got the new site up and running in early July. I think it is a function of where our priorities are with the new site. Again, as Trevor said, we had a decent performance here, 20% gain in our web business through the second quarter. We are now going to those next phases, Liz, where we're going to look at what are the next steps? What should those frequencies be? Today, we're going to maintain the same [case] as our current plan.

Okay. And then some in some of the competition, particularly kind of the [issue of independents], and I got on the call a few minutes late so I don't know if this came up at all. But have you seen any fallout in terms of the independents not being able to maintain, go out of business, that would help your market share?

I think that is a better question to be asked to the branded side of the business. They're clearly closer to that than we are. I think it is fair to say that whether it is independents or regional -- smaller, regional chains, or ourselves, everyone is suffering relative to the economic cycle. So I think everyone will struggle and the best players will survive in the process. And again, as you know, we're facing a lot of price competitive pressure out there from some of our competitors. So we think we're employing the right strategies for the long term, Liz, I guess would be what I would say about our strategies in how we're executing our business. We'll see where that goes, and I think everyone is going to be pressured through this cycle, no matter what level of the action sports industry you are.

And at this time, could you remind me when you -- when you're going to anniversary the lower AUR. You started that -- I thought you said a year ago or in 2008. But I didn't think it was that long ago.

No, it's not in terms of a strategy now. The fourth quarter, we had a lower average in retail because we simply had to mark stuff down to clear through product. That is not what we're talking about here in terms of the strategy of price and in value in key areas. So more of our strategy around the lower AURs has been effective partially in the spring, and we'll how that plays out here more so in the third quarter.

Okay. Great. Good luck to you guys. Thank you.

Thank you.

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

Hi, I'm calling on behalf of Betty. I have most of my [questions answered.] However, I wanted to know if you could provide me with some color as far as the products online. Are there any differences in what you buy on line versus the stores?

Again, we're -- we're just really getting into figuring out a lot of what we're doing there in that business. Historically, there has not been a significant difference. I would anticipate that there will be as we move forward here over the next number of quarters.

Okay. And beyond the store growth in online business, what other growth initiatives are you guys evaluating?

We are constantly looking at opportunities and where we think we can build our business, but nothing worthy of commentary at this point.

Okay. Great. Thanks.

Your final question comes from the line of Jeff [Venzendaren] of B. Riley. Please proceed.

Hi. Got on the call late so maybe I missed some of this. But in any event, I was curious to know -- I know you spoke about selling more units and kind of making up for that. And so I guess my question is, when you look through the sell-throughs, at some of the lower-price point items, some of the -- I know you're doing this kind of good, better, best. When you look at the sell-throughs of those, is that part of what is starting to help you at this point?

Again, I guess, Jeff, what we tell you is we're reacting to what the consumers are telling us we need to do. But, yes, still maintain the integrity of our brand, our branded products in terms of pricing structure and image and -- And so what we're seeing, the drop in AUR reflects the customer trading down to some of the lower-price tiers. Again, it also reflects our strategy in key categories performance to bring average unit retail down. It's a combination of those two things and then obviously, the strength of our sales people, again, to sell more units to make up for the AUR loss. That's a significant accomplishment in my opinion, and I'm very proud of the team -- our sales teams and our buyers in terms of what we have done there. Now, we have a bigger -- we have a chance to have a bigger impact to that relative to our business and what our strategies were as we head into the back-to-school cycle. So I think the jury is out on whether we will really translate into significantly improved sales. We're going to find that out over the next few weeks.

Okay. And then in terms of private label, I'm just wondering if you're seeing any break in prices there that could help you with IMU?

I think we are balancing -- generally, the answer is yes. But we are also balancing the need for speed in trying to reduce the time to market with the margin extension opportunity would be there. And in some cases, we are willing to trade off a bit of margin for a faster ability to react to the consumer environment.

Okay, great. Well I think your stores are looking sequentially better. So I wish you guys good luck this quarter.

Thanks very much.

This concludes the Q-and-A portion. I would now like to turn the call back over to Management for closing remarks. Please proceed.

Thank you everybody. As always, we truly appreciate your interest in what we're dong at Zumiez. And we are looking forward to the next few months in working through these higher-volume periods. And as we said, our teams, I think, are excited about the opportunity to get in there and see what kind of impact we can drive out through this back-to-school cycle. So again, we always appreciate your interest, and we'll look forward to talking to you in November for the third quarter call. Thank you.

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