Zumiez Inc (ZUMZ) 2011 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Zumiez Inc. fiscal 2011 first quarter earnings conference 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 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 first quarter fiscal 2011 results. Joining me today is Trevor Lang our Chief Financial Administrative Officer. As we announced last week, Trevor and his family are moving back to Atlanta and therefore he is stepping down effective June 1. I want to thank Trevor for his many contributions over the past 4 years.

He played an important role in steering our company through them 1 of the most very difficult periods in retail. With his assistance, we've emerged from the economic downturn a stronger organization than when we entered the recession, and as a result we are now well-positioned to pursue our growth strategies. Trevor has also built a strong team around him during his time at Zumiez and I confident they're up to the task of handling the added responsibilities until his replacement has been down.

Now to the quarter. Let me begin by saying we are very pleased with our start to the year. Our sales and earnings results were both up meaningfully over the year-ago period as a momentum from the holidays carried over into fiscal 2011. Comparable store sales increased 12.6% and we reported diluted earnings per share of $0.06 versus a loss of $0.06 in the first quarter of 2010.

Our differentiated business model which includes a diverse mix of branded apparel, footwear, accessories and hard goods, a great sales experience complemented with a strong web business is further distinguishing us from the competition and is driving sales gains. These key strategies combined to drive strong full price selling this spring and strengthened our position as the leading branded action sports lifestyle retailer.

During the quarter we opened 9 stores including our first 2 stores in Canada. Our plans call for opening 44 new stores this year including up to 10 in Canada which is a step up from the 27 open in 2010. Based on the real estate opportunities we are seeing and the recent performance of our new stores, we're excited about our accelerated pace of expansion and remain confident in the long-term potential for approximately 600 - 700 domestic locations.

Continuing to add to our results is our e-commerce platform which experienced a 151% increase in sales in the first quarter. The investments we have made over the past several years to enhance of the extension of our brick and mortar stores continues to pay dividends in terms of site traffic and conversion rates. And we think there is more opportunity to increase the overall penetration of this business. It is very gratifying to see our long-term growth strategies driving such strong results in the near-term.

As we've outlined in the past several earnings calls, we remain focused on executing solutions that drive same-store sales growth, opening high return new stores, growing our e-commerce business, and new initiatives such as our initial expansion into Canada this year. At the same time, we will continue to invest in our infrastructure to support our growth plans and foster the creative and entrepreneurial culture that has come to define Zumiez.

While the first quarter represents only a small percentage of our full-year earnings our recent performance is a good indication that are selling and merchandising strategies continue to resonate with consumers. As we discussed on the last earnings call in March, we do see some headwinds on the horizon from the increased product, labor and transportation costs that are affecting the entire industry. But, as a specialty retailer of products that are hard to find elsewhere, complemented with great sales teams and efficient operations, we believe we are well positioned to mitigate some of these pressures through selective price increases along with other strategies. With that I'd like to turn the call to Trevor who will review the financial results in greater detail and discuss our outlook. Trevor.

The combination of strong sales growth, better than expected margins and control spending helped us to meaningfully exceed last year's earnings and our first quarter earnings plan. When we gave our guidance in March we said we believe incremental same-store sales increases above the low to mid-single-digit range should flow through to operating profit at a 25% - 35% rate, assuming there is no significant compression in product margins. I'm happy to report that we exceeded this goal and our teams continue to perform extremely well.

We continue to invest in process, technology and people to execute on our multi-year initiatives. We believe we're maintaining a good balance between investing for the future and maintaining profitable growth. We manage for the long-term and have been investing more heavily in the last 15 months and are optimistic that these investments will continue to differentiate us in the future by providing improved assortments for our customers, enhanced solutions that facilitate customer interaction in stores and online, and further developing operating efficiencies to leverage our cost structure.

Turning to the first quarter net sales increased almost 19% - $105.9 million from $89.1 million in the prior-year period. The increase in net sales was driven by a comp-store increase of 12.6% and the opening of 30 new stores since the end of the first quarter of 2010. Break down these results further, our footwear, accessories, men's and juniors department all comped positive in the quarter, and our hard-goods and boys departments comped negative.

All regions of the Company comped positive. As Rick mentioned our e-commerce performance did very well, increasing by 151% from the prior-year first quarter. The comparable store sales gain was primarily driven by an increase in transactions, offset partially by a decline in comp-store dollars transactions.

While we did see the first quarterly increase in averaging in retail for the first time in 2 years, this was more than offset by a decrease in units per transaction. Gross profit for the first quarter of 2011 increased 31.1% - $33.4 million or 31.6% of net sales from gross profit of $25.5 million or 28.6% of net sales in the first quarter last year.

The 300 basis point increase in gross profit margin was primarily driven by leveraging our sales gain over our store occupancy and supply chain cost and a decrease in cost incurred in the year-ago period associated with the relocation of our distribution center. You will recall the relocation of our distribution center from Everett, Washington to Corona, California resulted in expenses of $1.2 million impacting gross margins by 140 basis points last year.

Moving to expenses. In total SG&A expenses increased 7.4% - $30.9 from $28.9 million. However decreases as a percentage of net sales to 29.2% from 32. 3% of net sales in the first quarter last year due primarily to our ability to leverage these expenses on higher sales. Our operating profit was $2.6 million in the first quarter fiscal 2011 or 2.4% of sales compared to an operating loss of $3.3 million in last year's first quarter or 3.7% of sales.

Our net income for the first quarter was $1.9 or $0.06 per diluted share compared to a net loss of $1.9, or a loss of $0.06 per diluted share in last year's first quarter. Remember that last year's loss per share includes approximately $0.03 associated with the relocation of our distribution center.

Turning to key balance sheet highlights, as of April 30, 2011, cash and current marketable securities increased 35% - $130.7 million from $96.8 million as of May 1, 2010 due to strong operating cash flows and prudent working capital management. Inventory was $63.1 million versus $58.6 million a year ago, representing a 7.7% increase from the first quarter of fiscal 2010.

At the end of the quarter inventory on a first growth basis was essentially flat with the same time last year. Also as of April 30, 2011, 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 of the complexity of assessing sales, product margins and earnings growth given the variety of factors that impact performance including the challenging economic positions we still operate under.

For the second quarter we are planning same-store sales to increase in the mid-single digits which should equates to sales $108 million - $111 million. We believe our operating margin should be about 0.5% - 1.5% range and this should lead to diluted earnings per share in the range of $0.02 - $0.04.

A few comments about the full year as well. As most of you know the majority of our sales and the vast majority of our earnings occur in the second half of the year. As we discussed in the last earnings call because of the industry headwinds and limited visibility we are not giving full year sales and earnings guidance.

However we would like to reiterate the following points. We are planning total and same-store sales increases for this year. We expect product costs to continue to increase especially in the second half of the year. We intend to grow SG&A in the mid-to-high single-digit range at a rate less than planned sales growth.

Assuming there is no significant compression in gross margin, we believe we can leverage our cost structure with the same-store sales increases in the mid-single-digit range and that incremental sales above this range will flow through to operating profit of 25% - 35%. We plan to open 44 stores during fiscal 2011 including up to 10 stores in Canada. CapEx this year should be around $35 million - $37 million compared to $29.4 in fiscal 2010. Depreciation and amortization to be about $18 million in line with fiscal 2007.

Looking out beyond this year we are focused on growing our top line sales, gaining market share, while expanding our operating margins. Our long-term product financial plans are built to grow our operating profit at a rate faster than our sales and ultimately obtain operating margins in the low-double-digits to low-teen range.

We believe we can achieve these long-term financial results primarily by focusing on top line strategies designed around driving same-store sales gains, opening new stores, growing our e-commerce in multi sales channels and exciting new initiatives like our expansion into Canada. Finally I'd like to thank all the wonderful people at Zumiez from the board to my peers on the senior team down to the rest of the organization.

This is a special place that has grown an invested in it's business and people over long time and has cultivated a winning strategy and a winning team. I believe it will be very difficult for others to compete and win over the long-term because of the generational leadership and strategies that have been made over last 30 plus years in this organization. I am glad that I was able to participate and contribute to the Company's success over the last four years and as a shareholder I will enjoy watching this Company's continued growth. Thanks for dialing in today. Operator, I think we'll now turn it over to questions.

(Operator Instructions) Christine Chen, Needham & Company. Please go ahead.

Thank you and congratulations on another great quarter. And best of luck to you, Trevor, you will be missed. I wanted to ask, you had mentioned in the past that second half you expect cost to be up I think 10% to 15%. Is that still what you are looking at? And then when do you think the cost pressures start to dissipate? Is it a second half 2012 event?

I will take a stab at this and then Rick may have a few thoughts as well. Yes, I would say for the cotton-based component of our business, we are seeing the same 10% to 15% that most other people are seeing. And if you look at [cotton] block index and other pricing that has come out lately we are now back under $2.00 for cotton, which is a good sign but still we're up over double of what we were a year ago. So I can't tell you from my crystal ball perspective when some of these cost inflationary pressures dissipate and we come back -- if we ever come back down from where we are today.

I think what's interesting about our business, we have mentioned this before, but about half of our sales comes from products that are not heavy cotton-based products -- shoes, accessories and hard goods are slightly over half of what we sell and those products we are seeing less pricing pressure then we are on the cotton. We worked with our brands for a long period of time to execute strategies that will hopefully allow us to mitigate some of the risks that exist out there.

I think, probably, the most important point I would make is what we'll deem whether we're going to be successful or not and passing along price increases is ultimately due to our deliver fashionable brands that are unique and hard to find elsewhere. We've been doing that well over a year now and we obviously have some momentum as we move into back-to-school.

And I would say, finally, not as important but also something we keep a focus on is how our competitors react during these peak selling seasons and how that will affect our ability because we're going to need to be competitive in some of the commodity items. It'll be important for us to stay close to what's going on on the competitive front as well.

Adrienne Tennant, Janney Capital Markets.

Good afternoon and let me add my congratulations and also best of luck, Trevor. For Rick, I guess one of my questions is sort of more general, it's about the women's business. A lot of the teen retailers are sort of struggling with their girls business, the juniors businesses. I'm wondering if you think it's a good time to expand the investment to take advantage of some of the weakness or if you think that business is better off sort of chased as it starts to turn? That's my first question. And then for Trevor, we've always had these discussions about how really solid you guys are on managing your inventory growth versus your sales growth. As you look at the back half of the year and you look at the increasingly difficult comps, how do you think about planning your inventory to be able to deliver ongoing positive comps on some pretty tough numbers? Thanks.

All right Adrienne thanks for the questions. On the first part, women's we invest more heavily or do we essentially chase the businesses, is what I heard in your question. First, again, let me remind you and everybody that we've we have had a tough run over the recession with our women's business like everyone else. It has shrunk in the mix of our business. But, over the last few quarters, we have actually seen our women's business comp up. And that was true here in this first quarter as Trevor indicated in his comments, that we've had a positive gain in our juniors business on a comp store basis. We feel like we've got some momentum in what we are doing with juniors. We certainly don't have all the answers yet, Adrienne. We are clear about that, too. But we are clearly going, we think, in the right direction with good branded partners helping us drive that business and I think an appropriate mix of private label.

I think what we're going to do in this area, what we always do, is we're going to let the customers tell us what we need to do. And we do have the ability within that to chase some business in season, relative to particularly to the screened products. So that is going to be our approach as we head into this very important back-to-school cycle in terms of how are going to approach our women's business.

Burning inventory it is a good question. I will give credit where credit is due. We have a very strong leader that runs our product team and has great merchants and a great planning team that coordinate and plan at a very finite level at the detailed category level. They've worked together for a long time and they understand where they have strength and opportunities and they will plan again that finite level.

We've done that for a very long time. Probably at least 10 years we've manage our inventory exceedingly well relative to our sales growth or when sales recovered in the great recession we always had inventory generally growing at a rate slower than sales. And, actually, as we look at the rest of the year and again look at this at a reasonably finite level, we still think we can grow our inventory at a rate slower than our sales growth. And that's how we are thinking about the rest of this year.

Great. Any comment on month-to-date sales at all?

No.

Great. Okay, thanks. Best of luck.

Edward Yruma, KeyBank.

Hi this is [Chari] for Ed, thanks for taking my question. I was just wondering if you could comment on the real estate strategy in terms of either site selection or any metrics you can give us around how you're looking at the 44 new stores for this year and then ultimately the 600 to 700 potential that you mentioned?

Chari, good question this is Trevor. Our real estate strategy has been relatively consistent, certainly the last year and I'd even say for a longer-term than that. Our goal is to do a mix of a-mall b-mall and c-mall's. Which is never perfect, but as close as we can get that to be one third of each. We try to do a mix of new markets and mature markets and we define that as markets we've been at over 3 years.

And, generally speaking, we have around 14% of our stores that are in outlets versus non-outlets. This year that will be higher mix of outlets, that was just the way the deals came across the table this year. I wouldn't say that's a long-term strategy for us but I do think we have the unique opportunity to do more outlets this year. We have a very tight process for rejecting the new store sales and have a very good pro forma model for both projecting revenue as well as the cost structure and that process has worked well for us a long time. I don't think we plan on deviating much from that.

We have seen our rent costs -- as our business has gotten better in the last 2 years. Our rent cost will come down meaningfully from where they were during the peak of the great recession. And we think we still have opportunity, still have the portfolio of our partners and the landlord market. So we are feeling pretty decent about that.

And as Rick mentioned we've opened our first 2 stores in Canada now. We're just getting started there, but we are encouraged by the early results and we kind of know where we should be up there as well.

And could you just remind us how many of the 44 will be in Canada?

Our goal this year is around 10. We're not completely done yet, but our goal is10 of the 44 stores in Canada.

Great and my other question was just around the price increases. You mentioned AUR is up for the first time in 2 years and you saw strong full priced selling this spring. So can you just clarify the timing of the incremental price increases you are making? It sounded like you were saying they were additional ones we're expecting for back-to-school, is that correct?

We've taken areas that we felt like we had high confidence that we could raise prices and we did raise prices and we've really not seen any velocity slowdown. I will say it's not broad-based price increases and they're strategic and they're areas that, again, we felt had a higher level of confidence we would have success and we did have success.

I'll just reiterate something that Rick said on the last call which is, it really doesn't this time of year because it's not as competitive, and people are shopping and they're just willing to buy versus the hugely competitive environment that exists during back-to-school and holidays. While we have confidence and we've got the momentum behind us and we've got some great, unique brands that are hard to find in the mall, that all gives us some confidence.

There's a lot of pressures on the consumer today too with pricing of gas and food and all the other commodity increases that are there. So all I can tell you is, to date, we have not seen much pressure. But it's a very different environment when you get into back-to-school and holiday's. Yes we have some confidence but how our competitors react and how the consumer is feeling will ultimately dictate on whether our price increases will be received at the consumer level.

I guess I would add that, again, we actually-- I think we said on previous calls, we actually haven't seen that much price cost pressure increases at this point relative to what we expect to see in third quarter. So we're going to have to be able to pass more prices on in third quarter than we are doing today in terms of our strategies and how we're going to be implementing them.

I agree with Trevor that, so far so good with what we've tested. But it's not that meaningful outcome I would say relative to again a very competitive, very high-volume back-to-school period where we can't control what our competitors do. And, in certain cases, we may need to match them and what their pricing structure is. We'll have to evaluate that based upon our own position at that point in time.

Great. Thank you and best of luck. Trevor.

Sharon Zackfia, William Blair.

Hi. Good afternoon. Just a really quick question, Trevor, I might have missed this. Did you talk about merchandise margin in the quarter and did you break it out between IMU and mark down?

We didn't but I don't mind telling you. Our product margin, just pure product margins, were up some portion of 30 basis points and that's on top of being up 130 basis points I think last year in the first quarter. We don't go through the detail of breaking up how much of that was through IMU versus mark down.

I would reiterate Rick's point, is we did have more full priced selling this year versus last year. Our inventories were some of the cleanest we've had in a long time and we generally manage pretty good inventory. Anecdotally, I would say some of the price increases as well as having very clean inventories and great, fresh product and really being on trend was what led to almost 200 basis point margin, if you look at the 2 years combined. But this year-long was just around 30 basis points.

Okay and then, secondarily, I don't know if you want to comment on this but I'm just curious, Rick, as to whether or not you expect there to be any difference in your relationship with Volcom given the pending acquisition by PPR?

I don't anticipate any relationship because as I understand the Volcom team is in place and we have a good, strong relationship with Volcom. So no, I'm not anticipating any.

And the next question will come from the line of Sean Naughton, Piper Jaffray.

When you guys mentioned earlier the competitive landscape, when you look across the competitive landscape as were transitioning from spring into summer, do you feel like the pricing in the market and brands that you compete on is rational at this point?

One thing we have said this for a while, but I will reiterate again, we're more differentiated now than we've been in a long time. Our shoes are now 23% of our sales. The level of brand diversity we have is still very high. No one brand represents more than 7% of our sales. We have 200 brands of size and full-year we have probably 400 brands between brands coming in and out seasonally. We've done a good job of integrating, marketing and signage and web, in-store initiatives. So we're just more differentiated than we've been even in the past. So that being said, if people are highly price promotional and the (inaudible) that just tough for all of us. When we view the competition, we view it more from people being highly price competitive versus being competitive on products that we have and that's really our focal point when we talk about the competition.

I guess, Sean, I don't think it's really changed much over the last few months. All the way since holidays through now, I think it's still very price competitive and very promotional out there. So our performance continues to be pretty good, relatively speaking, in that marketplace.

Got it. And then on the AUR, can you just talk a little bit about what you think drove that? Was it more of the price increases or do you think it was a function of mix? Just a little bit more explanation there and do you believe that this is a trend that should continue through the back half?

When you look at the five major departments that we comment on all, but one had AUR increases and that one was boys, and boys is less than 2% of our sales, so it's pretty broad-based. The price increases that we've had -- I would say that it's hard to actually go in look at it in detail by category. But we have had certain price increases. I think a lot of it has to do with mix as well. It's hard to break it out how much is mix versus raising prices, I guess would be my comment.

And then maybe, lastly, just a real estate strategy question long-term. You mentioned again the 600 to 700 store potential. As e-commerce potentially plays a larger role in your business, has that changed your thought process in terms how many stores you think you can ultimately have or is that 600 to 700 still factor in some pretty significant growth in the e-commerce channel that you are having today?

Sean, over the last 3 to 4 years as we have really kind of ramped up our e-commerce business and our strategies around that, our observations on consumer behavior, impact of technology on consumers, that drove us a couple of years ago to bring down the number from 800 stores to that 600 to 700 store range. That was our thinking at the time, that the way the consumers were using technology would require fewer stores then we originally thought 5 or 6 years ago.

So at this point we continue, as we said in comments, to believe that 600 to 700 that is still the appropriate range. But we've got a long ways to go to get there. We're going to have the opportunity to re-visit this question on a annual basis. As to our efforts in growing our peer e-commerce business and our multi channel strategies to evaluate that 600 to 700 number and we will do so as we sit down, look at our plan and update our long-term planning each year.

Another thing I would add to that, Sean, is like everything we do here, we plan on a pretty finite level. We, for the most part, know those 600 to 700 malls. And when we reduced the number of malls from 800 stores down to 600 to 700 stores, we literally knew where the majority of the stores where we reduced them. On the high end at the 25% reduction of stores, on the low end it's more like a 13% reduction in stores. And, for the most part, what we've said is that those tertiary malls that don't necessarily need to be around in suburban markets are the lower volume, c-volume malls are the places we no longer need to be.

The other thing I think is interesting, and we've seen this because we have a great Board of Directors and were staying close to the industry is, if you look at some of the market that are performing exceptionally well for us at a store level those markets are also some of the markets that are performing exceptionally well for us at the web business. So, as we see those businesses perform well, that gives us encouragement that the customer is interacting with us in multiple forms in multiple ways. It's important to note that we have a pretty good understanding of what is going on in our investment structure and our plans is how we think about the web and the stores is pretty integrated and again we know which stores we probably don't need to be in. And we also get to watch other people close stores which helps us make decisions as well.

Makes sense. Best of luck in the second quarter and best of luck to you, Trevor, as well, in your future endeavors.

Andrew Burns, DA Davidson.

Good afternoon. I was hoping you could elaborate a bit on the e-commerce growth in terms of the drivers there, whether it's conversion or traffic? And, on the traffic side, are you doing anything in particular to drive that traffic to your site? Thank you.

Sure, Andrew, we'll give you a little bit of color on that. Again, your question is what is driving, is it a traffic, is it conversion? And I'm happy to report that it is both. And, as Trevor said, we are a big believer in the execution of multi-channel and cross-channel strategy approach to what we are doing here in our Company. I think what we're seeing is, again, when done right what we're seeing is all boats all sales in all channels are lifted when you can execute these kinds of strategies we are doing at this point.

Now, I also want to remind you that, we were coming from behind here in e-commerce. We weren't probably where we needed to be 4 years ago. And we are certainly making the ground up very quickly. And, again, I think that the strength of all of our teams and the strength of understanding the cross channel world that we believe we are going to be working in and working even more in over the next few years. So it is a mix of both again, Andrew. It is more traffic and higher conversion rates relative to a year ago.

At this point I will add though that most of the traffic is still driven organically. It's people coming in and wanting to find Zumiez. Getting back to that cross-channel kind of approach.

Great, thanks. And then, just in terms of the guidance for 25% to 35% incremental margins and comp (inaudible). I guess I was surprised in the quarter how handily you beat that given it's a seasonally light sales quarter and I'm just wondering if you might be able to elaborate on that a bit? Was it really just the upside in products margins or maybe any expenses that might have shifted out of the quarter? Color there would be helpful, thank you.

Yes, this is Trevor, Andrew. There is no expenses that shifted out of Q1 into Q2. When you look at the flow through and the quarter you are right it was really well. We put in a number of new initiatives and strategies to focus in on our operating costs and we are seeing some of the benefits of that. And so when you look across our operating costs, whether it's the supply chain, the store expenses and here at the home office, we manage those essentially at the same level that we were when we were planning that upper-single-digit comp, even though we delivered that 12.6% comp. So we basically manage our expensive very tightly. And because of some of the infrastructure investments that we have made in the past, that's what give us a that heavy leverage.

For example moving our distribution center down to California. We don't incur a lot more expenses when we drive incremental revenue. And the fact that we are now closer to 75% of our vendors we don't incur the same level of inbound freight transportation cost that we have before, which is one of the reasons we moved it down there in the first place.

So I would say as I said in the opening remarks, we have a pretty disciplined organization that has done a good job of managing that incremental cost. I do want to reiterate, as we think about the rest of the year, that we do think that 25% to 35% is achievable with a big if, if we can manage to maintain our product margins. We've been doing that now -- I think Brian and I were looking at it the other day, for 6 quarters in a row we've exceeded that 25% to 35% number. But it will be imperative for that to continue that we pulled product margins in the back half of the year.

Mitch Kummetz, Robert W. Baird.

Thanks. First question, Trevor, on the guidance. Let me ask a question this way. Your SG&A was up I think 7% in the quarter, you're guiding to mid-to-high single-digit increased for the year, so should we assume you are looking at mid-to-high single-digit SG&A increase for Q2 as well?

If you're going to exclude the Berg lawsuit we had, I think that's probably a reasonable expectation. On a GAAP basis, our selling administrative would be in the low-single-digit range. Some people include that Berg lawsuit, some people exclude it. The low-single-digit on a GAAP basis, again, probably higher-single-digits on an adjusted basis if people exclude that lawsuit last year.

Okay so then the follow-up to that is -- I'm excluding that it in my model So if I look at your sales and earnings guidance and assume high-single-digit SG&A growth, that does sort of imply that gross margins are down year-over-year in the second quarter. First of all, is that how you are thinking about the business and, if that is the case, is that a function of seeing some higher cost starting to come through the business in Q2?

I think our current expectations is that gross margins Q2 to Q2 -- let's just say assuming the high end of the range -- are flattish to maybe up just a tick. We are expecting that our gross margins will hold to maybe being up just a notch as we look at Q2.

Okay. And then on the e-commerce business, I think you mentioned up 150%, could you give us some context to that? And what percentage of the business is that now this year and how much did that contribute -- how many points did that contribute to your comp on the quarter?

So again it gets hard to divorce those two because, again, as Rick said, we see those as interactive and that those businesses are together. We do get the 151% but even that you have to be a bit cautious with because both channels drive each other. And so I think if you were to divorce the two, which again we would caution people against that because of the multi channel launched strategy that we're executing on. But I think it was some portion of 300 basis points that the web contribute to the total comp.

I think our Web business is down like 6.1% of sales versus something in the low 3% of sales last year.

Okay. And then just a couple quick ones. In Q2 how many new stores are you guys looking to open in the quarter? And then maybe lastly, Trevor, on tax, I think the tax rate came in a little bit higher than what I was modeling. I was wondering how much we should think about that for the second quarter?

We plan to have 60% of our stores open by the end of the second quarter. Which if I have my math right that's around 17 stores in the second quarter. And then we generally open all the rest of our stores between back-to-school and holiday.

I think our tax rate was in the mid 38% range and I think our expectation is that that tax rate would continue to be in that mid 38% range.

Dorothy Lakner, Caris & Company.

Thanks. Good afternoon, everyone. Congratulations on the quarter and good luck, also to Trevor. Just one question regarding private label. You've been really successful sort of throughout the recession driving some more value-oriented customers with private label. I just wondered where that ended up as a percent to sales in the quarter? And then, also, we've noticed some changes in the stores about some of the offers, the bundling that you've done in the past that you were very successful with, I wonder how we should think about that going into the back half of the year? And then anything you are doing differently on the trading front? Clearly part of your success in driving sales has been just a great sales force and great selling techniques. Just wondered if there is anything new to report there?

On the private label, we only give that on an annual basis because we think it can be a little misleading given on a quarterly. Last year our private label business was about 18% of sales and that was up from I think 15 something before that. But yes, our private label business has continued to do well. We've got a great team back there who understand the business well and has a very creative organization that is thinking about new ways that we continue to deliver to our customers.

In regards to bundling, bundling is still important but much less so than it was back at the peak of the recession. So we do still have bundled packages. We think they are important for certain aspects of the customers that we perceive, as you know we are lifestyle retailer so we're serving all income groups. So the bundling package we think are still important, but they are much less meaningful than what they were before.

And that is actually a pretty decent size reason why our transaction is down is because of the fact that people are buying less units. They are much more coming in and wanting that specific, unique item that's hard to find elsewhere. So they are spending up, whether it's shoes or apparel or some of the accessories we have. Their fashion trends have changed a little and that people want something cool and unique and they are not as focused as they once were on price as well.

We just completed a couple of weeks ago our annual May managers retreat and it was incredibly successful event for us. And that is one of the key events of our year as we look at driving towards back-to-school. It's a time to not only provide the skills necessary to build great leaders and great teachers but to also make sure that we are sending common themes as we prepare over the next couple of months for our back-to-school cycle.

So we're not doing anything different and I'm actually quite proud of that relative to our what our strategy is because our system is about giving people the skills sets, the life skills to help people be great at what they do and then asking our managers to do the same thing for their teams, within the context of our training and development programs. Yes, we do have some tactic things that we are going to be changing and adjusting as we head for this back-to-school cycle and it will be a bit different than previous years. I'm not going into that to any detail. More of what we are doing though with our people is a strong and as powerful I think that it's ever been. The event itself was just absolutely terrific.

Jeff Van Sinderen, B. Riley & Company.

Good afternoon this is Jimmy Baker sitting in for Jeff. Could you speak a little bit more about how you are approaching expansion in Canada and maybe how that will differ from the US at the store level in terms of unit size, store format and productivity?

Sure, Jimmy. Let me start by saying that we are, as I said before, we are familiar with our Canadian consumer. Over the last couple of years we spent a lot of time up in Canada getting to understand the market as best we could. In terms of both what we're going to do for real estate strategy, what we believe is the right thing to do from the product strategy and what we thought was the right thing to do with relative to how we translate our people strategies into Canada.

We are now executing that. As you know, with the first couple of stores are open and the remaining stores are going to open later this year. We are effectively opening what are pretty much Zumiez stores, has been our conclusion, with a bit different product mix but not a lot. What we will do is I think, what we are very good at doing now, is adjusting to what works, what doesn't work.

We are going to be splitting stores between the Vancouver marketplace and the Toronto marketplace this year. What we'll do as we open these stores again is evaluate what's working, what's not working, make the necessary adjustment. And that will lead to what our plans will be as we move through this year into what our plans will be for next year. These are all very fluid, they're going to work themselves out here over the next 6 months. As we learned from our experience in both Vancouver and Toronto and then adjust constantly and how well we do will determine what our plans will be for next year in terms of more stores in Canada. Ultimately we see Canada as somewhere around a 55 to 65 store business.

That's helpful thank you. And most of my other questions have been answered. But if I could just ask a follow up to some of the main questions on your guidance. Are you basing your comp guidance on what you've seen thus far in May or is there something else that you're looking at that suggest your comps will slow sequentially versus Q1?

That's a good way to ask about the current month Jimmy, I give you credit (laughter). As Rick said we're not going to answer May. I think we put a lot of thought and detail and have a lot of people involved in our financial planning. And we generally give guidance that we feel very comfortable about and then we chase and have done better for probably 2.5 years now. There's nothing fundamentally in the business that would tell us that we would have a sequential slowing. But our nature and our tendency is to call it how we see it and then as business comes in better then it comes in better. Again I want to reiterate we've put a lot of thought and consideration into these forecasts and we have a lot mutual confidence in what we put forth today.

It's a long quarter. We have a long ways to go. We are only two weeks in. I think our approach is a good approach and a realistic approach.

David Griffith, ROTH Capital Partners.

Mind you, I'm not complaining but it almost seems like your inventory at the quarter and was a little bit light, especially in a rising cost environment. It would almost imply that, at this point you, actually haven't slowed those kind of cost in inventory yet. And then also, do you have any temptation to chase product to try and get some lower prices, at least of the private-label side?

Again, I think I said earlier in the comment David, that we actually haven't seen that much of a price increase impact our business through first quarter. It's not been that significant of an impact on the business. You won't see that reflected in the cost it at this point in time in any significant kind of way. So your interpretation from that perspective would be correct in terms of where we are at.

We are always looking at how we can chase and what categories we need to chase and that's an ongoing part of our business and we are certainly doing that as best we can on a category-by-category basis.

The other thing I would just mention David if is you look at probably our two best performing categories in the first quarter is accessories and shoes. We certainly seen some price inflation in shoes but not much, as Rick said. And accessories really none, maybe a little bit or half of that but for the most part none. So when you think about what we're investing in inventory, categories and departments that are doing the best, we've not had that level of inflation because those products are less cotton-based.

What it is really driving the footwear business? It's been one of your best performers for several months now, a couple quarters at least.

It's more like several years now. So we're still in a cyclical footwear trend and I think as you know from being around this business for a while you get in these runs where there is cyclical cycles in certain categories or certain fashion cycles will drive the business. And this has been a cyclical footwear trend now for about 3 years. And in those kind of trends what you see is certain brands get on runs and we're going to ride those runs and then you also get some newness in the brands relative to people seeing the opportunity in a footwear cycle.

It's a combination of both of those. Tempered by our footwear business being that the core kind of skate footwear business just like our core skate hard good business and our core state apparel business has been a bit tougher because of, again, what is our view, demographic trends that are working against that younger core skate consumer. So we are battling that aspect even within the footwear cycle which again shows how strong that footwear cycle is.

David the only thing I would add to that is overlay on top of the fact that we've got a good trend in that -- I'm not going to tell what for competitive reasons -- but we've got some good technological investments that we've made that are teaching us a lot and allowing us to make better decisions in our footwear and we've learned a lot in the last year and a half because of some of those technological investments. I think those are other things that -- we've just made some investments that are allowing us to make better decisions and that, hopefully, continues for a bit.

David, I guess, is the other question there. That kind of implied. I don't know. I hope it runs for a while.

And then just a quick maintenance. Ending square footage for the quarter?

We ended with a 1,201,850 square feet and that does include our two stores in Canada.

Edward Matthew, Barclay's Capital.

Quick question. What are you guys seeing on board shorts, are you seeing them picking up? And in terms of hard goods, you guys said it was a negative comps for the quarter, so we are just wondering what will drive this business until Q4 of this year? Thanks.

All right. We do want to get into too many details category by category trends. Lets just suffice it to say that it's been cold around a lot of the country. I don't think you should expect that anyone is doing that great with a lot of the short categories. Leave it at that.

Hard goods, again as I said briefly in comments and then in a previous question, the skate hard goods business is really what we're talking about in the spring. It's a very important business for us because, again, we're a lifestyle retailer. This is not something we do casually. We take hard goods really seriously, it's a very, very important part of what we do. It's key and important to the industry. It's key been key and important to the brands that we support. But it's been challenged by what I believe is fundamentally a negative demographic cycle relative to the number of 12 to 15 year-olds, has been declining for a number of years now and will continue to decline for the next couple of years. I don't think is going to be a miracle turnaround in our skate hard goods business. I think that will continue probably to be a business that is going to be challenged for the next few quarters.

Jennifer Black, Jennifer Black & Associates.

Hi this is actually Carla White calling in for Jennifer Black. I just want to ask a question, can you talk about in general terms what kind strategies you're looking at to enhance your boys business? And then any color you can add for what you're looking at for the back-to-school selling season? Thank you.

Boys, as I mentioned before, I think it's 1.6% or 1.7% of sales, it's a small piece of what we do. We have an opportunity there and we'll stay focused on that I would say.

And the only thing I would on the boys business is that, we will as we always do every year Carla, really pursue it more in the particularly this peak back-to-school window. Where you see us a lot more active from an inventory perspective, inventory investment in the boys business. I think it will probably peak a little bit higher than 1.6%, 1.7% in that back-to-school. As far as looking deeper into strategies for back-to-school, we are not going to go there at this point.

We are actively now -- we've been working on that over the last few months. We've got a lot of good ideas, a lot of good practices I think in place, good coordination amongst all our teams. We're prepared, Carla, from our side and ready to execute. Now we'll get into all the training aspects of what we need to do to really get the team ready to execute out in the field and our web operation. It's about what we're going to do, but we can't control again the broader market and the irrational nature of what may go on there in a highly competitive environment here at this back-to-school season. Let me suffice to say, here at the end, we're going to do all the things we can possibly do to maximize our results in back-to-school and make a good fight out of it in terms of the marketplace.

This does conclude the question-and-answer session of today's conference. I'd would now like to turn the call back to Mr. Rick Brooks, CEO, for closing remarks.

Thank you very much. And again one final heartfelt thanks to Trevor and best wishes to Trevor and his family on their return to Atlanta even though Seattle is better. We won't let him stay far from the Zumiez family.

And lastly, thank you all of you out there, our investors, the analysts that follow our stock, we greatly appreciate your interest and we're going to look forward to talking to you again in August and reporting on our second-quarter results and thanks again, everybody. We appreciate it.

Ladies and gentlemen this does conclude today's conference. You may now disconnect. And have a great day.