Zumiez Inc (ZUMZ) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Incorporated fiscal 2010 second quarter earnings call. (Operator Instructions). 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 projected results is contained in the Company's annual report on form 10-K, and other documents filed by the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements. No reporting or rebroadcast of this call is permitted without the Company's express written permission.

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

Thank you. Good afternoon, and thanks for joining us to discuss Zumiez's second quarter 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.

We are pleased with the sales growth we generated during the second quarter. Comp store sales rose 9.3%, continuing the momentum we began to see in the first quarter, and at the high end of our guidance range. We exceeded the earnings guidance we shared with you in May, and more importantly, the quality of our business increased meaningfully from last year. The trends we witnessed in the first quarter continued through the second quarter. We're still benefiting from an improved economy relative to the same time last year, and the strategies we executed in the second half of 2009 continue to resonate with consumers. In fact, we saw acceleration in transaction growth in the quarter.

While we adjusted our strategies in response to the economic slowdown, I think it's important to note that our mission to be the leading branded action sports lifestyle retailer has remained constant. We've consistently offered a diverse assortment of established, as well as hard-to-find, apparel, footwear, accessory, and hard goods brands. This, along with our focus on customer service and our commitment to providing a unique retail experience, helps us successfully navigate one of the most difficult retail periods in recent history, and emerge a stronger, smarter organization that is well-positioned for the future.

In addition to driving sales gains, our initiatives helped gross margins improve 250 basis points, even with the additional expenses associated with the relocation of our distribution center. This was achieved primarily through stronger product margins as a result of improved inventory management and higher IMUs coupled with the levering of our store occupancy costs.

While we're pleased with our comp performance, gross margin expansion, and significantly improved operating performance, our focus remains on the future. We continue to make meaningful investments in talent, technology, and programs that we believe will lead to sustainable sales and earnings growth over the long term.

Some of the more important investments include adding high-return new stores. We opened 14 stores in the second quarter, and have opened 20 year-to-date. Adding infrastructure projects that facilitate better merchandise analysis and planning decisions. We're in the process of rolling out the first major phase of this project, merchandise business intelligence. We're excited about this solution, as it will allow for better, faster and more intuitive reporting, and improved exception-based analysis. 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 even better over the next few years.

Our e-commerce business continued to perform very well, up approximately 120% in the second quarter. The investments we have made to enhance our platform are yielding great results, where second quarter sales have once again accelerating above prior quarter growth trends. It's been a year since we rolled out the new platform, a more scalable and flexible system that resonates more with our online customer, and provides a better user experience. We plan on continuing to make investments in our quest to be the best multi-channel branded retailer, focusing on the action sports consumer.

Based on our first-half performance, we continue to be optimistic about our growth prospects in the back half of the year. Despite some headwinds, including an increasingly promotional atmosphere, stubbornly high unemployment, especially teen unemployment, and questions about the economic recovery, we believe the steps we're taking to streamline our business combined with our enhanced merchandising and promotional strategies have us well-positioned for the back-to-school selling season.

With that, I'll like to 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 to more than offset the planned operating expense increases, including the relocation of our distribution center to Corona, California. And report a slight profit in the second order, which is well above our initial guidance and last year's results I'm pleased to report that our DC has run successfully for an entire quarter with no interruptions, and has delivered on the goal to shorten the cycle time it takes to get product into our stores, and lower the overall supply chain costs.

For the second quarter, net sales totaled $97.7 million, an increase of $12.5 million or 14.7% compared to $85.2 million in last year's second quarter. The increase in net sales were driven by a comp store sale increase of 9.3%, and the opening of 30 new stores since the end of the second quarter of 2009.

To break down these results further, geographically our sales performance was fairly consistent across all regions, topping out between 7% to 8%. Sales from our website continued the acceleration we reported the last couple of quarters, increasing approximately 120%. Our accessories and men's department, which account for about 50% of our sales, were the biggest contributors to our positive comp in the quarter. Our boys department also comped positive, while our hard goods, juniors, and footwear departments had negative comp results.

Our comparable store sales gains are being driven by increases in transactions, partially offset by a reduction in dollars per transaction. The decrease in dollars per transaction is being driven by a high single digit decrease in average unit retail, slightly offset by an increase in units per transaction.

Gross profit for the second quarter of 2010 increased $6.1 million or 24.6%, to $30.7 million, or 31.4% of net sales compared to gross profit of $24.6 million or 28.9% of net sales in the second quarter last year. The increase in gross profit margin of 250 basis points was driven primarily by higher product margins, and a reduction in occupancy costs as a percent to sales, partially offset by costs associated with the relocation of our distribution center. Excluding identifiable cost of $1 million associated with our distribution center relocation, our gross margin would have been 360 basis points higher than last year's second quarter.

Moving to expenses, in total our SG&A expenses increased $1.1 million or 3.6%, to $31 million compared to $29.9 million. However, as a percentage of sales, our SG&A decreased 340 basis points to 31.7% from 35.1% of net sales in the second quarter last year. The decline in SG&A as a percent to sales was largely due to a $1.3 million charge taken in the prior year of second quarter for the settlement of a previously disclosed lawsuit. Excluding this charge, SG&A as a percent to sales would have decreased 180 basis points, primarily due to decrease in our store depreciation in the current year related to the change in estimated useful life of our lease-hold improvements we discussed in the first quarter, and leveraging cost on a 15% increase in sales.

We had an operating loss of $200,000 in the second quarter of fiscal 2010 compared to an operating loss of $5.2 million in last year's second quarter. Our net income for the second quarter was $100,000, or break-even on a per diluted share basis, compared to a net loss of $3.1 million or $0.10 per diluted share in last year's second quarter. Included in our 2010 second quarter results are identifiable cost of approximately $0.02 per diluted share associated with the relocation of our distribution center from Everett, Washington to Corona, California.

Turning to the first half 2010 financial results. For the six months ended July 31, 2010, net sales were $186.8 million, an increase of 15.3% versus the $162 million in sales for the first six months of 2009. Comp store sales for the first six months of 2010 increased 9.2% compared to a decrease of 17.2% in the first six months of fiscal 2009. Net loss was $1.8 million or $0.06 per diluted share, compared to a net loss of $4.7 million or $0.16 per diluted share in the first six months of fiscal 2009.

Included in our 2010 second quarter year-to-date results are identifiable cost of approximately $0.05 per diluted share associated with the relocation of our distribution center from Everett, Washington to Corona, California. The improvement in our year-to-date earnings is due to top-line growth of 15.3%, 150 basis points improvement in gross margin driven by the improved product margin, and leveraging occupancy on a 15% sales growth, and leveraging our SG&A on the improved sales contributing another 200 basis points to our operating margins.

Turning to key balance sheet highlights. At July 31, 2010, cash and current marketable securities increased $9.2 million or 11.3%, to $91.3 million from $82.1 million at August 1, 2009. Inventory was $78.7 million versus $69.6 million a year ago, representing a 13.1% increase from the second quarter of fiscal 2009. And at the end of the quarter, inventory increased by about 6% on a per square foot basis from the same time last year. Also at July 31, 2010, the Company had no debt, including no outstanding balances on its revolving credit facility

Now let me turn to our guidance. In putting forth this guidance, I want to remind everyone the complexity of assessing sales, product margins and earnings gross given the challenging economic conditions. For the third quarter, we are planning same-store sales to increase in the mid-single digit range, and total sales to be in the range of $124 million to $127 million. Operating margins are planned to be in the 8% to 9% range, and our diluted earnings per share is expected to be in the range of $0.21 to $0.24.

There have been a number of companies, including ourselves, that have discussed the rising costs and longer lead times coming out of Asia. We are not immune from these broad macro trends. We are seeing the same increased costs and lead times from freight forwarders and manufacturers. Our current guidance is not meaningfully impacted by these changes as our costs were secured before these pressures arose.

Our third quarter earnings goals are predicated on gross margins staying flat to slightly increasing relative to the third quarter last year. We believe this will also be the case for the fourth quarter. We are not ready to speak to the impact on fiscal 2011, but do know costs are increasing. We will use the benefits of our unique strategic position to mitigate these increases.

Looking at the full year fiscal 2010. At the beginning of the year, and on the first quarter earnings call, we said that we believe we could grow our same-store sales in the mid to upper single digit range, and improve our operating profitability at a rate faster than sales. We have done this for the first half of the year.

As we look at the second half of the year, we are planning our same-store sales to grow at a lower pace than in the first half of the year. We are planning on growing our net income and diluted earnings per share at a rate faster than total sales growth, which means we will have higher operating profit margin than last year, and to the extent we exceed a mid-single digit same-store sales growth, we would expect incremental sales to flow through at a 25% to 35% rate.

We now plan to open 27 new stores this year, and have closed four stores, and we are investing in our e-commerce infrastructure and merchandising systems, as well as our distribution and supply chain platforms. Our current plans call for about $26 million to $28 million in CapEX, including 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 2009. Total inventory is planned to increase at a rate closer to our total sales increase. And inventory per square foot is planned to increase at a rate closer to our same-store sales growth.

We expect to generate positive free cash flow for the year, and expect our combined cash and current marketable securities to be at the highest level in our history. As we move beyond 2010, we are focused on growing topline sales, gaining market share, while expanding our operating margins. We believe we can ultimately obtain operating margins in the low double digits to low teen range. We believe the important investments we've made in the business will allow us to draw profitable growth in the future, and provide meaningful opportunities for our employees.

Our long-term top-line strategies are designed around first, driving same-store sales, second, opening new stores, third, growing our e-commerce business, and fourth, as well as potential new initiatives, like opening stores in Canada in 2011. We believe that by focusing on these strategies, we will again be able to drive double-digit percent revenue growth without returning to 20% annual square footage growth.

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

(Operator Instructions)

Your first question comes from Randy Konik with Jefferies. Please proceed.

Hi, this is actually Taposh filling in for Randy. I guess the question that we had was in relation to the news of your expansion to Canada. Maybe talk about how many stores you can potentially see in Canada. Would that store count be inclusive of that 600 to 700 objective that you laid out over the last, call it, year? Maybe describe what the competitive landscape looks like out there and if you can, maybe comment on the West 49 potential acquisition from a few months ago that seems to be no longer in the cards.

Taposh, happy to do that for you. We're still working out what exactly the number of new units will be open in Canada next year. Canada is the first logical steps for us in terms of international expansion platform. We currently do business with Canadian customers on our cross-border stores as well as on her e-commerce site. So, we have some portion of Canadian business today and I think this is a logical extension for us there.

We're not prepared at this time to comment on the number of stores we're going to do next year. I will tell you that anything in Canada will be additional to the 600 to 700 unit growth that we talked about in terms of US domestic sales. So, we're talking about incremental business that we will be looking at for our Canadian operations.

As it relates to the West 49, I'm not going to comment relative to discussions we had with West 49 other than to say that I hope our investors would expect that we look at all opportunities as we look at expanding new markets. And when we do look at opportunities in such as acquisitions (inaudible) and importance of cultural match between our business and potential candidates. And that always makes acquisitions difficult for us to do. So, again, I think we were being responsible looking at the alternatives, but yet at the same time planning to move forward with what we believe to be a logical next step for us in organic growth in the Canadian marketplace.

Got it. Thanks. And just a quick follow up, if I may.

Trevor, can you give us the actual product margin number for the second quarter and also maybe discuss--you mentioned that you expect gross margin to be flat to slightly up in both the third quarter and the fourth quarter--and maybe walk through some of the puts and takes especially as we look into the fourth quarter up against a more challenging comparison. Thanks.

Yes. So, just pure product margins were up about 170 basis points in the quarter. So that's the answer there. I think as you look at the guidance that we've given for the third quarter. We're not giving detailed guidance for Q4, so I'm going to stay away from Q4.

But the guidance we've contemplated in Q3 is predicated on a slight increase in pure product margins not nearly to the extent we've seen in the first half of the year. You'll remember that we had it pretty meaningful increase in product margins last year. Pure product margins, again, about 60 basis points in third quarter and 250 basis points in the fourth quarter, but got less opportunity because of the meaningful depreciation we had a gross margins last year. So I think that's how we're thinking about it. Most of the increase that we have in the slight increase we have in the third quarter would be driven by pure product margins.

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

Thank you, and congratulations on a good quarter. I wanted to ask--you mentioned the DC has gone really smoothly, which is great, and it has shortened your supply chain time and it's had a positive impact on margins--can you quantify how much lead time you cut out and then, long-term, what impact it could on margins?

On lead times, when we filed the 8-K disclosing this in the first quarter, we said that it's 70% to 80% of our vendors are located in southern California and that it would generally take two to three days to get that product from southern California and ship it north up I-5 to Everett, Washington and then down back through the rest of the United States. So I think two to three days is that we think will get out of the supply chain. On the outbound side will get a slight benefit, as well, because we have a higher concentration of revenue in California than we do in Washington. So they will be some slight benefit there, as well.

Then on the freight cost the other large benefit that we will have is we spent a reasonable amount of money shipping that stuff from our vendors in California up to Washington and that cost has been cut meaningfully on the actual cost. No, I don't think we can ask about a specific dollar threshold that it will improve, but we know getting the hottest, freshest new products to our stores two to three, may be slightly faster than three days, is going to have a benefit. And I think on the inbound rate site, again, our expectations we set on the 8-K was it be some portion of $1 million. And we have every expectation that that will be the savings we get.

Then as follow-up-- in this very promotional environment do you feel like you have pricing power on your more special items--the more exclusive items--to your store or are you starting to see any resistance to pricing there?

You know, Christine, we have really two things that are working really well in our business today. The first is the value portion in our business--it continues to resonate with our consumer. We're pleased with how we are performing on that front. And the second is a lot of full price selling coming from our unique brands that we carry in our stores. So, because of that--if we [sit around] some of those products and the styles [and lines] we're selling, I think we potentially do have some pricing power left there. Now, it could be a function of, again, as we think about our brands and what their needs and relative to our consumer, a competitive set. But again we have two portions of business that are doing well--the full price fashion-driven piece of our business as well as the value component piece.

And the last. Housekeeping question. Can you give us ending square footage?

Yes. Our ending square footage was [1.155 million] at the end of the second quarter.

Great. Thank you, and good luck.

Thanks.

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

Hi. Good afternoon. I was hoping, on the merchandise margin discussion for the second half of this year, Trevor, is that the result of still better IMU? And the second half, are you expecting markdown to be better or both?

Are you talking about as we move to the third quarter--?

Yes, the back half of the year. I think you said you expect merchandise margins to be slightly--

Yes. It's mostly going to be though--I guess a couple things, I'd say. Our inventory is probably as clean as it's been in a long time. We continue that trend for couple--two quarters now, something like that. Ad that's going to help us because were really clean on our inventory, probably even cleaner than we were relative to the same time last year , so we are coming into the third quarter better.

So, yes, there should be slightly less need for markdowns. I think were closer to the consumer as far as what the needs and desires are and therefore we bought into better and I think probably most importantly is the IMU. The spread between what were buying the products for and what we think we can sell them for is probably by far the largest component of how we project our product margins to be better than they were last

I know you didn't want to talk about the sourcing pressure for 2011, but I'm going to ask anyway. Given all of the multiple systems that you are putting in place and so on, do you feel like there is some opportunity? And, given your pricing power as you just alluded to, to protect your margins in 2011? Or--?

I think at this point it would unwise to assume that we're going to expand operating margins in the first half of 2011. I think what our goal is going to be is to look at all the unique things that we have in our sourcing strategy, whether that's the different brands--if you will recall that no one brand is more than 7% of our sales. So, we have many, many brands that we can work with and make sure that they understand the importance of our margin story. We can potentially expand private label, we can do things within the private label where we source things, there are mixed variables within our business because certain components or departments within our business are higher-margin businesses. So, we're still working through all that, and I'd say we have a good relationship with the manufacturers we have, as well.

So, we're still planning a business, we are for sure that costs are coming up and lead times are increasing. It's our job to do what we can to two best mitigate that and I would not assume that people should improve margins but I do think that our goal is to, hopefully as best we can, keep margins flat.

Then lastly, Rick, I know it's a little early to start talking about this but for 2011, what are you seeing from the landlords I think most of us would be happy to see to re-accelerate growth more in the next few years. I know you guys tend to be a little bit more disciplined when it comes to what you want to pay, so are you seeing some greater opportunity there yet?

Sharon, I would tell you that dealmaking is still a challenge. I also like to remind everyone that throughout the second (inaudible) that being said, we still continue to grow every year and add new units. While we're not going to talk today about where were at with relative to our plan for next year at this point. In fact, I think we'll probably do that post-the holiday season.

And I can tell you, Sharon, that from our thinking the final number as to what we'll be doing next year will be dependent on the quality of the deals we can negotiate with landlords as well as our performance through these two peak cycles of back-to-school and holiday. But dealmaking's still tough. That being said I think we have a couple factors in our favor and one of them is that a lot of our competitors are going backwards. That could create some excess space within many retail centers. And also add that as we look towards 2011 I believe that we will be doing at least as many new locations as we are planning here in 2010.

Great. Thank you.

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

Thank you. A few questions. Trevor, to follow-up on Sharon, you mentioned in response to one of her questions that you could possibly expand your private label percentage next year. Could you tell us what that was in the second quarter--that compared to last year, Q2?

Mitch, we only do that on an annual basis. Because we think it can get misleading to look at intra-quarter. Relative to last year it was 15.7% in the year before that was 15%.

Has it been trending up higher over the course of the first half?

I honestly don't know, Mitch. I think it could be misleading so we think it's the right way to look at an annual basis.

And then on the Junior's business. It was negative for the quarter and that's been the trend for a while. Can you say whether or not it's improving? Was it less negative in Q2 than it was in Q1 in terms of the Junior's comp?

Yes, Mitch. It was meaningfully less negative than what it was last year. The other thing I just want to remind people, unlike most of what you have in the public specially retail companies, Juniors is about 10% of our sales. I would characterize--we feel like we've made some good improvements in our Junior's business. We have all year, and obviously that includes the second quarter, have driven unit gains. However, as we reposition this business over the last 12 months these unit gains are being offset by lower average unit retails.

We've had now, again, two full quarters of consistent velocity improvements and we will eventually reverse our year-to-date losses. And I will remind people that in the month of June it wasn't a big comp, but we did have a positive comp in Juniors in the month of June. We've got a new merchant that's been with us since December and I think she's taught us a lot, that we have taught her a lot, and I think as we look to the back half of the year we would hope that that business would continue to run the transaction gains we're getting and when the [Airu] losses abate, that should be sometime later this year.

When you think about the mid single-digit comps in Q3, and I think mid signals for the back half, right? When you look at how your merchandise category trended in the second quarter. Should we expect a similar trend over the balance of the year with accessories and guides being positive and boys, as well, and maybe some continued weakness on the hardgood side. And, I guess, is that still kind of a mixed bag?

I think that we would hope that it would be slightly more balanced. As we look to the back half of the year, we really started seeing improvements in our accessories, in our men's business, as we progress to the last half of last year so our comparisons get a little bit more difficult as we move through the year on those.

We're doing some things on the hardgoods business that we're excited about, so I think as we think about the back half of the year you would see our goal that should see improvement in the businesses that have been tougher and a bit of moderation in the businesses that have been tremendously successful for us in the first half of this year.

And then, two last quick ones. On the gross margins, how much of the benefit in the second quarter was on leveraging on occupancy? Can you quantify that?

I guess you could probably get this on the 10-Q when we file it next week, but I think it was--looking near about 70 basis points.

I assume you expect some leverage on a mid single-digit comp in Q3?

Yes.

And then, lastly, the tax rate for the year.

I think we're thinking it's going to come in between 37% and 38%. It's been a little quirky in the first half of the year because we lost money and we were breakeven but for the full year we are currently contemplating that our tax rate will be 37% to 38%. Okay, great. Thanks. Good luck.

Thanks.

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

Hi. Just a follow-up on the Juniors. It sounds like your private label business is still outperforming the brands. Are you thinking about increasing the percentage of private labels for Juniors? And then, are you seeing more innovation for brands for this category?

Linda, historically over the last few quarter that our private label business in Juniors have performed better than our brands. That continues to be true for the second quarter. However, in Juniors, too, we are seeing--the comment earlier--we have both value plays working and we have full price fashion plays working. And we have some brands in Juniors that have started to get some real traction. And we're very pleased about that. We feel good about that and I think it reflects positively on our brand partners getting involved and working with us to get some new branded products working in Juniors. We are encouraged by that. Again, I want to remind everyone that it's a small portion--overall portion of our business, but we're seeing both ends of that spectrum work in terms of value and we start to see a few key brands pick up again and perform better.

The other thing that's important to note about the way we manage the business here is that our goal is always is to get the fashion and the trend correct, work in the cost and make sure we can build a profitable business model. And I would remind folks again as we said earlier as were driving transaction gain and driving margin gain. So, we felt like we kind of done a better job of understanding where the Juniors consumer is we think we've done a good job in mixing in our private label and our brand and we driven down our average unit cost enough to drive margin gains in that business, as well. So we feel like we've hopefully set ourselves up for success. As everybody know it's the most competitive portion of what we do and will continue to be so, because there's lots of retailers who either solely focus on the Juniors or it's more than 50% of their sales.

And then just one follow-up. Could you discuss reads on any back-to-school markets? How is it trending relative to your expectations or do you think it's too early to extrapolate?

We obviously contemplate our month-to-date sales and margins when we give our guidance. I would say our month-to-date performance is a bit better than the the guidance we've given. That being said, we still have a lot of the quarter remaining, so we believe it is prudent to be a bit cautious as we project out the remainder of the quarter. So the simple answer to that is again were doing slightly better than we projected. In the places that have gone back to school, we see good results.

Great, good luck.

Thank you.

Your next question comes from the line of Edward Yruma with KeyBanc. Please proceed.

Thanks very much and congratulations on a nice quarter. Can you talk a little bit--I know one of the major suppliers in the industry indicated that they were having some difficulty getting some of the seasonal product in and specifically, snow and that they were shipping delays. Have you seen this in your supplier base and what your confidence around getting some of those key seasonal items in place? Thanks.

We have seen some of our products miss a boat or maybe be a bit later than when he had originally projected but nothing of meaning for us. We have good relationships with our vendors and we have very collaborative relationships and they let us know when there's issues and we try to address them. Today we have no meaningful impact to that and our guidance doesn't [contemplate] that we would have any meaningful impact.

Thank you.

Your next question comes from the line of Jim Duffy with Stifel Nicolaus. Please proceed.

Hi, everyone. Thanks for taking my questions. Rick, in your prepared remarks you mentioned an increasingly promotional environment given what appears to be lean inventories in the category I'm a little surprised by that characterization. Can you talk about that a little bit more? Do you see competition taking promotion beyond the level that is rational for the category?

I think you can walk in the mall and you see that certain areas where prices are incredibly promotional on the mall today. I think we can battle that a little differently than most of the particularly the vertically-integrated players, the non-lifestyle driven players is another way to say it.

And I say that because our business model is so diverse in terms of brands and categories of product that we've have a lot more levers to pull. So if we were to look at--when you look at how promotional denim is on the market. Well, denim is a less significant portion of our business relative to some of the vertically integrated players or the non-lifestyle players on the market. I mean that we can pull other levers in terms of the diversity of the brands that we're representing, in terms of the categories and how we're positioned within the marketplace where those things are not as strong and we have more mitigates to dealing with the promotional environment than our competitors. I thought July was pretty promotionally competitive and I think we did pretty well in the month.

Okay, good. That's helpful. And then, many retailers not necessarily in this category are mentioning an increase of customers to choose the premium offer versus lower-priced alternatives. Are you seeing any of that in your business? Maybe a detectable shift of those value-type offerings towards premium offerings?

Jim, again, our business, as you know, being a branded player this is an important part of our business is exactly presented those unique items, unique items within categories of product--key categories of product. And as I've said, we're finding that we have success on the value and we're having success on the customers choosing to buy those full-price branded products. And to some extent we have seen that shift.

Okay good. It looks like you have unique offerings which are really carrying some momentum in the stores right now. You're also beginning to anniversary some of the professional offers, which is Pfeifer 85. Do you foresee a bottoming of the average ticket metrics anytime soon? Or average unit retail, I should say?

Jim, this is Trevor. Last quarter we had the biggest decline in average unit retail than we've had in the last six quarters. Our average unit retail has been climbing in the last six quarters, as well. A lot of that actually has to do with mix, because our accessories business is successful for us right now. Our accessories business is the lowest-priced department we have.

And so I think if we were to see those other departments perform as we said earlier at a better rate and things like hardgoods and pieces of business like that would do better than you should see an abatement. And yes, I think right now we will start to anniversary some of those large programs, so yes, our goal would be to be that we would see that a bit of improvement in the average unit retail. We're not currently contemplating that it's going to increase this year. It's possible as we get to the end of year but we're not planning on that. But we should see an improvement in that metric of our comp.

Okay. Final question. Can you comment on the difference you see in merchandise mix via the Internet versus the retail operations? You guys have done a great job with the Internet, I'm just trying to get a feel for the composition of business relative to the retail stores?

I wouldn't say it's overly meaningful different. I would say they do have a higher portion of the shoes and hardgoods with that being said it's not hugely different.

Is your private label business as productive on the Internet?

Again, I don't think there's a big difference there.

Okay. Great. Thanks so much.

Thanks, Jim.

Your next question comes from the line of [Jeff Vancinderin] with [Steve Riley]. Please proceed.

Let me add my congratulations, as well. I joined the call late, so I apologize so anything repetitive here. Just to clarify your comments on keeping margins flat in the discussion relevant to sourcing. You are talking about keeping merchandise margin flat, is that correct?

I don't think we should get too much into 2011 because, frankly, we're not done planning that business. Our goal is always going to be to keep margins flat or improving them, but that's a goal at this point. That is not specific, so I'm afraid we can't give that level of specificity at this point in the cycle.

Okay, fair enough. I wonder if you can comment on what you're seeing and hearing in terms of recent mall traffic trends and how we should think about your comp trend and conversion rates and the context of that?

I would say as we said a bit earlier in the question, our current results are doing slightly better than the guidance we given. I haven't seen the latest ICSE data on mall traffic but my sense is again we seem to be outperforming most of the competition this year and I don't know that there be any reason that mall traffic would be meaningfully different now than it was in the last few months.

Okay. And then, any more color are insight you can count on denim, kind of what you're seeing in your business there? What you expect?

I don't like it too detailed on it, Jeff. The denim from our perspective, just about as promotional in July as it is here in August. And I think we performed well in July. So, again, I don't want to get into the habit of talking about specific categories of product or specific brand performance because our story is about the diversity in brands in the diversity of categories because we sell the complete lifestyle action sports lifestyle.

I tell you that again what you saw in a performance in July reflected a pretty competitive denim environment and I think that holds over that we can perform relative to that in August.

The other thing I would say Jim, just to help you guys a bit with that. I think that if you look at the other public companies I would say denim is much higher proportion of their business. We're selling shoes, we're selling hardgoods, accessories is over 20% of our sales now. So denim is a much smaller percentage of our total business than it is for a lot of the other publicly traded teen retailers.

Did you mention what you're seeing in terms of promotional [kits] and shoes?

Our promotional kits isn't significantly different, Jeff. I think we are concerned about some of our competitors promotional kits and some discounting we've seen from some players right out the gate in terms of their presentation of shoes and that's distressing to us and I'm sure it's distressing to our branded partners.

Okay, got it. Very good. Thanks very much and good luck with the rest of the quarter.

Thank you.

Thanks, Jeff.

(Operator Instructions)

Your next question comes from the line of Lee Gierdano. Please proceed.

Okay, thanks. It's Lee Gierdano. Just a follow-up to that comment on the brands, Rick. When you--talk about the evolution of the brand portfolio have you seen any notable changes in the top brands in the store and any up-and-comers that have caught your eye?

The answer, Lee, is yes, but we always do. And again this will be one of those answers that we don't like to talk about in terms of interim. I think it's best address on full-year basis when we can talk about not having seasonality in the discussion and we can look an a a full rolling 12 periods of results. So I only get specifically into commenting inter-year relative to that . We will be able to comment on that when we get to the full year.

But I think the trends we've seen over the last four or five years have been that smaller brands have been taking a larger or let me say it this way--the concentration in our top ten and top 20 brands has been declining for a number of years now. I would expect that we may see that trend continue here this current

Great, thanks a lot.

Your next question comes from the line of Connie Wong with Wedbush Securities. Please proceed. Miss Wong, your line is open. Miss Wong, are you possibly muted on your phone? All right, your final question for today's call comes from the line of Adam Engebretson with Piper Jaffray. Please proceed.

Good afternoon, thanks for taking my question. One quick question for you here. Can you talk a little bit about the e-commerce opportunity and what sort of opportunities there? Are the transactions you're seeing there from new customers or from existing customers and are you tapping a customer base you didn't already have with that? Thank you.

Trevor and I will probably take this. In regards to what we're doing on e-commerce I like to make sure we look at the history of where we're coming from and we are coming from probably not the strongest position as we look back over the last two years, I think--a brief history--we hired an e-commerce leader and experienced multi-channel e-commerce leader almost two years ago.

He spent the first few months figuring out our business, understanding it, we launched a new platform in July of '09 and at that point in time we were probably about 1% overall mix of our e-commerce business relative to total revenue we're turning out probably at the 3% level just barely over a year of the launch of our other new platform which as you said in the comments much more flexible, a much better consumer environment and we are gaining a lot of traction there. And while we're seeing gains in new customers, our biggest improvement has been in the conversion rates that we have seen in terms of our traffic across our e-commerce site. Trevor, anything you want to add?

No, you got it.

Thank you.

I would now like to turn the call back over to management for closing remarks.

Thank you again we appreciate--always appreciate everyone's good questions here, your interest in what we're doing here at Zumiez. In closing this call I just want to make sure that I thank our entire team here for the great work here for the first six months of the year. And I want to thank our vendor base for their great support throughout this difficult economic environment we've all been weathering together. And we're excited about our position and how we look forward here to third quarter results and will be anxious to come back and talk to the investment community at the end of the third quarter.

Thank you everybody. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.