Zumiez Inc (ZUMZ) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Incorporated, fourth quarter fiscal 2009 earnings call. (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 recording or rebroadcasting of this call is permitted without the Company's express written permission. I would now like to introduce the host for today's call, Rick Brooks, CEO of Zumiez. Please proceed.

Thank you. Good afternoon, and thanks for joining us to discuss the Zumiez fourth quarter and fiscal 2009 year-end results. Joining me today is Trevor Lang, our Chief Financial Officer, and following my openings remarks, Trevor will review our financial and operating highlights. I am encouraged with the way fiscal 2009 progressed, and I believe the changes we made to adapt to the difficult and changing environment are paying off. The (inaudible) throughout the year began yielding improved sales and earnings results from the back-to-school period, and those trends got even better in holiday, culminating with positive comparable store sales gains in the last two months of the year and a strong start to fiscal 2010. The past two years have certainly been one of the most challenging periods we have faced as a Company.

The global recession that began in 2007, worsened in 2008 and carried over into 2009 has had a profound impact on disposable income and the way consumers spend their money. Throughout this period, we stayed focused on what has made us great -- finding ways we can enhance the customer experience with unique product offerings and maintaining and growing our unique culture. We also focused on our cost structure, lowering it whenever possible; but at the same time, keeping a balance of investing for future growth. While we are pleased the cost reductions we have garnered over the last two years, we are more excited about the talent, infrastructure and technology investments we have made over the same period of time. We believe the combination of a strong culture that understands our mission, along with a lowered cost structure and a well capitalized balance sheet, have made us stronger than when we entered the recession.

It is particularly gratifying to see the strong recovery in product margins and earnings in the fourth quarter that we believe is a reflection of a better macroeconomic environment and the huge efforts our team has invested in our business. Our improved sales and significantly improved product margins drove a fourth quarter earnings increase of 38% on a GAAP basis and allowed us to end the year in a very strong financial position with the most liquidity we have ever had. Looking back over the past two years, we are by no means satisfied with our financial performance, particularly a second consecutive year of negative comps and declines in earnings. However, I am pleased that we have been able to navigate the volatility without changing our mission to be the premier action sports lifestyle retailer. As a result of the economic downturn, we have made a number of important changes in how we operate and analyze the business, including a greater emphasis on value. However, we stayed consistent where it is most important to us, at the store level. We've continued to offer the widest assortment of unique brands combined with an in-store experience that cannot be found anywhere else in the mall.

As we go forward in the upcoming year, we plan to build on the momentum we began so see in the back half of 2009 with continued focus on the successful strategies we implemented and to investments we believe will create long term benefits. These investments include investing in our people through best-in-class training and mentoring, implementing merchandise business intelligence and product assortment planning tools that will enhance our product offerings, our continued focus on cost reduction and improved efficiency. As an example, we recently announced the relocation of our distribution center to Corona, California. We believe this change will result in faster inventory churns, long term supply chain efficiencies and cost savings. And infrastructure investments will allow us for increased sales opportunities across multiple channels. Throughout this recession, we have continued to invest in opportunities to drive future sales. We reduced our cost structure and we strengthened our balance sheet. And now, as we look to 2010, our clear focus is on increasing sales. I believe we are well positioned for 2010 and beyond. And with that, I would like to turn the call over to Trevor, who will review the financial results in greater detail and discuss our outlook. Trevor?

Thanks, Rick, and good afternoon, everyone. So 2010 is off to a better start than 2009. The economic conditions have improved versus this time a year ago. That said, I believe a good deal of the recent improvement can be attributed to the team's successful execution of the strategies we put in place early last year, combined with a heightened focus on doing the things that have always set Zumiez apart from the competition.

Last year on this call, we laid out some simple strategies; and even though our business has improved, they are still relevant. First, we are going to focus on the customer. This includes having the best sales force on the floor, the most unique brands available, a full presentation of the lifestyle -- which includes hard goods and footwear. Our customers want the best brands, categories and styles that represent their lifestyle. We continue to offer the broadest and most unique assortment of action sports lifestyle brands anywhere in the mall. While our merchandise has always included a wide selection of price points across categories, we are putting greater emphasis on value to reflect the current economic situation. Second, as a lifestyle retailer, we continue to offer a multi-tiered price structure on many categories of products so we continue to serve all customers who are interested in action sports. And third, over the last two years, we have executed a disciplined cost reduction strategy and will continue those efforts in 2010.

Throughout the year, we showed our discipline in managing inventory, expenses and CapEx, all the while focusing on the customer. Excluding the California legal settlement and impairment charges somewhat unique for us, we grew our SG&A for the second year in the row at about half the rate of average square footage growth while at the same time investing in areas we believe are important to serving the customer. And as a reminder, about 80% of our SG&A is incurred at the store level. We believe our model is unique and not easy to replicate, and we are committed to driving both top and bottom line financial results. Looking at the actual results for the fourth quarter, net sales totaled $132,400,000, an increase of 5.6% compared to $125,500,000 in last year's fourth quarter. The increase in net sales was driven by the opening of 36 new stores since the end of the prior year, partially offset by a comp store decline of 1.7%.

To break down these results further, relative to the last several quarters, our stores west of Texas performed better, decreasing 2%, slightly below change average. California, our largest volume state, had a 1% comp store increase for the quarter. Our direct channel business continued the sales acceleration we reported in the third quarter, Increasing over 60%, and in the fourth quarter was 3.5% of total sales. Our men's department, along with accessories and footwear, comped positive; while our juniors, hard goods and boy's departments had negative comp results. Gross profit for the fourth quarter increased $48,100,000, or 36.3% of net sales, compared to gross profit of $40,600,000 or 32.4% of net sales in the fourth quarter last year. The increasing gross profit margin of 390 basis points was driven primarily by higher profit margins worth about 250 basis points and improvement in excess inventory shrink and supply chain costs, partially offset by the deleveraging on a negative comp primarily in store occupancy costs.

Moving on to SG&A, in total, SG&A expenses increased $3,200,000, or 9.8% to $35,100,000, compared to $31,900,000 and increased as a percentage of net sales of 26.5% from 25.5% of net sales in the fourth quarter of last year. The increase in SG&A as a percentage of sales was driven by deleverageing on a negative comp and increased store expenses associated with our 36 new stores. In addition, during the fourth quarter of 2009, we took a noncash impairment charge of $1,800,000 included in SG&A, or approximately $0.04 per diluted share related to 19 underperformance stores. As in the year ago period, we took a noncash impairment charge of approximately $800,000, or approximately $0.02 per diluted share. Our operating profit increased by $4,300,000 or 50.2% to $13 million, or 9.8% of net sales compared to $8,700,000 or 6.9% of net sales in last year's fourth quarter.

Net income for the fourth quarter was (Inaudible) or $0.29 per diluted share, compared to $6,300,000, or $0.21 per diluted share in last year's fourth quarter. Excluding the aforementioned noncash impairment charges in the both fiscal 2009 and 2008, our fourth quarter 2009 diluted earnings per share improved to $0.33 this year versus $0.23 in the fourth quarter of 2008, an increase of 44%. Turning to the full year fiscal 2009 financial results, for the year ended January 30, 2010, the Company reported net sales of $407,600,000, down slightly from $408,700,000 in sales in fiscal 2008. Comp store sales for fiscal 2009 decreased 10% compared to a 6.5% decrease in fiscal 2008, and our sales per square foot were $367 compared to $424 last year. Net income for the full year decreased to $9,100,000 or $0.30 per diluted share, from $17,200,000 or $0.58 per diluted share in fiscal 2008. Our effective tax rate for the year was 34.8% compared to 35.6% last year.

Also included in our fiscal 2009 SG&A are noncash impairment charges totaling 2.5 million or approximately $0.05 per diluted share, as well as a charge of approximately $1,400,000 or $0.03 per diluted share, which was included in our second quarter results associated with the settlement of an agreement previously disclosed. Turning to key balance sheet highlights, at January 30, 2010, cash and cash equivalents and current marketable securities increased 29.5 million, or 37.5% to $108,100,000 from $78,600,000 at the end of fiscal 2008. Inventory at the end of the year was $50,900,000 versus was $52 million at the end of fiscal 2008, representing a 2% decrease compared to the prior year with 10% more square feet. At the end of the year, inventory decreased by about 11% on a per square foot basis from the same time last year. We believe we have an appropriate level of inventory for future sales and are comfortable with our seasonal stock in aged inventory. Also at January 30, 2010, the Company had no debt, including no outstanding balances on its resolving credit facility.

Now, let me turn to our guidance. When looking at 2010, we are obviously more optimistic about the future based on the recent reported results. However, there is still lingering concern in consumers' mind and our economy is fragile. We have demonstrated our ability to plan our business at a level that reduces downside risk but executed in a way to take advantage of opportunities and chase sales where necessary. In putting forth this guidance, we want to remind everyone of the complexity of assessing sales, product margin and earnings growth given the challenging economic conditions that persist. Therefore, we are going to refrain from providing specific annual guidance, but will continue to give quarterly sales and earnings guidance. For the first quarter, we are planning same store sales to increase in the mid to upper single digits and total sale to be in the range of $86 million to $89 million. On a GAAP basis, operating margins are planned to be in the negative 5% to negative 6.5% range, and diluted earnings per share loss of $0.09 to $0.11.

Included in this first quarter estimates are charges of approximately 1.2 million or $0.03 per share associated with our relocation of our D.C. from Everett, Washington to Corona, California. For comparative purposes, if you look at last year's first quarter results, we had some portion of $1 million or $0.02 per share in savings that were incremental, one-time to nature and we do not believe we will replicate this year. In addition, our first quarter 2010 projections include two items that are worth calling out. First, due to our improved annual outlook versus the same period a year ago, we are accruing for fiscal 2010 bonus payments during the first quarter, which we were not doing in the first quarter of 2009. We have also decided to aggressively defend ourselves against the [Bird] California lawsuit, and as a result we will be incurring legal fees and expenses to defend ourselves, as we believe this case lacks merit.

The bonus accrual and legal fee investments in the first quarter of 2010 are estimated to cost us about $800,000 or $0.02 per share in the first quarter of 2010. Looking further into the second quarter, if we post a mid single digit comparable store sales increase, which based on current trends seems possible, we would assume a moderate improvement in our loss per share compared to the second quarter of 2009. A few comments about the full year. As most of you know, our business is seasonal, with the majority of our sales and earnings occurring in the back half of the year. Historically the first two quarters have represented about 20% of our full year earnings, much less significant due to lower sales volumes in the full year. The vast majority of our profits are earned beginning in the second half of the year. For the full year, we are planning our sales, including our same store sales, to be up for fiscal 2010. We are planning to open approximately 25 new stores and close four stores, invest in our e-Commerce infrastructure and merchandising systems, as well as our distribution and supply change platform.

Our current plan calls for about $26 million to $28 million in CapEx, including the purchase of our new D.C. in Corona, California, versus $16,600,000 in 2009. We also expect depreciation and amortization to be about $21 million versus $22 million in fiscal 2009. And finally, because of the positive progress we have made in reducing our cost structure, we would expect our full year earnings to grow at a faster rate in sales in 2010, to the extent we obtain a low to mid single digit same store sales gain. We are focused on growing our sales and operating profit organically, and we believe we can flow through incremental sales to operating profit at a 25% to 35% rate in fiscal 2010, to the extend we exceed low to mid digit same store sales increases. As we move beyond 2010, we are focused on growing top line sales, gaining market share while expanding our operating margins. Our long term financial plans are built to grow our operating profit at rate faster than sales, and we believe we can obtain operating margins in the low double-digits to low teen range.

As we always have, we will continue to make important investments in the business that we believe will allow us to draw profitable growth into the future and provide meaningful opportunities for our employees. Our long-term top line strategies are designed to drive same store sales gains, open new stores, grow our e-Commerce and multi-channel sales initiatives, as well as potential new initiatives. We believe that by focusing on these strategies we will be able to drive double digit percent revenue growth without returning to 20% annual square footage growth. Alicia, I think we'll now turn the call over

(Operator Instructions). Our next question comes from the line of comes from the line of Edward Yruma, please proceed.

Hi, thanks so much for taking my question. Can you talk a little bit about your hard goods business and changes you might be making within that business? I know that you've talked about some pressure there, but I've seen some strength recently in the snow, but how do you view that as part of the nix going forward. Thank you.

I am glad to do that, Edward. As I think you all know, this is a time of year where we are looking at making our hard goods snow purchases, working with our brands on our buys in that area. And I think, as we have said in our sales release, is this is another year that's not been a great year for our hard goods business through the winter months. So we had kind of number strategies in place that we executed against, and they were successful in some respects and obviously not successful in others. So the first thing I want to say relative to our thinking next year and beyond, is that we are not walking away from the hard goods business. We are looking at this as an opportunity to say for us, what do we have to do to fix this business and try to get our business returned to a positive growing sales level. So the first thing, Edward, I want to say is we are committed to it because it is part of the lifestyle. It is key to who we are as a Company and it is key to what our customers expect from us.

We have a number of ideas, a number of strategies, that we are currently discussing with our vendors to try to drive the business forward. I think we need to get creative and in terms of how we are going to do this to get success. Unfortunately, though, I am not prepared to go into any details at this point about what they are for competitive reasons. So that's kind of where we're at right now. It is a business that we are committed to. It's a very important part of our business. We have a long history of being in it and a long history of growth in the business, and it is a significant part of our business, and it's a significant part of our business in terms of sales as well as culture. So, we have got some good ideas, we're working with our brands on it and we have got a ways to go.

Great, and one other follow up if I may. How should we think about tax rate for the year, particularly related to the first quarter, since I think you did have a little bit of an elevated tax rate last year? Thank you.

I think actually our tax rate of 35% is just below our historic norm of, let's say, 37% to 38% range, Edward. I think we are currently thinking about our tax rate being in the sort of 37% range as we look into the current fiscal year. But that again will depend on how well we execute and what our profit looks like and things like that. But I would suggest that people need to model somewhere between 37% to 39% as they look into fiscal 2010.

Great, thank you very much, guys.

Thanks.

Your next question comes from the line of some from Thomas Filandro from SIG. Please proceed.

Thanks, and congratulations on the execution side of the business. Rick -- quick question for Rick. I think I heard you both say that the early trends are strong in the business. So I was wondering if you could elaborate on that a little bit more. And then on the product margin side, just for clarification, is that a function of mix helping out lower your AUC, or are you seeing lower averaging cost on like for like products, and what is your view on AUC or average unit cost with the Fall selling season. Thank you.

All right, Tom, great. I will take the first part of that question, which had to do with the sales trends. In both Trevor's and my comments, we were referring to our reported February numbers relative to what we saw, which you have all seen that, our positive 11-2 comp. And I think, as you know, that was transaction driven in its nature. We still experienced an AUR decline; that was mostly offset by our ability to sell more units by our great sales teams out there to offset most of that AUR decline. So as you look at that gain in February, it was actually transaction driven. And we are not going to comment on March at this point. Our policy is not to do inner month comments, so we're not going to comment on March.

On March, yes. So on the margin front, both in Q4 and the year, we had meaningful progress. And just a quick bit of history for everybody. In the first six months of this last fiscal year, our product margins were extensively flat. The gross margin reduction that we had in the first half of the year was completely due to deleveraging on the negative comp. As we moved into the back half of the year, our product margins started accelerating. I think we were up just under 100 basis points in the third quarter, and in the fourth quarter -- as I mentioned in the prepared comments -- we were up 250 basis points. That product margin improvement was very broad-based. Every single department, whether it's accessories, shoes, hard goods or apparel, they all had improvement. We spent a lot of time in the second quarter, the third quarter call talking about how we had planned into that with lower costs, a higher proportion of value products, the package deals. We had designed into that to have a higher item view that hopefully, as it actually has happened, we would actually have a higher profitability, but we wanted to allow ourselves flexibility to the extent we had to get lower on prices, we would do so. We fortunately didn't have to do so, and therefore we saw the reflection of our product margins. And if you look at the full year, again, our apparel as an aggregate group, apparel margins were up; our hard goods as an aggregate group were up, and our footwear and accessories were up; and again, I will just give the product team a lot of credit here for keeping our inventory clean the entire year, for finding those unique things the kids told us they wanted, and then executing. So a great effort to grow your margins for the year by some portion of 80 basis points in a very difficult year.

Thank you.

Our next question comes from the line of Sharon Zackfia of William Blair & Company. Please proceed.

Hi, good afternoon. Hey Trevor, I was wondering if you could break out the 250 basis points of merchandise margin between IMU and markdown?

I don't think we measure it that way, Sharon. That is not the way we look at it, because again, it's so broad and our product offering is diverse. I would characterize the vast majority of the improvement is design, higher IMU through either lower costs or a change in product price that we were going to sell it for; and also as well, as our inventories continue to get cleaner throughout the year.

Maybe a follow-up. Obviously hopefully we will see that IMU improvement through the first half of this year as you just mentioned. But is there incremental opportunity as the design team looks at sourcing and product design for this year?

I think there probably is a little more opportunity in the first half of year than there is in back half of the year. And we essentially have operated at -- the product margins are not far from the peak operating margins or product margins that we have offered. So throughout this entire time, the last two years, as our gross margin has come down, the vast majority of that gross margin has become due to the deleveraging of the occupancy costs on the negative comp. So we haven't seen -- we did not see a substantial decrease in the product margins. I think as we look into the next year, we certainly believe we have product margin opportunities. We are focused on those. We think we can execute against those. As we've said now for probably a couple of calls, what we are really excited about and investing heavily in is a long term solution through product business intelligence that we will have in place in sort of the mid part of this year, and then as we move into the late part of this year, it really benefits sometime in 2011 is an assortment planning solution that we believe is where the product margin upside exists. The private label team has done a great job this last year. Private label went from 15% to 15.7%, and we think we've got some momentum there, so that business may take more market share and that would help product margins, as well. But as we said in the prepared remarks, we are going to plan for margins conservatively because they came back a lot better than we had thought they would throughout this last fiscal year.

Let me add to that, Sharon. 2009, I think, from all of our perspectives, was really going to be a story about product margin recovery for most retailers after the very difficult fourth quarter of 2008. And again, that is exactly I think what we have delivered here. And as we said in the prepared comments, what think the story for 2010 is going to be, and where we are really focused, is yes, we want to see incremental improvements in product margin, but our real focus in 2010 is let's start driving top line growth. Let's get back to really hitting that hard, gaining share in our niche in the marketplace. That is -- if you want to think about how we are thinking about the business at this point -- I think why we feel a bit more optimistic about the year is, we are really focused on now, let's -- we have got a lot of things in place. Let's go after it on the sales line now.

Okay, great. Thanks.

Your next question comes from the line Christine Chen from Needham & Company. Please proceed.

Thank you. I was wondering if you could remind us -- I know you don't want to comment on March today -- but if you could remind us just how big a swing the Easter shift has on a month to month basis, and then if you could sort of talk about what opportunities as far as product categories as you look ahead into 2010?

Yes. I will take a stop of those and Rick may have something to add on. So Easter, as you know, moves up a week. It was the second Sunday of April last year and I think it's the first Sunday of this year. So what will happen is that week before Easter is a pretty important week for us, so that will help week five of March and will be a detriment to week one of April. So March gets benefited, April gets detrimented. It is probably a low single digit to maybe a mid single digit impact between the two months as we have analyzed that over the years. So no impact to the quarter, but there will be some benefit to March, and that will detriment April a bit. And the second question was on what, Christine?

Product categories where you see some of the biggest opportunities?

Yes. I think Rick already spoke about the snow category, snow hard goods category. For the year it is less than 3% of sales, but still it's important to what we do. I think there's things we know we can do on the junior side. I think you guys have heard us say that we have invested in that, both from a people and a product perspective. We have got some good ideas. That will be long term in nature. You will see sort of some short term changes over the next year. We're more optimistic about the back half of the year with what we're doing in juniors, so I think that's something where we've got opportunity. Again, the juniors is about 11% of our sales, so not huge. The pieces that, frankly, have been the most exciting for us over the last two to three months have been in men's and accessories, and those two products are almost 60% of our sales. And so we are very optimistic about how we can continue to drive those trends. I think in the first half of the year, we have the benefit of the package programs and the higher proportion of value packages that we didn't have last year. We were still figuring all that out. So we're somewhat -- I'm more optimistic, as we said in the prepared comments, about the first half of the year because we can continue to execute on the strategies that were so successful for us in the back half of last year.

Great, thank you and good luck.

Thank you. Our next question comes from the line of Mitch Kummetz, of Robert W. Baird & Company, Inc.

Yes, thank you. First question, Trevor, on the Q1 guidance, could you just give us a little more help on how we should be thinking about the operating margin in terms of gross margin and SG&A? You mentioned some of the impacts on SG&A, 800,000 on the legal, and also the bonus accruals. And it sounds like you should see gross margin pickup, I would think, on a mid to high single digit comp and better product margins. So could you maybe provide a little more color there?

Yes. There is going to be some noise in the first quarter numbers, Mitch. As you know, as I mentioned in the prepared comments, we are moving our D.C. from Everett, Washington down to Corona, California. Our distribution center expenses are included in our product margins. Those charges -- the vast majority of those charges -- over $1 million of those charges will roll through our gross margin. We estimate those sort of one time charges. We have only moved our D.C once in 30 years, hopefully we won't do it again. That is going to have a 1.3% margin impact on our guidance.

But what about on a pro forma basis if you take that out? I mean, you would expect your gross margin to be up, I would imagine?

Yes, somewhere 100, 150 -- maybe even a bit higher that that, if you were to exclude the charges for the D.C. closure. So yes, I would say 100 to maybe slightly better than 150 basis points would be our current thinking.

And SG&A up maybe around 3 million to 5 million, something like that? I haven't gone back to work through the numbers to get to your earnings guidance.

Yes, our current expectation is that our total selling and general administrative dollars would grow by sort of a mid teen number, is how we are thinking about the first quarter. And again, the bonus thing is kind of the timing. We did pay some incentive comp in fiscal 2009, but we didn't incur any of that in the first three months of the year just because we didn't think we were going to end up paying anything. So that will kind of work itself out over the year. That's just more of a timing issue, although it will go up some relative to last year. And the legal charges, that's just really an incremental expense that we are going to have to do to fight off this lawsuit.

Got it. And then you provided a longer term operating margin target of low doubles to, I think, low teens. Last time you were in a double digit operating margin was in 2007, and you did -- I think it was $488 a foot back then. You completed a year where you did $367 a foot. Can you talk a little about where you think current activity needs to be to get back to a double-digit operating margin?

Yes, if you look at our peak operating margins in fiscal 2006, we did $499 a square foot in sales and our operating margins were 10.9%; and as we moved into the first six months of 2007, we were gaining on that, as well. And then the recession started to hit in the late part of 2007, and we are where we are now. So we have take taken a substantial cost out of the business. This last year alone, the real estate teams took about $65,000 of costs out of the stores. Our stores cost just over $400,000 before, and now they are more in the $350,000 range now. That helps not only cash, but depreciation, which is our fourth largest expense. So that's just an example of one of the large cost components we have taken out of the system. I am not going to give you a specific number, because, Mitch, the way we think about that is, we will invest in our SG&A to the extent we see greater top line opportunities, with the goal of getting to that low double-digit and teen margins. So one example of that would be, in the last I'd say year or two, we have invested heavily in the web business, and e-Commerce business and multi-channel strategies. We have actually gotten some traction there, and we want to give ourselves some flexibility invest in areas of the business that we know will drive long term sales and operating margin growth. So our goal is, as best we can, just to kind of steadily improve those operating margins to get back up to that range. If we are in an environment where sales are like they were in February, we might accelerate some of our SG&A investments. If things get tougher, we might slow those down. But the goal of what we would like to do is to have a nice, steady trend towards that higher operating goals that we have in the next two to five years.

Got it. Thank you. Good luck.

Your next question comes from the line of Dorothy Lakner from Caris & Company. Please proceed.

Thanks, and congratulations on the strong finish for the year, as well as the strong start to this one. You had a lot of success in the second half of the year just changing your promotional strategy and providing these packages of value to customers. What kinds of things did you learn last year? Were there things that didn't work? How can you build on that this year now that, I guess, so to speak, the cat is out of the bag?

We did learn a lot, Dorothy. We tried a lot of things, and some of those things didn't work. I am not going to share it, but the things we failed at, either, both the others will fail at them as they try them, just like we did. But we found some things that worked in a number of things; and again, I want to really make sure, our business, as we think about it, we have to think about it differently by department. So things in men's are significantly different than how we might think about them in our women's business. So we had great success with what we did in our private label. We had great success with what we did on the package deals, which involved both our private label and branded products. At the same time, we are having success selling full price fashion in a number of key categories. So you are seeing us go after those categories in each department as it makes sense.

And gain, we are seeing some success in selling key brands that are on the up trend; and again, I will ask Trevor to comment kind of a little bit about the broad brand strategy results from this last year, too, in terms of kind of reporting a bit on that. We learned a lot. And again, I don't want to get too specific about it. And we are going to build on those things as we go forward season by season, because each season will have a bit of a different strategy based upon the mix of the different products that we are going to be looking at. We will try to, as we always are, focus really carefully into those back to school windows and those holiday windows when we make most of our profits for the year. And so we are working with our brands, we are working with our private label team and saying let's really think about how we are going to do this.

Now, in the package deals, Dorothy, I am not that concerned about others trying to copy us on it, frankly, because those package deals to really, really work, require great sales people. Those deals have to be sold and presented to the consumer. One of the reasons that we can make that work is because of the confidence that we have in our sales teams out there -- how we measure that and how we drive success on that and how we incent those programs. So I am not sure that it is as easily replicable as it might look like from the outside.

Yes. The only thing I would add to that, Dorothy -- this is Trevor -- is we are more brand unique probably now than we have ever been. This is the fourth year in a row where we have had pretty significant turnover, not only in our top ten brands but our top 20 brands. So we are seeing the cycle of continuing unique brands are more important than ever. And just in this last year alone, we had four new brands come into the top ten that were not in the top ten last year; and in the top 20, we had a total of between -- before that I just mentioned, about three more in the top 20 -- so we have seven brands in the top 20 in the previous year. And we have had about a 300 basis point swing from the amount of business that was concentrated in the top 20 going to a less than a top 20, meaning a higher proportion of the smaller brands are taking market share. And that, again -- to Rick's point -- that is something that's unique, because alot of these brands are very resolute and disciplined about where they open distribution and they have seen what's happened to brands when they open distribution that's not right for the long term interest. And so I think that is something that is a competitive advantage and we are good at. And I think again the other thing, our private label team has done a great job. We have a very poignant strategy for our private label on what is going to hit the basic core commodity price, what's going to be the high end price, what's going to be the lifestyle attributes that we are focused on. So I think all of those things are hard to explain in a short period of time. But the product strategy is very well understood and very well articulated. We know where we have some opportunities to drive incremental sales and we are focused on doing that.

Yes. I just want to build on that comment quickly again, Dorothy. You have heard us say many times about our private label sales will be about complimenting and supplementing the brands, and this is a great example of that (inaudible) outline. There is a basic program out there that our brands don't want to play at those price points, but that's where our private label comes into play. And then as Trevor highlighted, we have these small brands that are taking a bigger share of our over all sales. And that is very exciting for us, too, because that means typically those small brands are selling at full price.

Yes.

So that is the interesting thing about our business. And then you have to -- as I said at the beginning of the response to this question, you have to kind of layer that department by department in terms of how you see those play out.

Great. Thanks so much for the detail, and good luck.

Thank you, Dorothy.

Your next question comes from the line of [Justin Sendarin] from B. Riley. Please proceed.

Afternoon. As we are thinking about back to school, how should we think about your inventory planning in terms of up percentage versus what you are planning in terms of comp? I know you laid out in some guidance for the year in terms of where you think comps can come in, but how should we think about that relationship to inventory planning versus your planned comp?

Yes, Jeff, this is Trevor. It is a good question. We, for most of the last two years, have had a decline in our inventory per square foot greater than our sales per square foot. And that was warranted because of the difficult Great Recession that we were in during the last two years. We now are seeing, obviously, much better sales both from our new stores as well as our comping stores. And so we are probably going to be investing in inventory. So you should expect our investment in inventory per square foot to be below our comp store sales guidance, but yet not negative. So the guidance we gave was sort of mid single digit to upper single digit. You should then expect our inventories to be increasing, at least for the first quarter, probably in the low single digit range. And depending on how business trends, we can take that up if we continue to see what we saw in February.

Okay. And then, as a follow-up, just wanted to get any more color, if possible, on what we should expect to see in the evolution of your junior's business. I know you are working on a bunch of things. So any color or detail you can give us there would be great.

Yes. I think as we have talked about in previous calls, we hired -- started -- our processed in reevaluating junior's started with hiring a new DMM for the position, Jeff. That position joined us in early December. I am not going to share too much of the details of what we are thinking about here. But we are listening, we're learning about how we need to think about this business differently than I think we have in the past. I can tell you that nothing is being left untouched in our evaluation, whether it is product, whether it is how we sell the product, it's product knowledge in the stores, how we merchandise the product, how we sign the product, how we market the product. We have a complete team looking at everything as it relates to our women's business. And so, I am not going to get into the details of what we are doing. I would rather let our actions speak over the next few months, and particularly back to school to see how we do. But I want to assure you that we are leaving nothing untouched in our evaluation of what we are doing in women's.

Got it. Thanks and good luck for the rest of the quarter.

Thank you. Your next question comes from of Linda Tsai from MKM Partners. Please proceed.

Hi. Could you provide a little more color in the accessories and footwear business? What have you been doing differently there over the past year, and what is working?

Linda, this is Trevor. So on the accessories piece of the business, that is probably one of the places we are most unique. We have product offerings that other people don't even have -- certain categories that people don't even sell. We have brands that are very hard to find in the mall. And then we have special things made for us that are unique. And accessories has been doing better for us, I want to say probably at least the last couple of quarters and into the first quarter of this year. So I think it's just a lot of uniqueness, a lot of things hard to find elsewhere in the mall. The team has done a good job of merchandising. The other thing about accessories is, it is generally lower averaging retail for us and I think we've seen this kind of secular trend moving to lower cost items, so it is easier from a gift giving perspective to give something that has a lower average unit retail cost, and I think that is part of what we saw in the fourth quarter. And on the men's side of the business, it is very broad. We are seeing success against almost all category within the men's department. And again, I think it has to do with the merchandising strategies and the uniqueness of our product offerings.

How about footwear?

Footwear has been one of our best departments going on two years now. I think for most of -- in fiscal 2008 when we comped down 6.5%, footwear actually comped up 10%. This last fiscal year, I think it was a very slight positive comp on a negative 10 comp for the year. I think our footwear was up just a bit. And again, same answer, which is we have got a lot of unique brands that are hard to find. It fits in well with the lifestyle. And there was a lot of unique interesting -- not only brands, but silhouette that have come out over the last two years. I think the footwear business over the last two years has done a good job at being a trend setter and I think that had as much to do with it as we did.

And I would add to that, Linda, that (inaudible) last commentary, there are cycles we go through where different departments lead the trend cycle. And we have been, in the last few years, in a footwear driven trend cycle, where it seems to be starting with kids with a high level interest in the uniqueness of product -- silhouettes, brands. And now we've kind of run that for a couple of years, and I think we're seeing that flatten out a little bit, kind of normal to the cycle. And you said, we are seeing other departments like accessories and in our men's business, kind of become -- take a leading position relative to the cycle. So again, as you think about the business from an overall trend perspective, those are kind of the things that we expect to see play out.

And when you say uniqueness, you mean unique to the mall or unique as a SKU, where you have actually worked with the vendor to come up with something totally unique?

We mean -- in certain cases we mean silhouettes that are unique to us because of the unique -- of a brand -- from a brand offering perspective that is unique to us, or it's just flat out -- it's the brand that's got some momentum that is unique to us.

Got it. Thanks, and good luck.

Thank you.

Your next question comes from Rob Wilson from [Tetheron] Research. Please proceed.

Yes, Trevor, a little bit ago you talked about $1 million of expenses hitting cost of goods sold in Q1. Is this amount tied to the 1.2 million that's on the press release as a charge?

Yes. That's right. Because our D.C expenses flow through our cost of goods sold and therefore, impact gross margin, when we incur some of those cost in the first quarter, it will flow through our cost of goods sold and therefore impact our margins. So yes. Said another way, if we weren't closing down -- or relocating is a better way to say that -- our distribution center, the projection of our margins would have been some portion of 130 basis points better. Currently we are projecting our margins to be sort of flat to down a little bit; but again, that includes about 130 basis points estimate for the D.C. closure relocation cost.

So the other 200,000 will be in SG&A?

That's right.

Okay, and one other thing. You mentioned that $2.5 million of charges for store impairments, and you said 1.8 million was in Q4. Was the other 700,000 in Q3?

They were in Q2 and Q3. I think it was $300,000 in Q3 and maybe $400,000 in Q4. I'm sorry, Q2 and Q3. I apologize.

That is very helpful. Thank you.

Yes. Sure.

Your next question comes from Jennifer Black from Jennifer Black. Plead proceed.

Hey, congratulations on making significant headway. I have a question about the skateboard market. And I know it is small, but it seems like it is something that really attracts kids and gets them started. And I wanted to know if you have the current statistics of the size of the skateboard market, how you feel about where the sport is going, and just any comments you have I would love to hear. Thank you.

Great, Jennifer. Glad to try to help you out a bit. We do have some data. I don't have it here at my fingertips so -- and I don't want to try to recall it without having it here to give it to you more specifically, but perhaps something we can follow-up on. But let me say that in the skateboard marketplace, I think all of our industry is being somewhat affected by the fact that we are in a negative demographic cycle for 13 to 16-year-olds.

So I think that has made it a bit tougher in the skateboard marketplace because that is the key age group in that skateboard marketplace. Now it goes younger, it goes older, but that's the core concentrated age group. So that would be the first thing I want to remind everybody is that we are in this negative teen demographic cycle for another couple of years in the process. So that is negatively, as we perceive it, impacting our business. I also think that the dollar ticket level her of -- again, I think our experience through the recession has been that the higher the ticket is, the more challenging the business can be as it relates to a value proposition. And so I think you find that kids are willing to trade down, to some ways shop decks at a lower priced points.

Those are not also things we have chosen to do here from our perspective of the business. We don't do Zumiez shop decks. We kind of stay away from that. We stay away -- that means we stay away from the low end of the pricing of the skate decks. And that may hurt us a little bit, but I think it is a right long term position as a good our partner for our brands. So those are kind of the two things that I'd remind you of. One, kind of macro economically driven, and then the other demographically driven. And I can tell you that as it relates to participant levels, I'm not aware of any -- recalling the research, I don't -- I can't tell you there's any significant movement in participation that would signal some kind of flag to the industry. In fact, I think it is the opposite. The numbers are very encouraging.

Okay. I will follow-up with the rest of the question. Thank you.

Thanks.

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

Thank you, guys. I just want to dig in a little bit on your thinking around the first quarter comp guidance. I think, Trevor, you mentioned mid to high single digits. That would imply a deceleration from where you were in February. So can you give us some insight into your comfort level with that range? Is that conservatism or should we read into that as something structural that's leading you to believe there is going to be an accepted moderation?

Steph, this is Trevor. So I guess I would say we probably are being a bit conservative. We have done that historically, for the last five or six quarters, doing better than plan.

Okay, that is helpful. And then secondly, two related questions. But on the 25 new stores you have planned for 2010, can you just give us some sense of geographic concentration, or maybe by type of center or type of mall, and then an update on your outlook strategy? Thank you, guys.

Yes, so currently, our outlooks represent about 14% of our sales base. And I'm just flipping to a page here that has some of this data for me.

While Trevor is doing that, Steph, I will make the first comment there in terms of the nature of the centers. As you would guess and as we said at the ICR conference in January, we have reevaluated the overall target number for our stores and put it in that 600 to 700 store range. And as part of that strategy, particularly influenced by the recession, we have been focusing now in terms of our targets for these locations on primarily what we consider to be AA, A and B centers. Now, we would define that -- again, that is within our own definition parameters, but think of it as A and B malls. And we really have been focusing in on areas where we can find good economics and good locations in the more higher quality centers, because we are concerned that some of the lower end centers just aren't going to perform well over the next few year.

The other thing is -- just following on to Rick's comment, then I'll your answer your question. What is interesting is we have gone through and looked at 600 the 700 centers. We looked at obviously the ones we're in and what's left to be done. We actually have a slightly higher percentage of the higher volume malls left to open. And so, as you would expect, our higher volume malls generally perform better for us from an operating profit dollar perspective, and so that should bode well for the long term, as well. But to answer your question specifically, the current plans of the 25 stores -- and not every single deal is done, but this should be directionally close -- we have currently four stores planned for the west, about 16% of our new stores; Aix stores in the south, about 24% of our new stores; eight stores in the Midwest, 32% of our new stores there; and the northeast is planned for seven or 28% of our new stores.

Thanks, guys. Best of luck.

Thank you.

Your next question comes from of Andrew Burns from Thomas Weisel. Please proceed.

Hi, this is Andrew in for Jim Duffy of Thomas Weisel Partners. Congratulations on the quarter. Two quick questions. Just in broad terms, if you could help frame up how you think about store growth beyond 2010 and whether the decision to reaccelerate is primarily dependent on a continued improvement in the economy, or does the new higher criteria of the A and B malls somewhat slow that growth trajectory down?

Let me talk to macro, and then I'll get into maybe some of the more detail. So our goal, as I mentioned at the very end of my prepared comments, is we want to have high sort of teen sales growth, maybe low to mid-20s depending on how well business is that year, sort of top line growth, if you will. We also want to grow our operating profit at a faster rate than our total sales growth so that we can get that organic operating margin back and ultimately get to that low double-digit, low teen range operating margin. And so we are going to address that as the sort of the results dictate that; meaning if results are better, we might accelerate some of that, if the results are worse, we will slow some of that down. I think as it regards to new store openings, historically, until we got into the fiscal 2009, the Company had opened 20% new unit growth.

I think as one of the very few benefits of the last sort of 18 months difficulty of businesses, it has allowed us to refocus our efforts on the quality of how we grow our business. And we feel like we have got a much more sustainable path for growth to get similar top line results, but not get there through 20% new unit growth. And that's really what we are focused on, is growing the whole retail concept -- not just the unit growth, but the e-Commerce business, sort of the multichannel concept, the new stores and comp store growth. And I think that we think that that is a more sustainable model to have long term growth for us. Specifically on new stores, I will tell you it is still a very difficult environment to open new stores. The landlords are not -- they don't feel the impact as fast as the retailers do because they have long term contracts with most retailers, and so they are still difficult to get deals done in this environment. We would have thought, and I think most retailers would have thought, that it would be easier in this environment. It's not.

And so we are going to be very diligent. We have a very focused agenda on how we want to open our stores -- 50% new markets, 50% existing markets, a mix of A, B, and C malls, and we want to get the return metrics back up to where they were historically. And so we are going to continue to be disciplined about that, and we will work with our landlord partners to get that achieved.

And I'd just add to that, Andrew, that as it relates to 2010, we are commit today opening 25 stores, that we said here. But I would also say that if this trend continues, we feel comfortable with the sales trend that we reported in February. We continue to build confidence as we move into the year. We are certainly willing to open more locations this year, and we will consider more locations if we can strike the right deals with landlords.

Great. Thank you. And one more question, with 2009 characterized by a consumer preference towards value oriented offerings, lower cost offerings, and then a strong start here to 2010, have you noticed any change in consumer preference possibly leaning towards increased appetite for higher ticket apparel items?

I just would say one thing. Our AUR, even with the results we had in February, was down in the mid single digits. So I think what you are seeing in this market -- and I have seen some of the people that we think are really good retailers say this -- people are willing to pay for something special. But if it's not special, you had better be really sharp on price. And so that's how we've thought about the business, is we have basic items that are basic -- they're good quality, good lasting basic items, and they are at fair, reasonably low price; and then we have other products that are brands that are unique, you can't get elsewhere in the mall, it's a silhouette, something else that, as Rick mentioned earlier, will sell at a price. And so I think value means different things to different people. And if it is about price, we've got that. If it is about something unique that's hard to find and you are willing to pay for that, we've got that.

Great, thank you.

Your last question comes from [Kapash Bari] from Jefferies & Company. Please proceed.

Hey guys, it's Kapash Bari filling in for Randy. Trevor, I guess as a quick clarification on the SG&A, so you mentioned about $1 million worth of one time cost savings in the first quarter of 2009. I just wanted to see if there were any other quarters we should be aware of in 2009 that had any kind of, I guess, one time cost cuts. And then on the legal expenses in the first quarter of 2010, is that something that should just be a one quarter event, or is there a likelihood that that might continue into 2Q? Thanks.

So on the first question, we clearly disclosed both in our earnings release and our 10K in the second quarter of last year -- I'd reemphasize it here in my points here -- we had a $1.3 million legal settlement charge what we insured in the second quarter of last year. That shouldn't be new. I think some analysts maybe decided to exclude that. As we mentioned as well in previous 10-Ks and 10-Qs, we have had impairment charges in the second quarter, the third quarter and the fourth quarter -- the second quarter number was, I think, about $300,000, the third quarter number was about $400,000, and the fourth quarter number we just reported was 1.8, so that is going to be something unique. As I said in the 8-K that we filed back in February, the distribution center closure costs are going to be $1.2 million in the current quarter, I think we said 1.5 million that will be incurred in the second quarter. So we're going to continue in the press release to call out some of those unique items. I don't think anything other than those comes to mind other than, as I mentioned in my prepared comments, for the second year in a row we have grown our SG&A at about half the growth in square footage, with the 80% of our SG&A being tied with square footage. And so I would characterize, we put up a pretty aggressive stance on cost reductions each of the last two years, and that will be more difficult in this year. And the other piece that Rick and I both reiterated clearly is we are a lot more focused on driving the top line this years, and we are going to make investments to do that.

Great. And then on the legal fees in 1Q, 2010, any chance that could continue into the second quarter, or the rest of the year?

Yes.

Okay. Thanks, and good luck, guys.

Thanks, Kapesh.

Ladies and gentlemen, this concludes the question-and-answer portion of the call. I will now turn the call back over to Mr. Brooks for closing remarks.

Thank you very much. We appreciate everyone's interest in following Zumiez so closely, and we will look forward to talking to all of you on our first quarter conference call in May. Thank you, everybody.

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