Zumiez Inc (ZUMZ) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Incorporated third quarter fiscal 2009 earnings conference call.

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 results--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 those projected results is contained in the Company's annual report on Form 10K and other documents filed by the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements. No reporting or broadcast of this call is permitted without the Company's expressed written permission.

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

Thank you.

Good afternoon and thanks for joining us to discuss the Zumiez third quarter fiscal 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. We were encouraged that our third quarter comparable store sales,gross margin, and profitability showed marked improvement over the first half of 2009, and our own internal expectations.

While we're not satisfied with a negative 8% comp, these results were better than our original projection for a mid to low teen comp store sales decline and reflect improved customer acceptance of our product selling and marketing strategies discussed in the first half of the year. We performed much better during the peak back-to-school selling weeks. I'm encouraged by this because it means when kids are coming out to shop for major events, they're choosing to spend with us. Unfortunately, during the non-peak weeks when there is less reason for consumers to shop, our business is more difficult.

Our commitment to the action sports customer remains strong and our entire team has done a good job of adapting to the changes in the marketplace. We continue to believe that an abundance of unique brands, a full representation of the lifestyle, and great sales people matter in specialty retailing. I believe the third quarter was really the first time this year we could fully plan and execute for the distressed consumer environment that began last year. Many of the strategies we laid out to capture a larger share of our customers' back-to-school spending were successful due to time when consumers were spending less.

We continue to work very closely with our brands and vendors to develop products for all categories that reflect current trends and are appropriately priced for the current environment. This work has included building in higher initial mark-ups so that lower opening price points don't necessarily translate into lower merchandise margins. In fact, product margins were up about 60 basis points for the third quarter versus a year ago.

The same time, we are committed to support the newer brands that are hard to find elsewhere and we're having good success with several of them gaining share. This is important for two strategic reasons. First, at the larger national brands, we have the most overlap with our competition. And, second, in a season where there isn't an overriding fashion trend creating excitement, having the exclusive brands allows us to connect to our customers and is vital into driving traffic into our stores.

We're working closely with our brand partners to maintain brand position including the brand's price integrity in spite of a very promotional competitive environment. We're also committed to investing in our people. We continue to invest in talent, training, and promotions of our best people. We believe this is another aspect of our consumer experience that is special and is a competitive advantage for us.

We saw some of the fruits of this investment in the third quarter as our units per transactions increased, driving a gain in dollars per transactions in spite of a decline in average unit retail. While this economic cycle has been very difficult for us, we believe the investments we constantly make in our people will continue to differentiate us from the competition.

Finally, I want to call out some of the successes of our eCommerce team. While still a small percentage of our total sales at about 2%, we've experienced a nice uptick in sales since launching our new website earlier this year. These results are the culmination of a great deal of investments from our eCommerce, information technology, marketing, and merchandising teams. We're excited about the long-term potential of this channel and currently testing a number of strategies aimed at driving more traffic to the site and improving our multi-channel sales strategy. We plan to continue to invest in this growth channel.

Our recent results certainly give us encouragement that Zumiez remains the premier retail destination for the action sports lifestyle. That being said, we will continue to plan the business conservatively, especially in seasonal categories which have consistently been the tougher part of our business. Our team has done a tremendous job managing inventories, which were down 7% in total and down 16% on a square footage basis compared to the third quarter of last year.

We plan to manage our seasonal inventories conservatively and invest in categories that have been successful for us. We've managed the business prudently during this severe recession, which has left us in a very strong financial position to fund our future expansion.

With that, I'll turn the call over to Trevor.

Thanks, Rick, and good afternoon, everyone.

As Rick mentioned, the third quarter improved meaningfully when compared to the second quarter. Our two year stacked comps during the key back-to-school weeks were down in the low double-digits compared to being down in the low 20s in the second quarter.

We see some glimmers of hope. California, which is our biggest state by a multiple of two times, had the second best comp in the western region which consists of 13 different states. Our direct channel posted a sales increase of over 50%, which was an acceleration from the first half of the year. Our product margins improved meaningfully over the first half of the years performance. We ended the quarter with one of the cleanest inventories in recent history, and recorded record levels of working capital.

Our current projections suggest we will end the year with over $90 million in cash, our strongest position ever. Looking at the third quarter results, net sales totalled $113.2 million, an increase of 0.8% compared to $112.2 million in last years third quarter. The increase in net sales were driven by the opening of 39 new stores since the end of the third quarter of last year, offset by a comp store sales decline of 8%.

Our same-store sales in the western half of the United States, which represented about 54% of our comp store sales, declined just over 10%; while our stores in the south, midwest, and northeast comped down about 6.5%. Transactions accounted--transactions accounted for almost all of the same-store sales decline. For the quarter, we had a gain in dollars per transaction, driven by a mid-single digit increase in units per transaction offsetting the lower average unit retail we experienced.

Footwear posted a modest positive comp offset by negative same-store sales in the quarter for all other departments. Gross profit for the third quarter increased $800,000 or 2.1%, to $40.1 million or 35.4% of net sales compared to gross profit of $39.3 million or 35% of net sales in the third quarter last year. The increase in gross profit margin of 40 basis points was primarily driven by a 60 basis points improvement in product gross margins, improvements in shrink, somewhat offset by the deleveraging of store occupancy expense on a negative comp.

Moving to expenses, in total SG&A expenses increased $2.8 million or 9.9% to $31.7 million, compared to $28.9 million in last year's third quarter, an increase as a percentage of net sales to 28% from 25.7% of net sales in the third quarter of last year. As a reminder, about 80% of our SG&A is incurred at the store level and will grow as our square footage grows.

Our SG&A increased a bit more than we had projected for two main reasons. First, we increased our incentive compensation accrual based on the better than expected results; and second, we took impairment charges on six stores. Without these two unplanned items, our SG&A would have grown at about half the growth in square footage.

The increase in SG&A as a percentage of sales was driven by the deleveraging on the negative comp, increased store expenses associated with 39 new stores opened since the third quarter of last year, and increase incentive accruals and impairment charges just mentioned. We had an operating profit of $8.4 million in the third quarter of fiscal 2009 compared to operating profit of $10.4 million in last year's third quarter. We recorded a tax provision of $3.5 million during the third quarter compared to a tax provision of $4.2 million in the third quarter of 2008. Net income for the third quarter was $5.1 million or $0.17 per diluted share compared to net income of $6.8 million or $0.23 per diluted share in last years third quarter.

Turning to our 2009 year-to-date financial results for the nine months ended October 31, 2009, the Company reported net sales of $275.2 million, a decrease of 2.8% versus the $283.2 million, in sales in the first nine months of 2008. Comp store sales for the first nine months of 2009 decreased 13.6%, compared to a decrease of 3.2% in the first nine months of fiscal 2008. Operating profit was a negative $300,000 compared to an operating profit for the first nine months of fiscal 2008, at $15.9 million, driven primarily by the negative same-store sales decline.

Net income was $300,000 or $0.01 per diluted share, compared to net income of $10.9 million, or $0.37 per diluted share in the first nine months of fiscal 2008. Included in this year's year-to-date net income is a $1.3 million charge or approximately $0.03 per diluted share for a previously disclosed proposed lawsuit settlement discussed during the second quarter.

Turning to key balance sheet highlights. At the end of October, 31, 2009, cash and current marketable securities increased $16.2 million, or 25% to $81.8 million from $65.6 million at November 1, 2008. Inventory was $76.4 million versus $81.8 million a year ago, representing a 6.7% decrease from the third 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 sales and are comfortable with our current seasonal back stock. Also at October 31, 2009, the Company had no debt, including no outstanding balances on its revolving credit facility.

Now let me turn to our fourth quarter guidance. Based on recent sales trends, we currently expect our fiscal 2009 fourth quarter sales to be in the range of $122 million to $126 million. This assumes a comparable store sales decline in the high to mid-single digit range. This comparable sales decline assumes our peak week comp stores perform better than our non-peak weeks.

The week of Thanksgiving and the three weeks surrounding Christmas represent slightly over 50% of the quarter's comp store sales and we consider these to be the peak selling weeks. Our guidance is predicated on the belief that we will perform better during these peak selling weeks and business will be tougher during the remaining non-peak weeks consistent with our recent history.

Our fourth quarter same-store sales plan contemplates a negative mid-teen comp during the non-peak weeks, and a negative comp in the mid to low single digits during the peak volume weeks. We believe we've made good progress in modifying our product assortment, mix, and value equation to reflect the current environment and the pressure on perceived price and value by our consumers. Our goal continues to be to have cool, fresh, new product at the right price when the customer comes in, and to operate with fewer markdowns relative to the same time last year. This has helped us to grow our gross margin in the third quarter relative to the same period last year, and we believe we have the ability to continue that trend in the fourth quarter.

We are planning our SG&A to grow between 1% to 3% in the fourth quarter. Recall though, in last year's fourth quarter included was a non-cash impairment charge of $800,000 that is not currently contemplated in the guidance this fourth quarter. Based on these assumptions, we expect to report earnings per diluted share of approximately $0.18 to $0.22, and our operating margins will be in the range of 6% to 8% for the quarter.

With regard to the full year, we want to share with you some other important points. We have opened all 36 new stores for fiscal 2009. We expect 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 at the end of the year to be in line with or slightly below our projected same-store sales decline. We are planning positive cash flow from operations for the full year, albeit, slightly lower than fiscal 2008. Our current plan is to have full-year capital expenditures between $17 million and $19 million. And we see no need to borrow on our new credit facility and expect our year end cash levels to be over $90 million.

Patrice, I think we'll now turn the call over to questions.

Sure. (Operator Instructions). Our first question is from Linda Tsai with MKM Partners. Please proceed.

Yes, hi. Nice job.

With respect to the parameters that you put around the peak selling periods for Thanksgiving and Christmas, I'm not sure if you said this already, but is this the way it usually falls out every year or has the concentration increased for this season?

Linda, that's been a trend that's been going on for probably a decade, where it has been getting more concentrated and we just expect in this economic cycle to see that even more concentrated and that trend to continue.

And then with respect to PacSun talking about how their going to have to discount a little bit more, I mean, they did this last year around the same time. What did you learn coming out of that period maybe in terms of working with your vendors or the kind of strategies that you had in place that you can apply for this year?

Well, it's a great question, Linda, and we can't--I don't want to comment on PacSun because we can't control what they're going to do. But we can talk about what we're going to do and I think that is why I like your question. So we learned a lot about what worked in our back-to-school window and what didn't work in terms of all the strategies we laid out and tried.

We've driven those strategies into our fourth quarter plan, obviously with different categories of product involved. And then different mixes of product as we think about it--in a gift-giving cycle and a winter business cycle versus the back-to-school cycle, and we think that we're pretty well positioned.

Now, again, we can't control what our competitor may do out there in terms of level discount they might employ, but we certainly are going to work closely with our brands. A key thing for us, and we kind of said this in the commentaries, about protecting our own position in the market place, protecting our own brand positioning, and protecting the positions of our branded partners. We're still 85%--approximately 85% branded in our mix.

So we have some of the coolest brands and we have the coolest brands in action sports and we want to make sure the things we're doing here will protect and help those brands grow their business over the long term. We're going to execute the strategies, Linda, that we have in place today. We have some room, I think, if we need to get more promotional. I think we do have a little bit of room relative to last year, and how difficult last year was.

But we are thinking about the long term as we lay this out. And we're going to also make sure that we're going to come out of this--we're going into this, as Trevor said in his comments that we're going into this very clean in terms of inventory position. So we're in a good spot, and--but we're not going to come--we're not going to carry inventory over, I want to be clear about that too. If we need to take markdowns, we're going to do that. But we like our position, we like our strategies, and we do think we have a little bit of room.

Great. Thanks and good luck for holiday.

Thank you.

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

Hi. I guess a few questions.

Firstly, Trevor, could you give us the occupancy deleveraging was in the quarter?

Just that as a stand alone?

Yes. You've done that the last few quarters.

I think we had about--flipping here quickly. There is about 60 basis points if you're just looking at the occupancy number.

Okay.

And then as I was just kind of updating my model quickly as you talked based on your SG&A guidance and I guess as we look in the fourth quarter, it is a little surprising to me that even given that comp range that you wouldn't see more gross margin expansion given the markdowns you had in the year ago period. Can you kind of talk through--and you have higher IMU, and so on. Can you kind of talk through why we wouldn't see more gross margin expansion year-over-year in the fourth quarter, and maybe if you're handicapping that somewhat?

Yes. The guidance suggests that our gross margins are going to grow some portion of 100 to 150 basis points in an environment where our same-store sales are planned to decline. So that's declining on top of the 13% decline we had last year in same-store sales in the fourth quarter. So we're going to continue to deleverage on occupancy expense, which is the second largest expense in our P&L.

And so I think the--even though we are going to have a nice rebound in our product margins in this plan or forecast, I think the fact that we're going to deleveraging our store occupancy cost, our buying costs, our merchants' cost, that is where the biggest piece of not having an appreciable increase in gross margins.

But the pure product margins we're seeing an acceleration in the fourth quarter on that relative to how we performed in the third quarter, which you will recall Rick said it was up 60 basis points; but that is not enough to offset the deleveraging effect we're going to have on some of the more fixed costs of our cost of sales.

Have you modeled in some additional cushion for markdowns just given the uncertainty for the holidays?

I think Rick has already touched on that. We've got some plans, we feel like they're achievable, and all of that has been factored into our forecast. I think last year there was a lot that was happening and the market was eroding really quickly; and I think we're not at that same level this year in the fourth quarter, and it seems like customers and competitors are being slightly more rational than they were last year. But I think that's all I can say as far as what we see in the upcoming quarter.

Lastly, Rick, I was wondering if you could help frame for us the challenges or opportunities with the new product schematic for the holiday season, versus back-to-school. Clearly, I think we all understand it is about gift gifting versus outfit building. But maybe if you could help us understand how that changes the way you look at the assortment, and how you're going to mark it? And is it more easy or difficult to execute what you did during back-to-school during the holidays?

I don't think it's necessarily any harder, Sharon, to execute the kind of same strategy. Remember we talked about, again, the higher initial markets built into the product, our packaged approached to selling. What we do is going to be different within that cycle, and we'll be doing different things at different times to meet what we believe is the right timing for our consumers.

Now, one of the key strengths we have here is the power of our sales teams, and it's connecting--I think our success at back-to-school and we've tried to outline it here relative to the sales performance stats, in terms of units per trans, and dollars per trans, and going up in spite of the averaging at retail decline.

That just speaks--I think is very powerful at speaking at the strength of what our sales team is doing is stores; being able to take the product strategy, execute them on the sales floor with customers, and work with customers to find--find the opportunities where we can meet their needs with their gift giving lists. While a lot of the strategies will be the same, they'll be applied to different product categories and you can obviously kind of guess, Sharon, which gift giving categories they will be.

The only other factor I would add into that is our winter seasonal business in terms of thinking about that, and that is going to be a function, again, of when weather hits in different geographies across the country. And, again, we position it we think with where we can provide greater value to the consumers in that area, too. So we're applying the same strategies relative to that seasonal business, too.

Okay. Thank you.

Thanks.

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

Yes, thank you.

Just to follow up on Sharon's question about gross margin, Trevor. You're saying gross margin is going to be up in the fourth quarter, and you're going to deleverage your occupancy. So if I'm right, you're probably looking at about 150 to 200 basis point improvement on the product margins; is that about right?

Yes.

Okay.

And then as far as the Q4 comp is concerned, I don't know if you'd care to comment on how that is churning through the first couple weeks of the quarter, but I'm guessing given your comments about peak versus non-peak you're probably trending at a negative mid-teens rate; is that about right?

I think that is right, Mitch. We're definitely not peak periods right now.

Got it.

In terms of the cadence of that comp over the course of the quarters, I'm assuming you would expect December to be your strongest month even though I think that's your toughest comparison.

Yes.

Okay, and then maybe two last things.

Rick, would you care to talk about sort of unit growth plans for next year? I mean, it sounds like you've hit your target in terms of store openings for this year. I'm guessing that a lot of that is already planned out for next year at least the first half. Can you talk a little bit about what you're expecting to do through where you have that planned so far?

I'll do my best, Mitch, to give you some flavor around that, and we--I'll start out by saying we do intend to grow stores next year. Now , relative to a number I'm not prepared to go there yet and let me tell you why. We just haven't seen our landlords get realistic about the fact that the sales bar has been reset by a significant number lower. And we believe that--we have some landlords we're working with and we're getting some deals done; but not enough the landlords are, I think, realizing just how much that sales bar has declined and that we need to see the rent structures decline with them.

So we are patiently working with all of our major landlords, looking at what we think are good locations in good centers, and preparing to do deals in some of these centers. But at this point we're just not seeing the kind of deals that we believe are appropriate to reflect where the new sales level is. Until we do, we're going to focus our efforts on those landlords who are working with us in that area, and we're going to hold and we'll continue working with the others but we're probably not going to get the deals done until we see the economics come down. At this point it is hard for me to give you a hard number, other than to tell you that we're going to grow the units at some number and we'll probably have a lot more to say about that

Okay.

And then, Trevor, tax rate through nine months looks to be about 37%, I think; is that what you're looking for for the year then?

Yes. I think last year our tax rate was 35.5% or 35.6% something along those lines. I think our current belief is that our tax rate will be similar to that for the full year.

Okay. All right. Great. Thanks, good luck.

Thanks.

And our next question comes from the line of Jim Duffy with Thomas Weisel. Please proceed.

Thanks.

Can I ask you guys to talk in more detail about the higher IMUs, how you're achieving that and any opportunity for further improvement in IMUs?

Well, as it looks into this fourth quarter, Jim, there's definitely an opportunity there because we all know where we were a year ago at this point in time. No one was prepared for the steep fall-off that took place and I think every retailer was clearing inventory out.

How we're thinking about it and how we're approaching the issue of higher IMUs is we're simply working very closely on our branded vendors. We're not asking them to change the quality of their product. Where it's appropriate that they may take out a little bit of make for things that don't add value to the consumer, we're asking them to consider those things.

Each of our brands has a different strategy. Some brands we'll approach with different missions than others; and then within our private label we're doing the same thing. We're looking at what we're doing, we're looking at what the new targeted price point we need to be at in terms of private label product relative to the value cycle we're in.

And then we're going back from that price point and working it back to where the cost of the product needs to end up and looking at what does that mean relative to the make we have to put in or take out of the product; and I can tell you that from a quality perspective there is (inaudible) and more of the little bells and whistles and details that have come out of the product or the packaging that's come out of the product to get that higher IMU.

Okay.

And then Trevor, maybe one for you. How do you think about the long run opportunity for the merchandise margins; and beyond the IMU, what are the other opportunities to make improvements in merchandise margin?

Yes. I think as we've gone through this cycle--the merchandising margins, if you go back to our peak operating year of fiscal 2006 and our peak operating margins were 10.9%. We've actually not seen a meaningful decline from where we were that year, and so our merchandising margins have held up. They changed a little bit in fiscal '07 and fiscal '08, and now where we expect them to be in fiscal '09; but overall, they've stayed reasonably constant with that peak operating margin year of fiscal 2006.

That being said, we do believe there is continued opportunity in there. I think we've gotten better at our inventory management. If you look at the age and the quality of our inventory, I think it's gotten a lot better especially over the last 12 months. I think we continue to make--to feel like we can make strides there.

We have a strong private label group that continues to make progress in their margins; and as you know, that is only about 15% of our sales. If they continue to take market share, that is a higher margin business for us so we think that there is margin opportunity within not just the mix of more private label, but also within the margins of the private label group.

One of the things we've talked about investors that we believe is a very long term solution for our merchandising margin is investing in assortment planning solutions, and so I guess I would say it is our number one initiative, it's a long term initiative, it will not be up and running in six months. It is an investment that we've got our merchandising and IT teams focussed on and feel like we're headed in the right direction there. I think there is some pretty good margin to be had out of being able to do a plan at a more finite level, and so we're pretty excited about that opportunity.

So we see operating margin improvement certainly from the gross margin perspective as well as SG&A leverage. One of the things that this cycle has done for us is allow us to really look at our cost structure and take costs out of the business. If you look at that fiscal 2006, when our peak operating margins were at that 10.9%, we were doing just about $500 in sales per square foot. We won't need to be able to get--we should not need to have to be anywhere near that $500 a square foot to hit that peak operating margins because of the fact that we've taken so much cost of the business.

As well as our direct channel continues to grow, which we think it will. It is a higher profit business for us as well. As we kind of think about all those things and how we're making investments in the business from a technology perspective and a talent perspective, our goal is that we will get back to that 10.9% margin. I wish I could tell you when, and then we'll start to even grow it from there.

So you're right, we do view that the cycle, while painful the last two years, we have got the strong balance sheet to continue to make those investments and our goal would be to take those operating margins above 10.9%. We obviously have a long way to go to get there from where we are now as the bar is being reset. But we do think there's opportunities to do that over the long term.

That is helpful. Thanks, good luck.

Thanks ,

And our next question comes from the line of Shawn Naughton with Piper Jaffray. Please proceed.

Good afternoon, guys. It is Steph Wissink for Shawn Naughton.

I just have a couple of questions. First of all, if you could just give some insight, Trevor, into the percentage of your stores that are currently at minimum payroll either on and hourly basis or in total dollars. And then secondly, just an update on your leverage point. I appreciate your response to Jim's question regarding the merchandise margin and your peak operating margin, but just any sense of overall what your leverage point is now on your fixed cost base?

Thanks, guys.

And the first question was about--I was thinking about the second question answer.

The percentage of your stores that are at minimum payroll currently.

Yes. In the fourth quarter very few of our stores will be at minimum hours because it is a high volume period for us. Especially those four weeks we spoke about, there is more probably six or seven weeks out of the 13 week quarter where we're not going to be operating at minimum hours. Our staff almost doubles during the peak volume periods with temporary help to come in and do that. So very few of our stores will be at minimum hours versus the first half of the year when probably 70% of our stores are at minimum hours. And so I think, there won't be many.

You can think about, Steph in terms of two components, the November and December, as Trevor says, we will not--most stores are not at minimum hours. But January is when stores will start getting back to that minimum hour perspective.

On the leverage side, Steph, we're going to have to grow same-store sales and product margins to grow operating margins. We're not going to grow our operating margins without some top line growth there. So we're not going to talk about 2010. We'll give you a more thorough update about how we're thinking about--certainly at least the first quarter of 2010.

But I think our belief is--we've done a very detailed pass at our 2010 budget, but we want to see how this fourth quarter plays out because it's historically been and will continue to be such a meaningful component of our profit that we're going to need some portion of at least a 2% to 4% comp store sales gain to grow our operating margins; and so I think that's how we think about it.

Very helpful. Good luck, guys. Thank you .

Thanks.

And our next question comes from the line of Lee Jordano with Imperial Capital. Please proceed.

Hey, guys. It's Lee Jordano. How are you doing?

Just had a quick question on if you could provide a little more color on the category performance on what you're seeing in terms of--I know footwear is the only positive comp right now, but what is going on with men's versus women's and also accessories; what are you seeing there? And then secondly, has there been any changes in the brand portfolio; how is that evolving? Thanks.

So I think if you look back to when our comps were down I believe it was 18.8 in the second quarter, versus the 8% comp that we just posted, footwear was a meaningful improvement; and as we mentioned in the prepared comments, the footwear posted a positive comp for the quarter. I think the most meaningful improvement from the second quarter to the third quarter was men's apparel, which is about a third of what we sell. So I do believe that those are the primary two categories, which between the two of those, you're getting over 50% of our sales that we've seen the most improvement on. Our juniors business continues to be difficult and our accessories and our hard goods business are a bit below the overall comp trend.

And from the brand portfolio perspective, Lee, we are, again, as we kind of said in the prepared comments, that we're excited when we see that some of these younger brands are taking a bigger share within the mix of our business, because of the fact that in most malls in America we're going to be the only place you can find those younger brands.

Again, we think we do a great job of representing for those brands with great people, great product, the full presentation of the lifestyle of product. So, and as you've heard us say that's been a trend for the last few years, where we have been seeing the smaller brands take a bigger share of our overall sales mix. So that's, again, a very encouraging sign for us.

Great. Thanks a lot. And good luck for holiday.

(Operator Instructions). And the next question comes from the line of Jeff Van Sinderen. Please proceed.

Good afternoon.

Anything unusual in terms of what you're seeing in November geographically so far?

Jeff, it is--we're not going to talk about specifically. Let's just--as opposed to calling out November. Let us just talk about the impact of weather, including in the--in the third quarter.

It's definitely a buy-now wear-now environment. So when you get, again, we have a very, as everyone knows, we have a very strong winter business between our outerwear and our hard goods; and where it gets cold, our business gets better, in that buy-now, wear-now world that we're in; and I think that was true relative to October. And I think that will be true as we look forward into the fourth quarter.

I guess that would be the--that's an overly, on top of all of the geographic type of results that we're seeing. Trevor, do you have anything else you would like to add to that?

No, I think--yes, when we saw in the early part of October, when we had a little bit of a cold spell, our business did relatively better than how it performed slightly before; and then after--then as you got into the later part when it got warmer, especially in the middle part of the country and the northeast, business got a bit tougher for us. So I do think that's right, the consumers are spending when there is a reason to spend and we're not seeing that sort of discretionary spending happening outside of those reasons to spend.

Right. Okay.

And not to harp on just a month, but just can you give us a sense of what the revenue concentration is in the first half of November, versus the second half? I would think that the first half is really not anywhere near as important as the second half of the month.

Yes, I think you're right. That is definitely the case . That week of Thanksgiving is one of the most material weeks of the year. So you're right, the first three weeks of November are not going to be nearly as meaningful. I think they're about 15% of the

Okay.

And with the value sort of more value positioning in the snow category this year, it sounds like you feel like you might have some upside there potentially for Q4?

The answer to that question, Jeff, depends upon weather, and that--it all hinges upon the strength. Now, again, as we said in the comments, we have bought seasonal businesses conservatively. So that also would have to be factored in there. Our experience with seasonal businesses, they have not been great. We have cut back and have planned that business conservatively as we head into this fourth quarter.

Fair enough. Thank you very much. And good luck for holiday .

Our next question comes from the line of Christine Chen. Please proceed.

Hi, this is Paula for Christine.

I was just wondering if you were thinking about changing any of your marketing strategies in this environment to sort of help improve your traffic during non-peak periods.

Paula, we're always playing with what our market strategies are. We are not going to change from the broadest based idea of what we're doing with our marketing, which is about reaching out to consumer at a grass roots level. And so from the fundamental approach with marketing, I don't see any significant changes but that doesn't mean that tactically we're not trying different things all the time. But that's not anything unusual for us.

Okay.

So sort of to follow-up, I think yesterday--I believe you had an event with Tony Alva in one of your stores. I'm just wondering how frequently you hold events such as these and does that increased traffic in stores at or around the event, and does it--obviously it would increase the traffic, but does it increase the conversion, and do you think that maybe events like these could be something you might do to increase the traffic during those non-peak periods?

Of course.

We certainly hope it would increase our ability to sell to customers, but that is not why we do the event. Again, to be clear, we do these events because it's a way of giving back to our consumer. It reflects, I think, to get a guy, a legend like Tony Alva hanging out in our stores is just a really cool thing. By the way, it is kind of an impromptu event we did with Tony; we had a great turnout for him. Again, how we market that in such a short, short window of time, a great turnout to see, again, the most classic skateboarders ever. Yes, we expect to try to see a bit better conversion. But also, I want to be clear, that's not really what our marketing is driven at. Our marketing is driven at building the Zumiez brand and building it by connecting with what is great about our brand partners.

Thank you. Good luck for the quarter.

Thank you.

(Operator Instructions). Our next question comes from the line of Edward Yruma with KeyBanc. Please proceed.

Hi. This is Char for Ed.

Most of my questions have been asked and answered, but can you just touch briefly on the private versus branded in your stores? So private label, you mentioning a 15% roughly, but do you have a targeted strategy to increase that? It is obviously more profitable for you, how are you really looking at private right now?

Again, that's a complicated question, Char, because it seems like an easy question but it is really not in our world. Because you have to think about that right down to the department level, and then within each department what category levels we're doing. We're always, again, playing with that mix based upon what makes sense in the current environment for that current customer.

Do we expect to see any significant movement in that number? Not this year we don't. And because, again, we're a branded player. So for us, private label is about playing what is right in the marketplace right now for our consumer.

And, again. different categories within different departments will have different mixes of the private label, so I don't anticipate any significant change this year. Now, if we are able to--if you want to look out five years, I would expect that we would continue to see private label probably grow at some number to be bigger than the 15% it's been over the last year; but it is not ever going to be for us something like 25%, 30% of the business like some of our competitors.

Char, this is Trevor.

One follow-up on that, that is interesting. To help you and investors to think about this, we've mentioned this in the past is that we think agnostically about individual brands. What we care about is the action sports lifestyle. That is why we have so much turnover within our brands if you look at the last 3, 5, 10 years, there there's always turn and churn going on in there.

So if the brands or if there's some brand that gets really hot and it takes market share, then we're going to put that in there because it will drive same-store sales that generally would drive higher averaging at retail and the margins may be a bit lower. But again, you're getting more margin dollars because it generally has a higher averaging at retail on it.

If we're in a cycle where people are really focussed in on our sort of commodity based private label; then, again, we feel like we have the benefit and the ability to do that, as well. So when we set our strategies to drive sales, we do it based, first, on the confines of the action sports industry and then what cycle we're in and then that is how we drive the strategy. We don't set out to say, hey we want private label to be this percentage of sales because it has a certain margin component to it. We do it based on what the consumer is telling us and what is hot and what is going on in the consumers' psyche.

Got it.

What roughly is your lead time to get the private label product into the stores?

Again, it changes by category. If you're talking about t-shirts , it is pretty quickly, we don't do a lot of private label t-shirts; but if' you're talking about cut and sew, you're probably out three or four months. And if you're talking about snow hard goods, you're nine months to a year out. Again, that's the thing about us is not just being an apparel retailer. We sell shoes and hard goods and accessories and apparel, it is very different

The only thing I would add to that is we're certainly looking at the opportunities to shorten whatever the lead times are in whatever categories we're working at. So that is obviously gives us a much better opportunity to react to what the customer is telling us.

Got it.

Just last question. The eCommerce business doing really well, is there anything specific that you're doing online versus in the stores, particularly for the holidays?

Now, again, we look at it as first--we look at them as one unit. So I wouldn't say we're trying to do anything specific other than maximize our eCommerce business, maximize our store business, and maximize the connection between the two of those operations, and we don't price significantly differently online than we do in stores. So there is no difference there from that perspective. It is really about maximizing each.

And, again, as we said in the comments, we're really building that business. We have a great--really improved our talent level there. We're seeing some good results, but we have a ways to come, too. We are coming from behind and we certainly think we can catch up quickly.

Great. Thanks, guys. And good luck on the holidays.

Thank you.

Our final question comes from the line of Randy Konik with Jefferies. Please proceed.

Thanks, guys.

I have a first question for Trevor and then a follow-up for Rick. Basically, Trevor, if you kind of think about the overall--the Company's total real estate portfolio, how disparate are the sales productivity metrics on the western stores versus the other parts of the country? And if there is some big disparity between the sales productivity per foot from a regional basis, is there some--what is the opportunity kind of get those underperforming regions or so forth up to chain average, etc?

Yes , the west, as you know is the biggest part of the country

Yes.

It probably always will be and then certainly always has been. We come from the west coast roots. Even in this environment where the west has been the most difficult performing part of the country for the last two years, we have higher productive stores in the west than we do in the middle part of the country and in the northeast.

So when you start getting into the more finite details by state, that is where we've seen the issues. So if you go back, again, two years ago, California, Arizona, Nevada and Florida. Florida was a new state for us two and a half years ago, those are very driven by what's going on in those economies. And as you get into, again, I think over the last two years the middle part of the country, the south and the northeast, I think their economies have not been hit as hard as the economies in the west.

So to answer your question, Randy, I think we're operating in our stores effectively and there is nothing that we feel like from our macro perspective that we can do from a people perspective that we feel like we really got some product misses. We just think it is a general trend that consumers have a lot less discretionary income to be spent. We probably also are a little bit more impacted in this environment where price is the overriding factor because of the fact that 85% of what we sell is brands we don't own ourselves, so we are going to generally have a slightly higher price point.

So I think our belief is certainly we will continue to focus to operate those stores more effectively, do a better job of getting the right inventory at the right place. With that being said, we need some help from the macro economy, I think, and we need it in those certain parts of the country that have been the most poorly impacted.

Got you.

Let me ask you this question, then, what parts of your store base, or what states, or areas are most below peak sales productivity metrics?

For sure the west. California, Pacific Northwest, the Rockies. Those are the ones that have fallen the most from their peaks.

You've started to see--so the encouraging side would be at least from the California being down big, in the last two years you're starting to see that come back a little bit, at least in terms of your west comp performance. Is that fair?

It's certainly the rate of deceleration has improved meaningfully for us in the last quarter. I'm not sure I'm ready to call it success yet because, unfortunately, we've seen California take two big steps down.

It took a step down in late '07 and then it kind of stabilized for the first seven or eight months of fiscal '08 and then in September of '09, Lehman and all the other stuff--September of '08, I'm sorry, we took another big step down in California and then it kind of stabilized and now you're right over about the last four, five, six months it has been improving.

I'm hopeful that's the case, it's going to quit decelerating and actually accelerate at some point. My only cause and hesitation is the big structural issues that exist in California with big deficits and the housing concerns, and the high unemployment. Those things are going to have to get better before that state is going to rebound for all retailers, I think.

Got you.

Rick, just in your experience, you're seeing the whole action sports category sky rocket and everything and now we're pulling back a little bit. Where do you think we are in this action sports cycle here? When do you think we base out as an industry and start to turn back--turn back up? And what sport would you think leads the way?

I wish I knew the answer to that question, Randy. I don't. Let me say this, though, I am confident that we have a ways to go with the action sports lifestyle in terms of its appeal and its ability to grow, yet, within the US.; and I say that for a couple of reasons. And, again, the life--our industry has been hit hard, just like every industry has been hit hard in this cycle. In some cases, disproportionately hard because of the exposure the industry has to, again, these--the west coast and these tougher states.

Yes.

So but I look at this and say I think there is a lot to look forward to here within the action sports. The fundamental basics of the industry are in terms of what it's about, which is about--it's about self-expression and independence and creativity and about doing your best. Those are some pretty powerful things and they happen to translate really well into the fashion world, right?

Yes.

Those same kind of ideas transfer into the fashion world. I think what we have to look forward to in action sports is the opportunity to see it continue to penetrate ethnic groups across the country like it's done in Southern California, where it penetrates every age demographic, every ethnic group and both genders. And I think that you don't see really in any other part of the country like you see it in Southern California. I believe the lifestyle is powerful enough that we're going to see those trends continue to play out across the country.

Now the last part of your question as to which I expect to come--which I see kind on a sector basis rotate up. I'm not exactly sure of that again. I would guess--I think the answer to that may vary based upon brands getting hot, athletes in different segments of the industry. So it could--it could be a variable function.

I think from a demographic perspective, I would expect over the next few years to see the younger groups come into the market in terms of more seeing the--the number of kids entering the teenage years increase. And that may, by definition, focus us on the--more towards the skate arena, but that's in the next two or three years.

Got you.

Lastly, is there a sport right now--if you kind of break down your products across sport, is there one that you think is better positioned or is performing better, I should say, versus what is the most challenging sport related product that you have in the store right now?

I could call any of them out at this point. All of them have been sequentially hurt by the overriding macroeconomics.

Okay. All right.

No, it's very helpful. Thank you.

Thanks.

There are no further questions in queue at this time.

All right.

Let me just wrap up, then, again by saying to everyone how much we appreciate your continued interest in what we're doing at Zumiez and your support for the way that we do it. Because we think we do it the right way which makes us the premier player in action sports lifestyle. So thank you, everybody, we'll look forward to talking to you in March.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and everyone have a wonderful day.