Zumiez Inc (ZUMZ) 2010 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Zumiez, Incorporated fiscal 2010 first quarter earnings call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. 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 the projected results is contained in the Company's annual report on Form 10-K and other documents filed with the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements, no reporting or rebroadcasting 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 Zumiez's first quarter of fiscal 2010 results. Joining me today is Trevor Lang, our Chief Financial and Administrative Officer. Following my opening remarks, Trevor will review our financial and operating highlights.

2010 is off to a solid start. Highlighted by good, topline momentum. Our first quarter comparable store sales were our strongest quarterly performance since the third quarter of 2007. I think it's fair to say that some of the improvement can be attributed to a better selling environment and a healthier economy versus a year ago. Especially in the west where we have the majority of our stores and revenue. However, we are confident that the internal initiatives developed and implemented over the past year reinforced by our mission to be the leading destination for the action sports lifestyle is driving important market share gains.

The first quarter was very much about having unique merchandise in our stores that reflect our position as the place for branded action sports products. Our diverse mix of well established brands and new innovative hard to find brands across apparel, accessories, hard goods and footwear has generated compelling sales and product margin results. Over the past year, we have made merchandising, promotional, sales and marketing adjustments that have resonated with our customers and differentiated us from other retailers in the mall. Good inventory management, slightly increased initial markups and favorable mix all contributed to 130 basis point increase in product margins.

While it is very difficult to predict consumer sentiment and we remain very concerned about macroeconomic conditions, we do know that when customers come out to buy, we seem to do well. I'm pleased with the strategic direction we are headed and our team's discipline on managing expenses while investing in infrastructure and talent. We managed to improve our first quarter operating margin by 80 basis points while moving our sole distribution center and if current trends continue we are planning on improving our annual operating margins over fiscal 2009.

We will continue to make investments that further improve our ability to never miss a sale and improve the shopping experience for our customers. We've discussed our initiatives in the past but as a quick reminder some of the more important growth vehicles we are focused on include, adding high return new stores, adding infrastructure projects that facilitate much better merchandising, analysis and planning decisions. In fact we are rolling out our first major phase of this project merchandise business intelligence over the next few months. This solution will allow for better, faster and more intuitive reporting and improve exception based analysis like sizing and color opportunities. This will ultimately lead us to the implementation of a new assortment planning tool that should allow us to plan and micro merchandise our business better over the next few years. Our e-commerce business continues to perform very well up almost 90% in the first quarter.

The investment we have made to enhance our platform are yielding great results with first quarter sales accelerating above recent growth trends. The new platform we rolled out last summer is paying dividends with a much more scalable and flexible system that resonates more with customers and provides a better user experience.

We are doing a much better job of converting customers that come to our website. And we continue to make investments throughout the remainder of this year and in future years to engage our customers in a broader multichannel experience. With good sales momentum coming out of the first quarter, we are planning for our improved trends to continue as we head into summer and toward back to school.

We are keenly focused on executing well in back to school and believe the strategies we are implementing give us a great chance for success. We believe we have the right strategies in place that will allow us to successfully capitalize on our near term growth opportunities while at the same time better position the Company to achieve our long term sales and operating margin objectives.

As we outlined on the fourth quarter call, our top line strategies are designed around driving same-store sales gains, opening new stores, growing our e-commerce and multichannel sales as well as other potential new initiatives. We believe that by focusing on these strategies we will again be able to drive double digit revenue growth without returning to 20% annual square footage growth and more importantly grow our operating profit at a rate faster than sales to ultimately obtain operating margins in the low double digit to low teen range. With that I would turn the call to Trevor who will review the financial results in greater detail and discuss our outlook. Trevor?

Thanks, Rick. And good afternoon, everyone. The combination of strong sales growth and better than expected margins helped more than offset planned operating expense increases including the relocation of our distribution center to Corona, California and report a diluted loss per share that was better than our initial guidance.

We are very pleased that we drove double digit sales increases while managing the complexities of moving our sole distribution center from Everett, Washington to Corona, California. We made this transition with minimal interruption to the business and we believe this long term strategic investment provides us with the scalable distribution center we need to grow our stores from 381 today to 600 to 700 stores in the future.

For the first quarter net sales totaled $89,100,000, an increase of $12,300,000 or 16% compared to $76,800,000 in last year's first quarter. The increase in net sales was driven by a comp store sales increase of 9.1% and the opening of 27 new stores since the end of the first quarter of 2009. To break down these results a little bit further, for the first time since the second quarter of 2007, our stores west of Texas representing over half of our total stores in revenue had comparable store sales results that were better than the rest of the regions, up over 10%.

All regions had a comp store gain for the quarter. Our direct channel sales results continued an acceleration we have reported over the last couple of quarters and increased almost 90%. Our men's and accessories departments were the biggest contributors to our positive comps in the quarter. Our success in these two departments, which is almost 50% of our sales, is broad based across categories. Our footwear and boys departments also comped positive while our hard goods and Juniors departments had negative comp results. Our comparable store sales gains are being driven by increases in transactions with a minor reduction in dollars per transaction. The decrease in dollars per transaction is being driven by a mid single digit decrease in average unit retail. Mostly offset by an increase in units per transaction.

Gross profit for the first quarter of 2010 increased $3,900,000 or almost 18% to $25,800,000 or 28.9% of sales compared to gross profit of $21,900,000 or 28.5% of net sales in the first quarter last year. The increase in gross profit margin of 40 basis points was driven primarily by higher product margins, a reduction in occupancy cost as a percentage of sales and improved shrink results partially offset by costs associated with the relocation of our distribution center. Excluding identifiable costs of $1,200,000 associated with our distribution center relocation, our gross profit margin would have been 130 basis points higher than last years first quarter.

Moving to expenses, in total SG&A expenses increased $300,700,000 or 14.5% to $29 million compared to $25,300,000. However, decreases as a percent of net sales to 32.6% from 33% of net sales in the first quarter last year.

As Rick previously mentioned, we are making important long term investments in our infrastructure including our web, multichannel efforts, IT systems and store systems. As I mentioned on the last call, we are also recruiting for bonuses this is year which was not the case in the first quarter of 2010. The primary reasons for the decrease in SG&A as a percentage of sales, was due to a change in estimated useful life of our leasehold improvements which are the initial capital assets related to the build out of our stores.

In the first quarter, we evaluated the historical life of our leasehold improvements and changed the depreciation life from seven years to ten years which is a better and more accurate reflection of these assets. For the quarter, we had an operating loss of $3,300,000 in the first quarter compared to a loss of $3,400,000 in last year's first quarter. We reported a tax benefit of $1 million during the first quarter compared to a tax benefit of $1,400,000 in the first quarter of 2009.

Our net loss for the first quarter was $1,900,000 or $0.06 per diluted share compared to a net loss of $1,700,000 or $0.06 per diluted share in last year's first quarter. Included in our 2010 first quarter results are identifiable costs of approximately $0.03 per diluted share associated with the relocation of our distribution center from Everett, Washington to Corona, California.

Turning to key balance sheet highlights. At May 1, 2010, cash and marketable securities increased $15,700,000 or 19.4% to $96,800,000 from $81,100,000 at May 2, 2009. Inventory was $58,600,000 versus $54,100,000 a year ago, representing an 8.4% increase from the first quarter of fiscal 2009.

At the end of the quarter inventory increased by about 2% on a per square foot basis from the same time last year. Based on our success over the last several months, we are increasing our inventory investment albeit lower than sales gain on a per store basis for the first time in six quarters.

Our merchandising team has done a good job of managing inventory for a long time. When we were in the midst of the great recession, we were lowering our inventory investment but now the business has improved we are making strategic investment that we deem appropriate. Also at May 1, 2010, the Company had no debt including no outstanding balances on its revolving credit facility.

Now let me turn to our guidance. For the second quarter, we are planning same-store sales increases in the mid to upper single digit and total sales to be in the range of $93 million to $96 million. On a GAAP basis operating margins are planned to be in the negative 4% to 5% range and our diluted loss per share is expected to be in the range of $0.07 to $0.10. Included in these estimates are charges of approximately $1,300,000 or $0.03 per share associated with the relocation of our DC from Everett to Corona.

For comparative purposes, last year's second quarter GAAP loss of $0.10 per share included $1.6 million or $0.03 per share of expenses related to the settlement of the Johnson California wage and hour lawsuit and non-cash impairment charges. Now 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 been about 20% of our full year earnings and much less significant due to their lower volumes. The vast majority of our profits are earned beginning in July and beyond.

What we discussed on the March 2010 earnings call for the year, we are planning our sales including our same-store sales to be up for fiscal 2010. We plan to open approximately 25 new stores and close 4 stores, invest in our e-commerce infrastructure and our merchandising systems as well as our distribution supply chain platform.

Our current plans call for about $27 million to $28 million in CapEx including the investment of our new DC in Corona, California for about $13 million. We also expect depreciation and amortization to be about $18 million versus $22 million in fiscal 2009. We still expect our full year earnings to grow at a faster rate than sales in 2010, to the extent we obtain a low to mid same store sales gain. We are focused on growing our sales and our operating profit organically and we believe we can flow through incremental sales to an operating profit at a 25% to 35% rate in fiscal 2010 if we exceed the low to mid single digit same store sales growth. We will now turn the call over for questions.

(Operator Instructions) Your first question comes from the line of Edward Yruma with Keybanc. Please proceed. Sir, your line is open. Your next question comes from Christine Shannon with Needham & Company.

Thank you. A nice sales improvement in the quarter.

Thank you.

I was wondering as we think about the second quarter and your guidance we are hearing about calendar shifts out of May into June, out of June into July. Can you help us magnified what the shift would be probably not as big as the Easter shift I would imagine? And then I have a housekeeping question.

Yes. We've looked at the Memorial Day shift. Our estimation is that it will be a small single digit impact and even less of an impact in the month of June. So there would be a detriment for the month of May and a small, minor adjustment positively to the month of June. June's a five week month so it gets even less material in the month of June than it does in May. So, that's the only big shift I think we are planning on.

Okay. And then could you just is give us your ending square footage number?

Yes. I am looking for that real quick. 1.147 million.

As you look ahead to the back to school season, what do you think the opportunities are as far as your product assortment?

Christine, I think what you are going to see us continue to execute the strategies we started a year ago back to school. We've been obviously learning and refining on those. We believe that going into this back to school season, value will still be very important to the consumer and so you are going to see us continue to find ways to for us to within our brand of business deliver value for our consumer and one of the most obvious ways is the bundling that we've been doing. But at the same time we are finding that when we have that hot branded piece of fashion, those items are selling quickly and selling at full price. So you are going to find that we will try to do a bit of both of those based upon category specific, department and category specific groupings and try to hit those right fashion pieces.

This is Trevor. I want to correct one thing. Our ending square footage was 1.119 million square foot at the end of the quarter.

The only other comment I'd give about product is we are seeing obviously pretty broad success out there in our men's and accessories department. We have seen success both of the less expensive stuff the private label and lots of successes with higher price branded products. As we mentioned on the year end earnings call, lots of diversity in turn over has happened and is continuing to happen. And so we also probably have a little built of opportunity for inventory. We have some great thing sell through last year that we are focused on having a better inventory position on. So there's been some recent volatility in the market that can affect consumer behavior but as far as our strategies, we feel pretty good as we look to the back to school period.

Great. Thank you and good luck.

Thank you.

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

Good afternoon and thanks for taking my questions. A couple of them. First on the juniors business are you seeing any signs of life there and what are some things that you are doing on the juniors business to try to resuscitate performance with that?

Jim, like in general in our business as Trevor said we are still in our junior's department comping negatively in this last quarter, but the trends have improved in terms of directionally. The negatives are smaller then they have been in previous quarters. We are a bit encouraged there. We still have a lot of work to do. Again, you're going to see us as I've said previously attack virtually everything we're trying to do. From how we sign things in stores, we are going to be testing different fixtures in the back to school window. Pretty much, as I've said previously, we are not going to leave anything untouched as we try to drive this business forward.

I don't want to get too detail on what specific we are doing around the product side because it's a competitive marketplace. So we are continuing to experience an overall basis average retail losses. That is more true in the junior's business for us. I'm hoping that we will anniversary those in the latter part of the third quarter which should help us obviously. So those are the main things. Again, I don't want to get too detailed, Jim. We are looking for everything that we can do and a merchandising and the marketing side.

This is Trevor. Unlike most of the publicly trade team retailers where juniors is some portion of 60% of their sales, just a reminder, juniors for us is about 11%. It's much less significant piece of the business than the publicly traded team specialty retailers.

Right. It used to be a larger percentage though.

A little bit. I think at the cap it was 15% maybe 16% It was 14% two years ago and now it's closer to 11%.

Okay. Rick or Trevor, with this improving some as you look at the store labor and your plans for store labor and back to school, do you expect to add staff versus year ago levels or will store staffing be running at pretty similar rates?

This is Trevor. For the first half of the year our stores are operating on a minimum hours and a lot of those stores were operating on a minimum hours before the last two years. So, there is not a lot of new staff being added to the first half of the year. As we get back to the back half of the year were the volume is, we will add staff based on sales expectations. We have a matrix like most retailers and we're pretty good at understanding it and projecting how stores are doing and adding labor appropriately. So we are very glad in the first quarter, we leveraged on the labor line and if we have same-store sales experience growth throughout the rest of this year our goal would be to continue to leverage that line item as well as the overall operating margin as well.

Okay. Final question and I'll let someone else jump in. You mentioned you are bringing in inventories earlier or I should say bringing inventories. Have you had or do you expect to have any delays in the timing of receipts due to labor and container shortages or have you, are you anticipating any issues in your private label program with regards to timing of receipts as you look at your sourcing base?

We have tried to anticipate some of that by, how we schedule the receipts. So we've been trying to be more conservative relative to those key, particularly our private label business. So we tried to anticipate some of that to make sure that we give ourselves more room to maneuver and like wise our brands are all trying to work on the same kind of strategy. As you know for us we need our brands delivered within our windows too. So we will focus on a category by category basis as we address that. But within our own business, what we can physically control ourselves, yes, we have been trying to move up receipt dates and give ourselves a little more cushion.

And Rick, are there penalties for the brands if they don't deliver on time, they can help you perhaps recoup some of that on the margin?

We have agreements with the brands. But we are not ones to charge our brands penalties unless it's something big or we are missing sales. That is not our mode of operation. And our brands have been very, very good about hitting our windows for a long period of time. So I don't anticipate we are going to see any major issues on that front.

Okay. Great. Thanks very much. Good luck.

Thanks.

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

Hi good afternoon. I wanted to ask a few questions on SG&A. I know there's a lot going on right now in SG&A, but I guess if we were to strip out kind of bonus and some of the other issues did you have litigation in the quarter? Because I think you had expected that but if you strip out some of those kinds of difference and timing, and maybe one time expenses what kind of leverage would you expect to get on a 9% comp? It strikes me 40 basis points a little low.

The Corona, the move to Corona rolls through our gross margin and as we said on the call, that is some portion of $1.2 million and that was worth about 130 basis points alone. Had we not made that move, you're right, the 40 basis points would have been higher, close to 170 basis points. In regards to the legal expense and the bonus accrual, the cost there, those numbers almost kind of offset with the depreciation change we made. Those offset each other, and so I think the big reason that you wouldn't have had some of the operating margin acceleration that you would have expected is the DC because all the other, we are accruing more bonus, there are other costs that are going one way, but then we had this favorable depreciation adjustment going the other way, those mostly offset each other I think in total.

My question was more on the SG&A side because I understood the DC move in the gross margin. Without the depreciation change, presumably SG&A would have been up year-over-year on a percentage basis?

Certainly.

I'm looking for, you know, if you didn't have all these moving parts and SG&A, is the 40 basis point leverage what you would expect with a 9% comp? It's just hard to tell as we start to kind of ramp-up some of the initiatives again.

When you say 40 base, on the gross margin or.

No. SG&A. SG&A is 32.6 versus 33 a year ago which isn't a whole lot of leverage on a 9% comp. So, I'm trying to figure out where your leverage is on SG&A going forward.

I mean, our goal, most of last two years, we have grown our SG&A half the growth of square footage. Last year we had a few things go our way on the cost savings side. This year as we look at our full year growth, we plan to have our SG&A grow probably closer to the growth in square footage. If you back out impairment charges and legal charges we had last year. On a comparable basis so we would see sour SG&A growing for a full year at or above the square footage growth so to the extent we run same store sales gains, we are going to get leverage in SG&A. But it is important to note that we are making the investments we talked about. We are accruing our bonuses. We are making investments in IT and talent and I'll just reflect back on the final comments in the prepared comments, which is our goal this year to the extent we drive a mid to slightly below a mid single digit same store sales gain, we're going to have operating margin leverage. I think that will come both from SG&A leverage as well as gross margin leverage.

Okay. And then separately for Rick, as you look out and the comps have been positive, are you thinking more about the accelerating square footage growth in 2011? It sounds as maybe there's a different algorithm to getting to this sales growth over time. I guess I'm just curious how you are viewing the landlords and where they are versus where you want them to be.

I mean, you are presumption there is correct in terms of our thinking, Sharon. We are anticipating again as we said in comments we are not going to return to 20% square footage growth and we don't have to grow double digit sales growth as well as expanding our operating margin. Our thinking is that as you know we brought down the number of stores to more in the range of 600 to 700 stores from our previous 800. Our thinking to a great extent that we have tremendous opportunities in the direct and multichannel world, and that we believe that and expect that our current stores over time as we execute the strategies we are doing there are going to become more productive stores and we probably won't need as many stores as we originally thought we would to achieve our end sales objectives for the company.

So we expect that that's long term, our thinking about how this will play out. As it relates to working with landlords at this point, we still are probably not seeing the kind of deals we would expect to see from our landlords relative to the pain of the sales losses over the last two years. And we do need to see landlords where that new sales if now at so we can drive the kind of deals that we want to drive that we need to drive to make our economics work. We are doing deals this year. We are adding the net 21 stores that Trevor discussed and obviously we would probably accelerate if we can get the kind of deals we want we would accelerate square footage growth higher than a 21 unit growth in future years but that is a function of the overall macroeconomic condition and a function of our ability to drive the right kind of returns with our landlords.

Lastly I'm going to throw back some of your words at you Rick from earlier. Because I haven't heard it yet this quarter. So you said you felt like you had good sales momentum coming out of the first quarter. You are the only company I've heard say that so far in May. Any elaboration?

No.

Alright. Thanks.

Thanks Sharon.

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

On the e-commerce business you said it was up 90% in the quarter. Can you talk more about that? How big is that business? What drove that level of increase?

Again I want to put this on a historical, remind everyone, Mitch of the historical basis here, which is we are coming from behind in the e-commerce world and the good news I think for us and our shareholders is we are making good progress from going back to when we hired our leader there about just over 18 months ago. We hired a new leader for our e-commerce team experienced multichannel retailer and pretty much he's laid out a plan.

We are executing right on schedule that plan as Trevor mentioned and that includes relaunching our site last July, enhancing our ability store search and browse. You will see more of that happening every week as we to make progress on the website. Pretty much at the end of '08 our e-commerce business was about 1% of sales. It's currently trending at about 3% of sales Mitch. So again you can see that we are making real progress on that front, and I think it's an area to Sharon's question, has potential that we are going to build in a major way.

On the product margin Rick, I think you mentioned what that was in the quarter. What is the opportunity for continued product margin expansion into Q2?

This is Trevor. So I think we said product margin is about 130 basis points in the quarter and that was driven by strength across the board, but accessories in men's was not only the comp driver but also the driver of the margin and there is some mix benefit in there as well. We see continued opportunity in the second quarter. Some of the successes that we've had and really the fourth quarter of last year, we do see that continuing. As we get, as we get to the end of the third quarter and early 2011, we are talking to the same folks that you guys are and I guess a balance of power between supply and demand is shifting back to Asia. When that happens, capacity tightens, lead times increase and cost increases. So I think as we look forward disease back half of the year really after the back to school period it's probably going to be a bit different than what we are seeing today.

Okay. Trevor on the DC relocation expenses, did those end in Q2 or did they continue into the back half?

The material components end in Q2. There would be some minor pieces but immaterial to the overall cost. The vast majority of those costs will be incurred and done in Q2. The only one minor caveat that I would put to that you have to evaluate every quarter end the lease commitments you have on the idle facilities up here and we need to be cognizant if we don't get a sublessor in this building, that we would have to take minor charges into the future until we get this available square footage up here subleased to someone else.

You talked in your prepared remarks implements a planning tool to better micro merchandise. What can you tell us about, what will that do to your business? How would that improve your ability to micro merchandise?

Great question. I appreciate you mentioning that because as you know one of our goals has always been that we want each store to be different through the people in the store, through the vibe that we set in the store. This has always been an issue for us. The right brands for the right markets and the right depth by brand. Now, what we are hoping to do here is take that to a whole new level with new and better tools and the theory is this. Our long-term goal would be that, this is again a long-term goal. It isn't something and the kind of detailed planning we are talking about doing Mitch is again each time you get more detail as you do this, as you dig into these assortment plans. The kind of work it takes to do this will take multiple years to see the full benefit. As we do that we would expect to see that sales would improve, markdowns would decline over time. Receipts would flow better into the system, and so over the long term, we expect to see better sales and better margins off of this effort by again better micro assortment stores. We are going to see this play out over the next three years.

Okay. Great. Thanks. Good luck.

Thank you.

(Operator Instructions) Your next question comes from the line of Jennifer Black with Jennifer Black & Associates. Please proceed.

Hi. Thank you for taking my call. This is actually Carla White filling in for Jennifer. Question, can you talk about your hards good business and how you are positioned in light of the fact that you indicated we are going into a negative demographic trend and how you see that business going forward? Thank you.

Sure. Obviously, I think our skate lifestyle that we represent incredibly well. We are not the only one I don't think in our industry that's struggling with our hard goods business. We do think to some extent relative to the demographic cycle and really our core skate customers that 12 to 16 year old and so we have seen over the last number of years that that customer base has been raw numbers and has been shrinking. So we think that is partly reflective of the cycle. We of course, I think these are high ticket purchases.

So there is again as we come through this economic cycle, there is that still tends to be an economic portion to again our complete range to $90 to $125. So I think there may be a portion of that that is reflective of just the outlay that is made on a skate complete. And obviously there are things we can do better too. I say that too. We need to make sure that we are representing the right kind of brands. It's a factor of all three of those things.

Great. Thank you very much.

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

Yes. Hi. Can you discuss the private label business, what are the opportunities there and any merchandise categories that your current vendors aren't currently where you can fill the void?

You know, Linda, at the end of last year we increased private label penetration a bit. It was up to -- we are clearly again you can see it from the bundling strategies we've been using in the stores, the value proposition, you are seeing us again with certain categories continue to drive the value proposition using to a great extent our private label product. And obviously that makes sense because we want to sell our branded product at full price.

We want to be a good partner for our brands and represent the value to their product and up sell their product from the commodity base private label business. So I think as long to a certainty extent private label and where we are is going to reflect the needs of our customer and in particular needs relative to the economic cycle that they are going through. So we are anticipating that, to be prepared for the value business to be headed into back to school combined that with branded products for full price fashion selling and we are going to let our customers, our customers will dictate where that will end up for this year. They are the ones who decide how big private label will be on relative terms but again from our perspective, what you are seeing, is execute what the customers are telling us what they want and doing it with high quality private label offering.

Are you saying that you might increase private label a little bit for back to school?

We would certainly be, we will be prepared to do that and then the customer will decide if it works. This is Trevor. Another thing that is important to remember is we are very brand diverse. We have no one brand that makes up 7%. Our largest brand is 7% of our sales. We have a dozen private label brands and some are larger than other ones. We've long said we are agnostic to individual brands and our private label fill deficit from price point perspective or from a brand perspective, a look perspective is were private label fills in. We put private label to the extent the buyers are seeing deficits in the product assortment and opportunities to drive incremental sales and gross profit. We have some good, neat, new ideas that we are excited about. We'll put some of those out in the back to school period and our private label team and Lynn has been doing this with us for six years, we are good at it. The important part that people need to understand is that much like we have turn over within our brands we do have turn over within our private label and that is the beauty of our businesses. So it's a very diverse process for us, it changes as the needs and the desires of our customers tell us.

Thanks very much.

Thanks Linda.

Your next question comes from the line of Jeff Van Sinderen with B. Riley & Co

I have a question on your plans for Q2 how should we think about that. I'm assuming it's would be less than it was at this time last year.

Probably slightly less Jeff but probably not noticeably I would think to most, to you or most consumers. As you know, we are getting pretty clean on inventory through the second quarter a year ago and our margins reflect that. Our margins last year were down, maybe 0.2 of a point. We are in a pretty good shape going back to school last year. So I wouldn't expect a large promotional cadence shift. I think more of what you might see is potentially as we saw is a mix shift between products and potentially our private label.

Okay. And then on the girls business anything you can share with us any new initiatives you are working on to improve that business.

We are doing lots of different things. I won't get into great detail. It's only about 11% of our business. We are trying, we are running smaller losses in that business like we've been something seasons and boys and foot wear in the quarter continue to run gains.

So we are improving results in that. We still have a lot of work to do. We are running larger AUR losses in our women's business. We are monitoring that and we are noticing that some cases now we are starting to run unit comp gains in key categories because the AUR drive are delivering value for the consumers. We are not seeing the gains there in terms of sales dollars. We are doing a lot of things. But again as I've said earlier we won't leave anything untouch whether it's signage on the girls side or merchandising. We are going to try some new fixtures. How we sell the product and training with our people, all those things in addition to the product are being addressed.

Okay. And then just a follow-up on hard goods. I know you mentioned some. In terms of the skate part of that which seems to be pretty soft, have you thought or are you planning to reduce penetration or has that already started and would it make sense to bring in any lower price items because it is just a higher price point niche or any thoughts on that would be helpful.

That's a good question. We have obviously looked at things like that. We do sell blank decks, although there hasn't been a large mix shift and the mix of graphic promodel decks. So we continue not to see a big difference there. Now we've historically made a decision that we are not going to do shop decks which is where most, most kind of independent shops dominate in their deck business. I'm not sure it's helping them in terms of their sales results there, but we just have chosen not to do shop decks. We don't think it's the right thing to do for the sports industry. We want to be supportive of these small brands, the skate hard good brands and we are committed to buying blain earnings through those brands. So city point we don't have really any major intent to go down that shop deck route.

Got it. Thanks very much and good luck this quarter.

Thank you.

(Operator Instructions) Your next question comes from the line of Randy Konik with Jefferies. Please proceed.

Good afternoon. It's Bruce Barry filling in for Randy. Congrats on the improvement in comp. The question we had was related around the geographic improvement that you are seeing in the western part of the US. Obviously those states are up against easier comps from past couple of years but I wanted to see if you can provide more color on whether it's easy comp related improvement or if you are seeing some tangible improvement in trend in California or any of the other western states. Thanks.

This is Trevor. Certainly we have our easiest comparison negative in the western region since the first quarter of 2008. For almost two years. We have easier comparisons although people don't buy from me because we have easier comparisons. I think it's pretty broad based when you look at the western half of the United States. It's not just California. We are having success in every single state, and I think that the actions sports lifestyle is more prevalent in the western half of the United States and I think they were in the midst obviously in the first quarter. We do have more opportunity. I think if you look at the rest of the regions, they were more in the sort of mid single digit range in totality. I think that is all I have to say.

We did comp up geographically in every -- in all of our divisions as we look at west, central and east and south.

That's right right.

If I can ask a follow-up. It sounded like despite the improvement in comp you are cautious on the consumer area. Your first quarter comp was pretty meaningful acceleration from what you put up over the past several quarters. Can you give us an update on or elaborate how you feel about the consumer environment here?

This is Trevor. We've been honest about this. When we came into this fiscal year, we thought things might get better for us. We thought we did a lot of things to position ourselves to perform at a better level but we would not have expected the level of comps we started to getting in February to happen. We comp single digits in January and things started comping positive. So what we feel like is we positioned ourselves to be unique in the mall setting. We have this unique mix that is hard to find elsewhere. We have great prices to be competitive. But what we don't have visibility to is the consumer and I think as we read everything in the press release and what we are seeing, it's a time for the consumer and they don't have an abundance of discretionary income. When the consumers are coming out we are getting more of our fair share but we have tentative and cautious outlook on how long would that last and will the consumer go back in their shell.

As we look into planning again as we said in the comments, we are focused on executing back to school. As you all know that is when we make back to school season, when we make all of our profits basically. We are intensely focused on that. So as we think about what we are doing here, we are keeping in mind how we mitigate what we think smart positioning with inventory heading into that critical back to school window and how to mitigate that risk in terms of inventory risk. So we are balancing those two things out in our planning and trying to make sure we are taking appropriate positions but have mitigating strategies through and post back to school to keep inventories in good condition.

All right. Well thanks a lot and best of luck for back to school.

Thank you.

There are no other questions at this time. I'd like to turn the call back over to you gentlemen for closing comments.

Again, I want to say how much we appreciate everyone's interest in Zumiez and we look forward to talking to you on the second quarter call. Thank you everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for participating. You may now disconnect. Have a great day.