Zumiez Inc (ZUMZ) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc., fiscal 2011 second-quarter earnings call. (Operator Instructions).

Before we begin, I would like to remind everyone of the Company's Safe Harbor language. The following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please note that the actual financial results of the Company for the periods being discussed may differ materially from the financial results projected or implied in the forward-looking statements.

Additional information concerning factors that could cause actual financial results to differ materially from projected results is contained in the Company's annual report on Form 10-K and other documents filed by the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements. No recording or rebroadcast of this call is permitted without the Company's expressed written permission.

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

Thank you. Good afternoon, and thanks for joining us to discuss Zumiez's second-quarter fiscal 2011 results.

With me today for the first time is Marc Stolzman, our newly-appointed Chief Financial Officer. Marc joined us on August 8, and we are very excited to have him aboard. I'm confident he'll provide the strong financial, strategic leadership needed to support Zumiez' daily operations and long-term growth.

Now to our results. We are pleased with our overall performance in the second quarter. Marc will review the numbers in a moment, but I'll point out that we experienced meaningful improvement across all of our key operating metrics.

Total sales increased 14.9%, with comps up 7.5% on top of a 9.3% increase a year ago. Product margins improved off of record levels last year, and our operating expenses leveraged nicely. The end result was diluted earnings per share of $0.08, a significant improvement over the prior year.

2011, we have continued to focus on strengthening our status as the leading retailer serving the action sports lifestyle, while at the same time positioning the Company to deliver increased sales and improved profitability in the near and long term. I believe our year-to-date results reflect a successful execution of our strategies, giving us added confidence as we move forward into our key selling seasons and look out beyond this year.

Our priorities moving forward continue to be driving same-store sales growth, opening high-return new stores, growing our e-commerce business, and new initiatives such as our expansion into Canada.

The foundation of our success and what will continue to strengthen our position as the leading branded action sports retailer is our product and our people. Our diverse mix of branded apparel, footwear, accessories, and hard goods, combined with a unique shopping experience, clearly distinguishes us from the competition. Our merchandise teams continue to do a great job fine-tuning our product assortments by mixing new hard-to-find brands with larger core brands that reflect current trends in demand.

We're also seeing benefits from the implementation of our new merchandise business intelligence system, which allows us to better plan and micromanage our business.

[At the same] time, the investment we make in our sales teams to ensure they have the necessary tools at their disposal to properly execute on the floor. Because our employees are passionate about the lifestyle, they provide a genuine, engaging experience for our customers.

2011, we plan to open 35 stores in the U.S. and have opened 26 year to date through August, including 14 in the second quarter. Our new-store performance has been very encouraging, and with a long-term potential to add another 175 to 275 domestic locations, there are significant opportunities still ahead of us.

This year has also marked the opening of our first stores in Canada. We've opened our first six stores in this market through August and plan to open four more by the end of the year. Canada has a very vibrant action sports culture, and we are confident this will be a successful expansion of our concept. At the same time, this market presents some cultural and operational differences that should provide us with valuable experience for potential expansion into other international markets.

Meanwhile, our e-commerce sales have continued to perform well, increasing 116% in the second quarter. Though dipping our toe in the water for the first several years of operating our website, we have quickly gained ground in recent years, growing this channel into a more meaningful contributor to our overall results. The investments we've made over the past several years to improve our e-commerce business continue 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.

There's no question our customer is evolving and becoming more powered through technology. Ultimately, we believe the Zumiez experience needs to resonate equally through all channels, and we will continue to invest in every channel of our business to achieve this goal.

We are obviously aware of the potential headwinds beyond the increased product, labor, and transportation costs that we've discussed in our past several earnings calls. Recent headlines suggest the U.S. economy will grow at a slower pace than previously projected. Unemployment levels will likely remain elevated, and the risk the risk of another recession has clearly increased.

In this environment, the mall has become highly promotional. However, we believe that as a specialty retailer of product that's hard to find elsewhere and with the in-store and Web experience that we provide, our concept reflects the quality of our strategies. We'll benefit in the long run by staying true to this concept and will sustain our position as a quality destination lifestyle-driven retailer.

That said, should there be another broad economic slowdown, we would not be immune. It's too early to tell how recent events will play out over the next few months and what impact they will have on consumers. As we have proven in the past, our organization is nimble and it will react quickly to changing market dynamics, and we will adjust our tactics accordingly.

What I do know is that our ambition to be the leading branded action sports lifestyle retailer remains constant, and we will continue to make decisions that are in the best long-term interest of the business and our shareholders.

With that, I'd like to turn the call over to Marc who will review the financial results in greater detail and discuss our outlook. Marc.

Thanks, Rick.

Before I get into the numbers, let me quickly say how excited I am to be part of this organization. Having lived and worked in the Seattle area for most of my life, I was well aware of Zumiez's success, and the great corporate and entrepreneurial culture created by Tom and Rick. Now that I've met many of the talented people here in the Company, I look forward to meeting our analysts and investors in the weeks and months ahead.

For the second quarter, net sales increased 14.9% to $112.2 million from $97.7 million in the prior-year period. The increase in net sales was driven by a comp-store increase of 7.5% and the opening of 32 new stores since the end of the second quarter of 2010.

To break down these results further, our footwear, men's, juniors, hard goods, and accessories departments all comped positive in the quarter, while our boys department comped negative. E-commerce performed very well, increasing 116% from the prior year's second quarter on top of 120% in the prior-year quarter.

The comparable-store sales gain was primarily driven by an increase in the dollars per transaction, offset slightly by a decline in the comp-store transactions. The increase in dollars per transaction in the quarter was primarily a result of an increase in average unit retail, partially offset by a decrease in units per transaction.

In the quarter, we opened two stores in Canada and, including the two stores we opened in August, we now have a total of six stores in this new market.

Gross profit for the second quarter of 2011 increased 22.3% to $37.3 million, or 33.2% of net sales, from gross profit of $30.5 million, or 31.2% of net sales, in the second quarter of last year. The 200 basis-point improvement in gross margin was primarily driven by costs incurred in the year-ago period associated with the relocation of our distribution center, leveraging the sales gains over our store occupancy, and an improved product margin.

You will recall the relocation of our distribution center from Everett, Washington, to Corona, California, resulted in expenses of $1.0 million, impacting gross margin by 100 basis points in the second quarter of last year.

Moving to expenses, in total SG&A expenses increased 2.7% to $33.7 million from $32.9 million. As a percentage of net sales, SG&A expenses decreased to 30.0% from 33.6% in the second quarter of last year, due primarily to a $2.1 million charge incurred in the year-ago quarter for the settlement of a previously disclosed lawsuit that impacted SG&A by 220 basis points, and our ability to leverage expenses on higher sales.

Operating profit was $3.6 million in the second quarter of fiscal 2011, or 3.2% of sales, compared to an operating loss of $2.4 million in last year's second quarter.

Our net income for the second quarter was $2.6 million, or $0.08 per diluted share, compared to a net loss of $1.2 million, or $0.04 per diluted share, in last year's second quarter. Remember that last year's loss per share includes approximately $0.02 in charges related to moving our distribution center from Everett, Washington, to Corona, California, and $0.04 for the settlement of a previously disclosed lawsuit.

Turning to our first-half 2011 financial results, for the six months ended July 30, 2011, net sales were $218.1 million, an increase of 16.7%, versus $186.8 million in the first six months of 2010. Comp-store sales for the first six months of 2011 increased 9.9% on top of 9.2% in the first six months of fiscal 2010.

Net income was $4.5 million, or $0.14 per diluted share, compared to a net loss of $3.1 million, or $0.10 per diluted share, for the first six months of fiscal 2010. Included in our 2010 second-quarter year-to-date results were identifiable costs of approximately $0.05 per diluted share associated with the relocation of our distribution center and $0.04 for the settlement of a previously disclosed lawsuit.

The improvement in our year-to-date earnings is due to topline growth of 16.7%; 240 basis points improvement in gross margin, primarily driven by prior-year costs associated with relocating our distribution center, leveraging our occupancy on sales growth, and improved product margins; and 340 basis points improvement in SG&A, primarily driven by the prior-year legal settlement and, additionally, leveraging expenses on the improved sales.

Turning to key balance-sheet highlights, as of July 30, 2011, cash and current marketable securities increased 44.4% to $131.9 million from $91.3 million as of July 31, 2010, due to strong operating cash flow. Inventory was $84.4 million, versus $78.7 million a year ago, representing a 7.2% increase from the second quarter of fiscal 2010. At the end of the quarter, inventory on a per square-foot basis was essentially flat versus the same time last year.

Also as of July 30, 2011, the Company had no debt, including no outstanding balances on our revolving credit facilities.

Now to our August sales results. Our comparable-store sales increased 4.3% for the four-week period ended August 27, 2011. In the prior year, comparable-store sales increased 9.1% for the four-week period ended August 28, 2010.

Total net sales for the four-week period ended August 27, 2011, increased 10.9% to $65.9 million, compared to $59.4 million for the prior-year four-week period.

Our August 2011 weekly comps were 2.9%, 0.4%, 7.8%, and 5.5% for the weeks one through four, respectively. The increase in comparable-store sales for the four weeks ended August 27, 2011, was driven by an increase in dollars per transaction, partially offset by a decrease in comparable-store transactions. Dollars per transaction were up for the four-week period due to an increase in average unit retail, partially offset by a decrease in units per transaction.

During the four-week period, footwear, men's, and juniors posted positive comps, and accessories, hard goods, and boys posted a negative comp. Year-to-date 2011, comparable-store sales were 8.6% on top of 9.2% for the same period last year.

Now, let me outline our guidance. In putting forth this guidance, we want to remind everyone the complexity of assessing sales, product margin, and earnings growth, given the variety of factors that impact performance, including the challenging economic conditions.

For the third quarter, we are planning same-store sales to increase in the low single-digit range, which should equate to sales of $146 million to $149 million. Operating margins in the 12% to 13% range, and this should lead to diluted earnings per share in the range of $0.37 to $0.39.

A few comments about the full year. We will continue our practice of limiting our sales and earnings guidance to the immediate quarter. We believe this is prudent under normal conditions, but with the current macroeconomic and industry headwinds, our visibility is limited further.

However, we would like to reiterate the following points. At the beginning of the year, we stated we believed our total same-store sales would increase for the year. We are pleased with our year-to-date sales performance.

On the back half of the year, we still expect sales to increase, including comparable-store sales, although at a lower rate than the first half of the year. As expected, product costs have increased, and we believe the strategies we have been executing on to mitigate the impact of these increases have been successful. With a unique product mix, offering an array of brands and categories that are hard to find elsewhere in the mall, and approximately half of our product being non-cotton based and less impacted by cost pressures, we believe we are well positioned.

That being said, with an uncertain economic climate and a highly promotional environment that exists today, we anticipate it will be more difficult to expand or maintain gross margin over the back half of the year. We intend to grow SG&A in the mid to high single-digit range, a rate less than planned sales growth.

We plan to open about 45 stores in total during fiscal-year 2011, including 10 stores in Canada. CapEx should be about $35 million to $37 million, compared with $29.4 million in fiscal 2010. Depreciation and amortization should be about $19 million, slightly above fiscal 2010.

Looking out beyond this year, we are focused on growing our topline sales and gaining market share while expanding our operating margins. Our long-term 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 digit to low teen range. We believe we can achieve these long-term financial results primarily by focusing on topline strategies designed around driving same-store sales gains, opening new stores, growing our e-commerce and multichannel sales, and executing new initiatives, such as our expansion into Canada.

Now, I would like to turn it back over to Rick.

Thank you, Marc. As we've touched on in our comments today, there are several factors, many external, which have increased the uncertainty as we think about our results in the short term.

It's important to note that with this backdrop, we've been operating stores in a disciplined, growth-oriented manner. We feel great about our product assortment and inventory position, and our sales and price strategies have us well positioned in the marketplace.

In short, we believe we are in a great position to perform well relative to the rest of retail, both in the upcoming holiday season and beyond. Operator, with that, we are ready to take some questions.

(Operator Instructions). Sharon Zackfia, William Blair.

Marc or Rick, I was hoping you could talk about the merchandise margin more in the third quarter. I don't think you broke out what you saw in merchandise margin specifically.

And then, appreciating what you're saying about the promotional cadence in the malls, have you started to see the merchandise margin come under some pressure so far in back to school?

All right, Sharon. Thank you for the question. Again, we're going to be -- obviously on August results, Sharon, we're going to be probably talking a little bit less than we would about the Q2 results.

But let me start off by saying I think that through August, we feel we've done a pretty good job on looking at pure product margins, and at this point, we feel we've done a good job of basically holding flat to where we were a year ago on product margins.

Now, there is still a lot of the quarter to go. I think we're only about halfway through the volume at this point in terms of Q2 and the total volume -- I mean, of Q3 and the total volume of Q3. So, we still have a lot of quarter to go, Sharon.

It is highly promotional. We think we've done -- again, kudos to our product team. We think we've done a good job of planning our inventory levels relative to the promotional environment. I think we anticipated some of the promotional, particularly sensitive promotional areas that are out there, so now -- so, so far, so good, but again I think we're very, very cautious about what this means going forward. And Marc, I don't know if you have anything else to add to that.

No, I think that covered it pretty good, Rick.

Did we get it, Sharon? Did that answer your question?

I mean, you know, if you back out the year-ago impacts with the distribution center, I think your overall gross margin was up 70 basis points in the July quarter. Do you have what component of that was merchandise margin? Was that (multiple speakers) flat?

The second-quarter product margins were up slightly, so I do think that less than half of what you saw was product. The other half was the other components of cost of goods sold.

Of leveraging cost of goods sold.

Then Rick, maybe a question for you since Marc has only been there a couple of weeks. Your trend slowed in the back half of July and stayed slow in the first half of August, and then really had a nice step up again. In retrospect, is there anything to identify in the back half of July or first half of August that kind of dampened comps somewhat?

Again, I think it's a great question. We've obviously spent some time, Sharon, as you would bet, looking at that and trying to understand it.

I guess let's -- first, let me back up at a higher level and say we're executing our strategies in this season that are the same long-term strategies we've been executing for a long time and, I believe, that are serving us well, and we'll continue to execute going forward.

So for example, in that world, we're -- as you know, we have a lot of brands you can't find elsewhere. So, we are not inclined to discount brands that can sell at full price. In fact, again, I think we've been successful in being able to push through the price increases where there is demand for those brands.

We anticipated, as I said a moment ago, that some categories were going to be incredibly promotional going into this season. So we planned, I think, our inventory astutely in preparing for that.

Now, as we've looked at what happened at the end of July and early August, I think there's no doubt, and our information as we look so far through this cycle of who is going back to school when, the entire season has shifted to be later. I think, at this point, we're pretty comfortable saying that, Sharon, and I think that is really what you're seeing reflected in -- particularly in August and the week two results, I think. We've seen week two volumes move into weeks three and four, and in some cases, as we look at, again, where people are in their back-to-school cycles, shifted later and got gains post areas going back to school.

So I think that's pretty typical of what we'd expect to see when there is really a lot of uncertainty around the economic environment we're in where people wait. They try to wait to get the best deals, and the volume shifts to be closer to need in these situations.

Now in that case, then again, I feel pretty good about our results, and many of you have heard us say in the past that we tend to do pretty well in these peak periods. So, our 7.8% comp and 5.5% comp in weeks three and four of August, I think, reflect that.

And the other thing I might add is that our 5.5% comp was hurt some by the hurricane. It would have been a stronger comp, but it really took an impact on that Saturday.

Now, I'm cautious on that, Sharon, because who knows if we get that all back, particularly again in this -- with the uncertainty around the economic environment. Does that help, Sharon, provide some color around it?

It helps a lot. Best of luck.

Mitch Kummetz, Robert W. Baird.

Rick, first question, on your product performance, we've seen a slowdown in the accessories business the last couple of months. I mean, it's gone negative the last couple of months. That had been, I guess, a pretty significant comp driver for you guys for maybe the last couple of years.

Kind of what are your views on that segment? Have you just kind of hit a wall there just because it's been such a good business, and now you're going up against tough comparisons? Or is there something else? And what's the margin impact of the accessories turning negative?

Thanks, Mitch. You know, we don't like, as you know, Mitch, to get into details within the department -- in terms of department performance, again -- partly because, again, we are just so category diverse within the departments.

Now that being said, we have some things that are -- we are anniversarying that are very tough things to anniversary, and we are very challenged there, but I'll also tell you that we have a number of things in accessories and other categories that are doing quite well. And so, we just need to weather this cycle of the anniversarying of a trend last year.

We're trying to drive forward on the trends that are working positive this year, and as we think about the second-quarter results, and even as we've kind of said here as relative to August, we've been pretty successful holding margins quarter to date in the August period, there's no doubt that accessories have been a negative impact to that in terms of mix and margin.

So I think, again, it speaks to the strength of our model, diversity of the brands, diversity of the categories that [as] dollars are moving around, we're able to capture those dollars in other ways and finding ways to maintain the margin structure. So, again, I think our buying team has done a really good job there.

Okay. That's helpful.

And then, just a question on the margins. In terms of your Q3 guidance, I think, Marc, you'd said 12% to 13% operating margins, which is down from last year. It sounds like you would expect to get some leverage on the SG&A. So, it's deterioration on the gross margin side. So I was hoping you could maybe just elaborate on that. How much of the gross-margin deterioration would be shifts in mix, like what you mentioned, Rick, versus just overall product margin deterioration on higher costs, versus maybe some deleveraging on the occupancy on a low single-digit comp?

Let me take the first part of that, and Rick can certainly jump in. Part of what we're looking at when we evaluate third quarter, last year we had really strong nonproduct margin costs. Our shrinkage results, occupancy that just comes through natural, whether it be [cam] and/or insurance type expenses, so we had a really strong third quarter in 2010 in the nonproduct cost of goods sold. So we definitely expect that we'll see year-over-year compression on that side.

I think on the product side, as Rick said in his comments, we think we're going to be up against a pretty promotional environment, so while we were able to see strong performance in the second quarter and have higher year-over-year product margins, I think right now we're expecting that pressure to generate a slight decrease in product margins in the third quarter compared to the prior year. Those two things combined lead to that lost leverage that you're talking about overall.

Rick, maybe just kind of a bigger-picture question. As you think about the business, you're going up against tougher comparisons in the back half. Tougher environment. But when you look at the business, I think last year, productivity, you did about $396 a foot. I think your peak was 2007 at $499.

How do you think about it? Do you still think that there's a lot of room for productivity improvement over time? Does that give you -- does that encourage you as you look at these tougher comparisons to think that there is still ability for you guys to grow -- I mean, to show positive comps beyond this back half, but into next year as well? What are your bigger-picture thoughts on that?

All right, again, thanks for the question, Mitch. We do have tougher compares. As we look into period eight and period nine, I think we're up against a 17 in period eight and a 21.5 in period nine.

It sounds like pretty tough compares, but you know, we don't plan our business, Mitch, relative to what the compares were a year ago. As our product teams build up the plans, as the sales teams and market teams add their plans to the product plan, we're basing our goals off of what we believe we can drive in terms of the current trends that we see in sales.

So why -- those are very tough compares. As Marc said in his guidance, we still expect that we're going to generate positive comps. Our plan is to generate positive comps in the back half of this year, just not at the rate that we did in the first half of the year.

So, we think we have strategies in place, Mitch, that we can do that, even with the tougher compares, but again at a lower rate than we did in the first half of the year.

Longer term, Mitch, as we look at peak productivity levels from where we finished last year to our peak at just under $500 a foot, I think as we look out longer term, we're thinking about productivity on a multichannel basis. So we're not only looking at what we need to do in terms of productivity from the store side and how we think we can drive comps and what market-share gains mean as we still believe we're playing a market-share game, but we believe that in a multichannel world we can execute strategies where we can lift volume in every channel and that every channel will help reinforce the other channels.

So, I just caution us as we think about, long term, our measures of historical productivity that over the next few years, consumer technology, how our customer uses technology, we're going to see different channels take different roles. And our historical measure of sales per square foot may not be, from our perspective, as relevant as it might have been in prior years.

So, I think we'll get back to where we have very productive stores in terms of historic productivity records, but we just may think about it differently, Mitch, in terms of how we're getting there, through what channels, and it may require us to rethink the measures a bit. So yes, long term, I think we can get back to those levels, but maybe from a -- taken again from that different perspective of a multichannel business.

Jeff Klinefelter, Piper Jaffray.

Just a couple of questions. Housekeeping first, Rick, just on those weekly comps that you gave us, that 5.5% at the end. Do you have a specific sort of basis point that you -- basis points that you lost because of the hurricane in the Friday/Saturday period at the end of the month? And then, also, in terms of -- go ahead.

I'll let Marc take that first, and then we'll come back, Jeff. Go ahead.

Yes, I think we certainly have done analytics to determine how much it is, and I don't think we could provide a specific figure. I think that gets a little bit too precise. But the fourth week would've resembled -- similar to or slightly lower than the third week when we back out the specific stores that we know were impacted.

Okay. And then, just one other minor question here. The tax rate for the quarter, lower than LY. Is that the new -- and I apologize if I missed this in your release, but is that a new run rate or is that just a one time?

I don't think we really discussed it in specific in the release, but for the year we don't see a lot of year-over-year change. I think for the quarter, we did have a benefit as we pursued natural employee-based tax savings, and so we did have a better Q2 year over year. Some of it one time, some of it still a forward opportunity, but nothing to read heavily into.

Okay. And then, generally on competition, Rick, clearly very competitive in the mall, no doubt, and in youth retailing. I imagine part of the answer to this is both, but I'm just curious the vertical retailers that are pricing key items like denim, basic tees, hoodies, very, very competitively, versus more of kind of a general action sports competition. You're feeling it from both areas. Is there one in particular that you're more concerned with going into the third and fourth quarters?

It's not that so much we're concerned with what they're doing, Jeff, from my perspective. It's we're concerned about what we need to do and what our plans are.

And again, I think in the case of denim, our buyers did a great job, right? As you know, we plan at a very detailed level where we're looking at -- as we build our seasonal plans, we're looking at category brand combinations by week as we build our plans.

So let's talk about denim in that example, then. We looked out at this season and said it was already highly promotional in denim heading for back to school. No real new fashion cycle in denim, and I think we knew it was going to be a pretty competitive market in denim and we planned our inventory accordingly.

So as we look at -- to answer your question, I guess, more directly, Jeff, about how we think about it from our business, the environment is what it is. We think we've done a good job of planning for the cycle in terms of managing our inventory levels, and I will tell you that I think our inventory levels are as clean as they've ever been. We're in very good position from an inventory perspective.

And so, as we look at a category like denim, we take markdowns relative to our plans and do what we need to do to move units and the velocity of units relative to achieving our internal plan and how we plan the business. So, yes, we are concerned about both those guys.

But again, we think we've done a pretty good job of managing what we expected. We expected to see this situation, so I think we've done a pretty good job of managing our way through it.

Do we like how promotional it is? No. Are we concerned about it for some of our branded partners? Yes. We don't think it's a good thing for our branded partners to be so massively on sale at some of our competitors, and we clearly are not doing that because that's just not our strategy. We don't think it's good for the industry and we don't think it's good for the brands.

So yes, we're concerned, but we're focusing on the things we can control, and I think, again, from our inventory perspective, Jeff, we're pretty pleased with how we're managing the process.

Randy Konik, Jefferies & Company.

This is [Traj Walker] filling in for Randy. I just wanted to focus on the comp metrics. For AUR, you mentioned some trending positively. Can you just talk about what's driving this, whether it's price hikes or mix? And then, if you could also just mention any relationship between the AURs and transaction counts? Thanks.

I don't think we're going to get a lot of detail regarding around either for second quarter or for the August numbers. But it is a mix of both as it relates to AUR of us being able to take price increases relative to the cost increases we have seen come through on product, and I think successfully, on those brands where there is demand, pass those price increases through to our consumer.

And it's also a mix shift, as we talked about with accessories. Obviously, accessories tend to be one of those categories where we're seeing declines in AURs, but potentially -- or we're seeing mix shifts in AUR relative to the changes in our patterns of volume there, so where we're seeing AUR gains relative to mix shifts out of accessories and into other departments that are running gains. So I'm not getting too into the details about the percentage of each of those mixes, but it is a combination of both.

[David Griffin].

Just on a housekeeping, what was the ending square footage?

Before I answer, I'm just looking at Rick is if we disclose this normally, so 1,246,849.

Okay, great. And then, Rick, could you talk a little bit more about kind of what you're seeing and how it's coming as you try to assort your stores more locally?

Sure, I'd be glad to, David. And again, as you know, we have -- I always like to remind people that you need to put this on a -- for us on a continuum.

We have been trying to assort -- do local assortments in stores from virtually the very beginning of Zumiez under a very simple sales-driven philosophy that you should put things in stores that people want to buy. Now with scale, that gets to be tougher and tougher, so over the last number of years, going back 10 or 15 years, we have been instituting technology enhancements to allow -- to provide better tools for our merchandise teams to assort -- to do local store assortments.

Now I think we're pretty good at it where we are today, Dave, in terms of -- particularly on a relative basis. We plan at a very detailed level in what we're doing with our business.

What we are currently doing in terms of the next evolution of assortment planning is -- and we mentioned this in the script -- we are instituting new business intelligence reporting tools. These new tools, and we are fully implemented on that phase of this project, and this is, again, for our merchandise teams, that BI tool will now integrate with assortment -- a new assortment of planning tools that we're putting in place for our buyers to use.

We are in the early phases of implementing the new assortment planning tool, and the goal is that, again, we can look dynamically at now planning individual category brand combinations for different mixes of stores for each individual category brand combination, and that we can do that and build plans on a weekly basis to drive that out.

And so, it's giving our product teams the tools to establish new baselines and new depth and detail to our assortment planning.

From that, as you would guess, right, we'll be able to do all sorts of things that we've never be able to do at a much more detailed level. Better size optimization within that structure, right color size, getting more fine-tuned about what mix of products and categories and lifestyles go together in each store.

And ultimately, we would -- give us a few years out, there will be another evolution in that relative to around planning rack capacity and building rack capacity into this model.

So we have a long ways to go and many things to go to do here, David, in these. I think, again, we have a history of doing this probably better -- as well or better than most, and I think it's particularly important relative to the diversity of brands and categories that we have in our business, and I think we have good plans now to go out and implement this new tool in the next two to three years to drive even a better result in our ability to do this.

And as you know, the first round of assortment planning using a new tool will be just establishing a new baseline, and it really would be into the second year of then how we adjust against that baseline, I think, before we really see some of the major -- hopefully some bigger benefits from executing the new tool.

Christine Chen, Needham & Company.

Thank you, and congratulations on a good quarter. Wanted to ask if you could share with us some more details about August from a regional performance perspective. I mean, clearly, the Northeast probably was a little bit more difficult, and maybe you could share with us just performance by mall type, and wondering about the productivity of your Canadian stores. I know it's early, but historically most U.S. retailers have seen Canada as a more productive region than the U.S., and I'm just wondering what you're seeing there. Thank you.

Okay. You know, I think as you know, Christine, (technical difficulty) giving the detailed comments regarding the monthly releases around regional performance, regarding sales.

And we did that primarily because there hadn't been a lot of significant differences, so it was -- it was not a -- not really providing any meaningful information at that point.

I would say that is generally true for August, except for what you called out, that -- and I think as Marc commented earlier, particularly even Saturday really hurt us in the eastern region of the country relative to the hurricane that went through the east. And by the way, we'd see that in the first day of period nine, too, where we had a lot of stores closed on that -- on Sunday in our eastern region. So, yes, the east was -- would've been the laggard for a month relative to primarily the weather differences on the East Coast.

As it relates to Canada, I don't want to actually say too much about Canada. As we've said previously on previous calls, it's very, very early in terms of our sales results. I think we feel pretty good about where we're at in Canada.

But we need to get through a couple of peak seasons, I think, before we really start to give greater color and highlight on Canada and how we're feeling about where we're at. I'd like to get through a back-to-school season up there. I'd like to get through a holiday season, and I think those will really inform. We'll be able to give you a better direction on those.

Again, I will say that initially, early, we feel pretty good, and our modeling would support your assumption there, Christine, in your question is that these are typically higher productivity centers. There are fewer malls in Canada. They are typically more productive, and we would expect our stores to be more productive, too, given the time for them to get through a couple of peaks and for them to mature a little bit over the first couple of years.

So, again, we feel good, but we need to get through some peak seasons to really get a better read on Canada.

Edward Yruma, KeyBanc.

Can you talk a little bit about incentive comp accruals? Obviously, you guys had a great year last year, and against those tougher compares, I know that comps are going to ease in the back half of the year. Are you still accruing at the same level of incentive comp or is that part of the reason you're able to drive SG&A leverage? Thanks.

I don't know how specific, ultimately, we would be on that. I think certainly when you look at the prior-year incentive comps, you're looking at some record levels of performance and we're still achieving record levels of performance.

But the comp incentive accrual, both first half and second half, is depending on how we do versus our internal plans.

We've been having a good year. We're booking the incentive accordingly, but how much does that create in terms of leverage year over year? If it was the item of note to call out, I think we would've called it out already.

And the only thing I might add is so much of this answer is contingent on the back half of the year heading into the holiday, so the fourth quarter itself will drive a lot of this answer. And while we've had great performance to this point, the back half of the year, September through the end of the year, is going to create much more of whatever that answer is going to be.

Andrew Burns, D.A. Davidson.

Thanks, and nice quarter. A balance-sheet question for you. With $4.25 a share in cash exiting the quarter, no debt, and even in 2008 maintaining a positive cash flow, just wondering if the use of that cash is increasingly a topic of discussion? Having a solid balance sheet is an asset to the Company, but it seems like there is opportunity there for either some buybacks or a special dividend, given the cash level. Thanks.

Andrew, this is a topic for the Company, and our Board does regularly visit this topic. We it do formally a couple of times, typically, in a year.

At this point, I don't think that we're -- there are no discussions to do any significant buybacks or cash dividends at this stage of the game. Primarily I think from our perspective, because we are heading into, again, what we view as could be a very tough economic environment to be doing business in, and also because we believe we are a growth company and we're going to take advantage of our ability to grow our business, invest in our e-commerce and our multichannel strategies, and to take advantage of other opportunities as they come along.

So at this point, I think we are comfortable with our cash position, but it is something that the Board looks at on a periodic basis and does consider alternatives, but at this point I think we are focused more on the economic uncertainties that are out there and on our growth opportunities that we believe are significant and are in front of us.

Andrew, this is Marc, just to add a couple of things. One, thanks for the compliment on Q2. I do think it was great performance.

But I think, just like Rick said, as I joined the Company that was one of my first questions is, what is the perspective on use of cash? The prudent answer would be we'd evaluate all of the uses of cash that you described as possibilities for what we would do, but having also had an opportunity to hear the Board discussion, that is something that is a future discussion, not current, about what we would do.

Cash is king in an uncertain economic environment. We have not only cash, but good flexibility on our balance sheet, and we're clean. So I think how we'll use that in the future as a growth company, like Rick said, first and foremost to make sure that we can achieve our growth.

We also have a history where we have executed an acquisition. So, having dry powder available for whatever opportunities are in this uncertain environment, I think, is great, so we feel really lucky to be in that and fortunate to be in that position.

Dorothy Lakner, Caris & Company.

You've talked in the past, I think, about how your customer does tend to shop not just closer to need, but the business tends to cluster around events, and it seems like over the past couple of months we've certainly seen more differences week to week or first half of the month, second half of the month, so is it fair to say that that typical historical pattern that you've seen is going to be perhaps accentuated for the balance of the year?

And then, secondly, just wanted a little bit more color on the juniors business. It was a troublesome one for you for a while. But you brought in new talent, turned things around. Just wondered where you see the additional opportunity there being? Thanks.

Thanks, Dorothy. You know, again, I would probably agree with your assertion that we probably will see shopping happening closer to need.

And for us, I think that it's a combination of, which will lead to the second part of your question -- it reflects a lot of the nature of our business of being primarily a male-driven business. So, men in particular, I think, in general, shop closer to need, whereas women shop more frequently throughout the year. Men tend to be more event-based shopping.

And I think the economic circumstances [and] certainly it being [great] out there are driving it then even closer to need. So we would anticipate that, I think, based upon our current trends and cycles for the remainder of the back-to-school period, as well as probably the rest of the peak, so there may be -- we may see this kind of variations as we've seen in July and here in August relative to the sales performance, so yes, I think that is a fair assumption to make at this point.

And is there anything that you're doing differently promotionally that maybe you weren't doing before to either smooth that out versus a year ago, say?

Again, we are executing strategies that are about the long term, Dorothy. So we are focused on, again, a promotional cadence that makes sense for the mix of product that is working in our business today.

I think actually in Q2 and even so far in August, we've actually had a reduced markdown level relative to the prior year on a slight basis, but that's on more inventory on hand, so again, it reflects again the cleanliness of our inventory that we have in place.

So no, I don't think it changes our thinking relative to this need. It puts obviously more pressure on our sales teams, I think, and our ability to hold and believe in our strategies relative to the kind of products and the mix of products and brand and categories that we're offering, and believe that we can get the result we get. You have to be, I think, a little braver to hold on price in this environment, and I think our team has done a really good job in that regard.

So, I don't -- we really believe in what we're doing. We believe, again, in having the kind of mix in brand diversity and categories that we have, and I don't think we would expect a significantly different promotional cadence as a result of that.

In juniors, just to give -- hit the last part of your question, Dorothy, we have comped now positive in juniors for quite a number of months now, consecutively. It still is a small part of our business in the, I think, 9%, 10% range in the last year in terms of mix of our overall sales. I think our team, we are finding our way there but we have more work to do in the juniors area yet, I think, to really set a clear path for what our mission is going to be in the juniors area.

So while we're seeing success, we're getting positive comps, we have a ways to go, I think, in terms of figuring out how we are going to be unique in the juniors area of our business while still being aligned with our action sports heritage. So, we have a lot of work to do there yet, and I know our team is working really hard. We're trying a lot of things and building new strategies and ways to try to drive the business forward.

Pamela Quintiliano, Oppenheimer.

Thanks so much, and let me add my congratulations for a great quarter. I just had a few questions.

One is when -- with the start of 3Q, you've spent a lot of time talking about how you had anticipated it was going to be very promotional, but then there's a lot of economic uncertainty in macro issues out there. So on a relative basis, is it -- were you planning -- I guess planning is the wrong way to put it, but were you thinking the macro was going to be as bad as it seems to be when you were planning your inventories for 3Q and looking to the remainder of the back half of the year?

And then in conjunction with that, if you were -- if it is worse than you thought it would be, are you able to pull back on any orders? And if so, what's the timing of that?

All right. We -- no, I would not say, if you were to talk to us and we were planning the back-to-school cycle and we were coming off, I think, a fairly strong Q4 and a strong Q1 at the time we are booking back to school, that we would have -- we did not anticipate, I think, probably the level of economic uncertainty that has arisen here in the last six weeks, over the last six weeks.

So, now, that being said, again our business is -- I think we have the flexibility that a lot of businesses don't in terms of how we work in the branded model. And we've been cautious on denim because we thought and believed it would be promotional, so we -- again, we don't believe we have a big issue as it relates to denim inventory.

And in other areas, in the screenable areas, we have a lot of flexibility that we can move under a relatively short time window.

So, we believe that as we look forward into -- towards the end of Q3 and towards the end of the year that we are going to be able to maintain a pretty -- even with this kind of enhanced economic uncertainty we are experiencing. We've done a good job of managing our inventories. I think our inventories are very clean, and we think we'll be able to continue to adjust as we need to outside of the -- I think I feel very comfortable saying that, outside of there being another recessionary environment that we might enter into.

So then, I guess, on a more positive note, with product costs, a lot of talk about the cotton costs coming in, when would you see an impact from that?

Can you clarify that a bit for me in terms of product costs?

Or in terms of the input costs because cotton costs have been so high, and now they're obviously coming in from the escalated levels that they'd been at, and given your shorter lead times relative to some of your peers, when do you think you'd begin to see a benefit or a positive from that?

I think, ultimately, locking in the orders is when we get to have more clarity on that, but we know the trend is pointing to improvements for spring, and as a retailer that hasn't locked in as many of those orders, I think we have a good opportunity to see an improvement.

Now that improvement will be from today's levels, not year over year spring 2012 versus spring 2011, so I still think we're going to have some overall cost pressures, but we're certainly coming off of this peak that we're in now and I think we'll begin to moderate back towards a better figure in the spring, and like you said, we're in reasonable position to take advantage of that compared to some of the other comments we've heard out in the market.

Betty Chen, Wedbush Securities.

Good afternoon, everyone, and welcome, Marc. I was wondering, Rick, if you can talk a little bit more about the online business? I know you've been investing in the area, and certainly we can see it in the numbers.

I was curious, are you getting any different reads from this online customer versus retail, and are there any sort of additional initiatives that we should be watching for online as you continue to [grow] that channel?

And then, I also had a clarification question regarding the second-half commentary around gross margin and SG&A. Marc, did you say that we should be looking for SG&A to be up mid single digit to high single digit for Q3, or for both Q3 and the full year as well? Thanks.

Let me take the first part, Betty, regarding the online business. I'll ask Marc to comment on your clarification on the forward-looking guidance relative to SG&A.

Our online business, again, just to put it in a bit of historical perspective, this is an area that I think we really made a major investment in talent just over three years ago and really upgrading what we are doing. And we've been executing against a pretty detailed plan of attack for the online business since that point in time.

What you're seeing is us getting results of, again, a very disciplined approach to investing in the business, executing a really clear plan of what we need to do to build the business, and to date we've been doing blocking and tackling is what I'd tell you, Betty, is that we've been doing the things we needed to do to get our business to the place we needed to be. We've seen a lot of great success obviously around the sales. Our penetration is -- I think in Q2 was approximately, I think, just slightly under 6% of our total mix, which is much improved over where we were at 1% three years ago. So we've made a lot of progress here.

Now as we look forward, we are going to continue to make a series of investments. We are working off, again, a rolling six months' plan that rolls out over the next 18 and 24 and 36 months. We're updating based upon our success in rolling out our initiatives. We have a lot of things we have yet to do yet in terms of, particularly, marketing the website. Most of what's happened to date has been driven by organic store growth and organic efforts within the web team itself.

So I think we need to have a very detailed plan that will allow us to continue to drive this business forward. We think it should be a much bigger part of our business. We think that it is a key piece of an omnichannel strategy. It's kind of the linking piece for all the channels.

So you're going to see us, Betty, continue to invest here. We will be rolling out a new platform on the web business here before the fourth quarter, as an example of that investment, and we anticipate that we'll continue to make investments on an ongoing basis in the business itself in both technology as well as talent here, going over the next number of years.

So we have, I think, a great opportunity there yet to build that business and to have it be that connecting piece of our multichannel and omnichannel strategy.

I'll let Marc, then, take the SG&A question.

Yes, so just to clarify, the SG&A commentary was on the full year growing in the mid to high single digit, and the real focus on that is a rate less than our sales growth. But other than the operating margins, I didn't speak to anything on the Q3 or Q4 for SG&A.

Jeff Van Sinderen, B. Riley & Co.

I guess my first question is, the second half of August was better than the first half. Any chance that comps accelerate, do you think, in September as they did last year?

And then, also, a point of clarification on your overall promotional cadence. Were you guys overall less or more promotional in Q2? And then, is the plan to be more or less promotional in Q3 overall?

And then, finally, what do you think needs to happen to get the transaction count up? How are you thinking about that versus mall traffic? Thanks.

Thanks, Jeff. So, let me -- we're not going to really comment on September comps at this stage of the game, and I already previously had said that we had a very tough Sunday relative to the hurricane where we had about 55 stores closed in our Eastern division.

And we are hopeful that we're going to get all that volume back, but we have yet to prove that over the next few weeks.

So outside of that, I would hope that we'd see the trends play out that we saw play out in August, but we have yet to experience that and we need to see that happen here over the next few weeks.

The promotional cadence relative to second quarter and even August, again we are -- our markdown levels have been relatively consistent with prior years, so there's not been a big, significant difference in our promotional cadence over those periods. And again, I think that's why you've seen us be able to keep -- slightly get a little bit of improvement in product margin or hold it here in August over those two windows. So, we feel pretty good about that relative to the how promotional the mall environment is itself.

Transactions, a bit different story. Again, transactions in our business because of the breadth of our offerings, both in brand and categories, Jeff, it gets to be a little bit more complicated. There's no easy answer for us in that regard because, again, we are having -- we are negative in transactions, as Marc has said. But that is certainly partly a function of the move away from some of the trends in accessories a year ago. And that is why you're seeing -- partly seeing the rise in our AUR.

So the dollars are moving around relative to, again, the mix of products we're offering. So we expected that this would be the case, in our planning cycles. This is what we had anticipated, and so our plan here as we came through Q2 and into Q3 was that we would see gains driven by dollars per trans rising through AUR gains both from the sense of price changes as well as mix shifts within our categories. So, this is what we anticipated, and I think as we think about transaction counts moving forward, this was not unexpected, and it's the nature of the business cycle we're in currently today.

So again, a complicated answer to what is -- seems easy, but in our business is quite complicated as we think about what we're doing relative to, again, brand diversity and category diversity of our offerings.

With no further questions, I would like to turn the call over to management for closing remarks.

Thank you. Again, we certainly appreciate everyone's interest in Zumiez, your support for our business, and we're excited about the back half of the year, again.

We think that, while there are challenges out there for us and a lot of uncertainty relative to the macroeconomic environment, we are well positioned relative to the rest of our retail competitors to deliver, I think, some pretty good results. So, we appreciate everyone's interest, and we'll look forward to talking to everyone here at the end of our third quarter. Thank you, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.