Zumiez Inc (ZUMZ) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc., Fiscal 2011 Third Quarter Earnings Call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

Before we begin, I would like to remind everyone of the Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez, Inc., business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties and actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially than the information that will be discussed is available in Zumiez filings with the SEC.

And now, I would like to turn the call over to Mr. Rick Brooks, Zumiez Chief Executive Officer. Please proceed.

Thank you, Melanie. Good afternoon, and thanks for joining us to discuss Zumiez third quarter fiscal 2011 results. With me today is Marc Stolzman, our Chief Financial Officer. Following my opening remarks, Marc will review our financial and our operating highlights.

We're very pleased to have delivered another quarter reflecting solid performance. Since beginning of 2010, we have consistently grown sales and earnings, and the third quarter was no different, despite being up against our toughest year-over-year sales comparison.

Total sales increased 13.3%, with comps up 6% on top of a 14.4% increase a year ago. Our top line results were better than initial projections we gave at the end of August.

At the same time, we were able to achieve record product margins by improving on last year's levels through strategic pricing in a quarter where product mix shifts and inflationary pressures were working against us. This, along with the leveraging of our cost structure on higher sales, resulted in record third-quarter operating margin, and earnings per share.

When we last spoke in late August, we indicated that we felt good about our prospects for back-to-school and fall, based on the strength of our product assortment and the shopping experience provided by our store and web teams. At the same time, we said we were cognizant of the fears that the US economy would slow further, or even slide back into recession.

In addition, we believe that among these fears, along with the inflationary pressures all of retail faced, we would be forced to operate in a highly promotional mall environment.

The macroeconomic headlines continue to be mixed. However, it does appear that the near-term concerns about the US did not fully materialize. That being said, promotional activity in the mall has remained, and our ability to execute our strategies [into] results through disciplined planning, preparation, and a quality in-store and online experience, is a testament to all of our teams.

The fourth quarter has gotten off to a good start, with November comparable store sales up 8.4%, on top of a 20.7% increase last year. The Black Friday weekend was in line with our comp results for the month, an encouraging beginning to the holiday season.

Like the back-to-school season, our teams have done a great job positioning company for the holidays. We continue to differentiate ourselves by staying true to the key operating philosophies that have served as our foundation since the beginning, mainly having a wide selection of established, as well as hard-to-find apparel, footwear, accessories, and hard good brands; and offering a unique lifestyle-driven shopping experience through engaged, passionate employees with a focus on customer service.

Thanks to our continuing efforts around improving our product assortments, combined with our ongoing commitment to investing in our people, we have been able to strengthen these pillars and further distinguish Zumiez from the competition.

We are also well-positioned in terms of our multiple growth opportunities. We are driving our business forward through four different vehicles, higher store productivity, domestic unit expansion, eCommerce penetration, and our first international expansion in Canada.

Comparable store sales year-to-date through November are up 8.3%, on top of a 12.3% gain for the first ten months of 2010. Our diverse merchandise assortments and compelling selling strategies are clearly resonating with consumers.

As of the end of November, we've opened all 45 stores we planned for 2011, 35 in the US, and 10 in Canada. Domestically, we opened 12 stores in the third quarter and two more in November. We currently operate 434 stores in the US and have plans to open between 8% to 10% new domestic stores each year as we move toward our long-term goal of between 600 to 700 domestic locations.

We are pleased with the productivity of our new stores. Our real estate team continues to do a great job finding good locations in markets where we believe we can be successful.

We also continued our Canadian expansion in the third quarter, opening six more stores. Still very early, and we want to get through our first holiday season in Canada before we make any broad statements about the long-term potential of this market, or our plans for next year. But I will say we've been encouraged by the initial results of this new venture.

Meanwhile, our eCommerce growth strategy continues to yield positive results. Sales fulfilled through Zumiez.com increased 70% in the third quarter and 100% in the first nine months of 2011, which comes on top of the increases in the same periods last year of 165% and 131% respectively.

On an annualized basis, the web now represents over 6% of total sales. We're making good progress in our efforts to create a platform that allows us to better connect with consumers and bring our unique in-store shopping experience to the internet.

As you've just heard, our game plan really hasn't changed since our last call, or over the past several years, for that matter. We continue to do the same things that made Zumiez the leading retail destination for the action sports life-style.

Over the last several years, we have proven we can successfully make adjustments to address changes in consumer behavior while staying true to the fundamentals of our business model, which will continue to serve as our blueprint as we move into new geographies and develop new channels. We are intensely focused on building a quality business for the long-term.

In closing, we're very pleased with our recent performance, and we feel good about our momentum as we start December. Fears surrounding the US economy persist, and it's hard to know what the effect of the crisis in Europe and other global events will ultimately have on the US consumer.

Regardless of what challenges arise, we believe we are well-positioned in near term relative to our peers, while continuing 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.

Thanks, Rick. Good afternoon, everyone. For the third quarter, net sales increased 13.3% to $154.0 million, from $135.9 million in the prior-year period. The increase in net sales was driven by a comp store increase of 6.0%, and the opening of 43 new stores since the end of the third quarter of 2010.

To break down these results further, our footwear, men's, juniors, and boys departments all comped positive in the quarter, and our accessories and hard goods departments comped negative. As Rick mentioned, eCommerce performed very well, increasing 70%, on top of 165% in the prior-year third quarter.

The comparable store sales gain was primarily driven by an increase in dollars per transaction, partially offset by a decline in 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.

Gross profit for the third quarter of 2011 increased 14.4% to $60.1 million, or 39.1% of net sales, from gross profit of $52.6 million, or 38.7% of net sales in the third quarter of last year. The 40-basis point improvement in gross margin was driven by a slight product margin improvement in the quarter, as well as leveraging our supply-chain expenses on the sales gain.

Moving to expenses, in total, SG&A expenses increased 11.0% to $37.3 million, from $33.6 million a year ago. As a percentage of net sales, SG&A expenses decreased to 24.3%, from 24.7% in the third quarter of last year, primarily a result of leveraging these expenses on the sales gain. Operating profit was $22.8 million in the third quarter of fiscal 2011, or 14.8% of sales compared to operating profit of $19.0 million, or 14.0% of sales in last year's third quarter.

Our net income for the third quarter was $14.1 million, or $0.45 per diluted share, compared to net income of $12.3 million, or $0.40 per diluted share in last year's third quarter.

Turning to our year-to-date 2011 financial results, for the nine months ended October 29, 2011, net sales were $372.0 million, an increase of 15.3%, versus $322.7 million for the nine months ended October 30, 2010.

Comp store sales for the first nine months of 2011 increased 8.3% on top of 11.3% for the first nine months of fiscal 2010. Net income was $18.6 million, or $0.60 per diluted share, compared to net income of $9.2 million, or $0.30 per diluted share for the first nine months of fiscal 2010.

Included in our 2010 third 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 top-line sales growth of 15.3%, 150 basis points improvement in gross margin, primarily driven by prior-year costs associated with relocating our distribution center, leveraging occupancy on sales growth, and improved product margins; and 220-basis-point improvement in SG&A,, primarily driven by the prior-year legal settlement and leveraging expenses on the improved sales.

Turning to key balance sheet highlights, as of October 29, 2011, cash and current marketable securities increased 38.5% to $137.1 million, from $98.9 million as of October 30, 2010, primarily driven by strong operating cash flow.

Inventory was $93.8 million, versus $83.1 million a year ago, representing a 12.9% increase from the third quarter of fiscal 2010. At the end of the quarter, inventory on a per square foot basis was up slightly compared to the end of the third quarter in the prior year.

Also, as of October 29, 2011, the Company had no debt, including no outstanding balances on its revolving credit facility.

Now, to our November sales results. Our comparable store sales increased 8.4% for the four-week period ended November 26, 2011. In the prior year, comparable store sales increased 20.7% for the four-week period ended November 27, 2010.

Total net sales for the four-week period ended November 26, 2011 increased 16.2% to $46.9 million, compared to $40.4 million for the four-week period ended November 27, 2010. On our November 2011 weekly comps were 12.3%, 8.9%, 5.8%, and 7.6% for weeks one through four respectively.

Our sales results on Black Friday and the holiday weekend were similar to the November's full-month comp store results. The increase in comparable store sales for the four weeks ended November 26, 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, men's, footwear, juniors, accessories, and boys all posted positive comps, and hard goods posted a negative comp. Year-to-date 2011 comparable store sales were 8.3%, on top of 12.3% 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 macroeconomic conditions.

For the fourth quarter, we are planning same-store sales for the quarter to increase in the mid-single-digit range and total sales to be in the range of $174 million to $177 million, operating margins in the 14.5% to 15.5% range, and diluted earnings per share in the range of $0.52 to $0.54.

This guidance is predicated on a slight decrease in gross margin compared to last year's fourth quarter, resulting from downward pressure due to the impact of sales mix. Additionally, we expect SG&A to grow at a rate slower than sales.

With regard to the full year, we want to share with you some important points. One, we have opened all 45 new stores planned for 2011, including 10 stores in Canada.

Two, CapEx should be about $28 million to $30 million, compared with $29.1 million in fiscal 2010. And third, depreciation and amortization should be about $19 million, slightly above fiscal 2010.

Looking out beyond this year, we are focused on growing our top-line 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 top-line strategies designed around driving same-store sales gains, opening new stores domestically, growing our eCommerce and multi-channel sales, and executing new initiatives, such as our expansion into Canada.

Operator, we're ready for some questions.

(Operator Instructions)

David Griffith, Roth Capital Partners.

Yes, good afternoon. Rick, you made it sound like your new stores are performing really well. Could you maybe touch a little bit more on new store productivity and what you're seeing in new locations versus in regions where you already have good stores, penetration?

You know, David, when we talk about that, and I'm going to let Marc talk about it a little bit more about this than I will. But we're really talking about relative to the stores that are maturing, not really the 10 stores coming on.

And this year's stores, as you know, we're still looking at how they're performing, but again, we're -- seem pleased with where we're at relative to even the 2011 series, although again, very few of those have -- in fact, none of those obviously have full-year sales in them.

I'll let Marc make a few more comments.

Yes, I don't know that we have a lot of more detail to provide. I think that we're seeing patterns similar to what we have in the past. We're seeing good performance, and I think whether we're talking about existing mature markets or newer markets, I think we've seen similar patterns.

I don't think that there's much to read into it, except that we're having strong overall performance and that also translates into the new stores.

Great, and then just a quick follow-up on Black Friday. Can you talk about the early openings and what impact you felt like they had, and it seemed like you guys really held the line on promotions while a lot of the rest of the mall was going pretty crazy.

Yes, I would be glad to, Dave. And we've -- you know how it is in retail, you've been in it for a while yourself, and you've seen it. There tend to be patterns that repeat. I would tell you that the extended hours from our perspective, maybe this is partially because of our -- as you commented on our promotional, or maybe lack of promotional strategy, but just as in the prior year, we saw that really for us, we -- the volume kind of moved out of the Friday and Saturday into that Thursday-Friday activity.

Again, we saw that same pattern last year, Dave, so we expect it -- we would probably see that same pattern again this year. That is what happened.

For us, I think it's about -- when you think about the weekend, it's about the shifting of pattern into those new hours. I'm not so sure that the hours in that sense would have -- that the hours necessarily make a big difference in the overall weekend. Again, maybe this is unique to us, because -- the second part of your question is that we clearly were not as promotional as many other of our [teen peer] group.

My comment about the relative promotional status is, that's not our business. We are re-selling brands. We are re-selling brands that are hard to find in many cases. We're the only place you can find them in terms of most mall-based consumers.

And these are brands with real equity. We would be doing our brands a disservice to be doing discounting, particularly the kind of all-store discounting that our competitors do.

Our position is that we want to be a great brand, a great partner for our branded suppliers, and that we have to live up to obligations to them to do a good job of representing them. That includes holding the line on brands where there is great value to the brands. And I believe we have some outstanding brands that are delivering value for us and themselves, and more importantly, our consumers.

Great. Good luck, guys.

Thank you.

Sharon Zackfia, William Blair.

Hi, good afternoon. Can you hear me okay?

Yes.

Yes.

Okay, great. I was hoping, Marc, you might be able to break down the merchandise margin into a little bit more granularity. I think you were expecting some input cost pressures here in the third quarter to begin, and I'm wondering if you offset that with higher IMU or fewer markdowns?

And then separately, Rick, if you could talk about the snow season, I think last year you did a few things differently -- how that season is starting out for you this year?

Sure. So I'll take the first part of that. I think when we last spoke, we definitely provided some perspective that we would see pressure on gross margin. We had excellent performance in the third quarter of last year on categories in gross margin but below product margin, namely our shrinkage performance and also some occupancy categories.

We anticipated that that would not be something that we could repeat. We did see in the quarter strong performance in both of those categories again, so that certainly aided us in achieving our gross margin.

We also were able to get our product costs favorable year-over-year, which -- there's no mystery to it, as Rick said, because of the branded position and the unique products we carry, we are able to command strong IMUs, which we did earlier this year as well, and because of the cleanness of our inventory and the lack of chasing some of the other activities we see in the mall, we kept our markdown activities very clean.

So I don't think there's much magic that I can share with you in the explanation, except to say that we really operated a quality quarter and it showed in the gross margin.

Regarding your question on the snow season, Sharon. Again, as you kind of intimated, no, we did things substantially different in terms of strategy last year in our snow season.

As many of you heard us say, we are proud that last year was the first year we ran a gain in our snow hard goods business in about four years. Now, we also had one of the best snow seasons in many --- many, many years last year. So how much of that was our strategy, how much of that was the quality of the snow season remains to be seen, and I think we're going to find that out a bit this year.

So we are continuing, Sharon, to deploy the same strategies that we used last year in terms of overall tactics with our snow business. As you would guess, we were somewhat cautious on how we bought snow, knowing how good a season it was last year. So I think we showed some restraint in that regard.

So no differences really in terms of our strategy, Sharon, in terms of our sales, on the floor sales strategy on, again, as you know, we believe in price neutrality in our strategy. So our on-the-floor sales strategies are the same as our web sale strategies across channel.

In terms of how it's starting out, as you heard us say at the top, our hard goods business comped negative in November. I will tell you that as we parse that, the snow business was actually a slight positive and our skate business was a negative that brought the overall group down.

Now that being said, the snow business in November is very small. The bulk of the business is in front of us for the snow season, and we remain cautious on our snow business, because we have certainly not seen the kind of consistent cold weather that we have seen in -- we saw a year ago. So we are cautious about the snow business at this point, and we need it to snow and get cold.

See what you can do for us there in Chicago, if you will, Sharon.

I'm in Miami, Rick, but I'll try.

See if you can help us out in Miami. You would be a miracle worker there, Sharon.

If it snows here, we're all in trouble. All right, have a good one.

Thanks.

Dorothy Lakner, Caris & Company.

Thanks. Good afternoon, everyone, and congratulations, not only on the quarter, but a solid, very strong start, actually, to the holiday season.

Wanted to ask if you were seeing, both in the quarter and then in November, any regional differences that you could share with us. Then as a corollary to that, I guess, looking at Canada, I realize it's very early and you want to get through this first holiday season there, but anything you can share on some of the differences that you're seeing, whether it's in product category or how you're managing people up there, given how important talent is to the Zumiez business.

Thanks.

Great. Thanks, Dorothy. On the quarter in November, in terms of regional, we really exit in back-to-school and really entering the holiday, we're in somewhat of a transition time period. I think we've seen -- while we don't provide a lot of regional color, where we have seen strength, it continued through back-to-school and even in the transition period in November.

November, I think we saw a little bit more of an impact on where did weather patterns shift, and how did we move into the snow side of the business, as Rick just said.

But I wouldn't describe any trend as remarkably different to our previous store opening pattern, to our new store performance, and to where the comp growth has been strong. Certainly we have strong concentration of stores in certain markets and those have performed well.

Then some of the newer markets, we have a combination of those markets coming up to speed, or those markets really moving into the next degree of connection with the customer.

I think there was no major surprises in looking at all the regions, either collectively or even down to the district level.

On Canada, Dorothy again, you're right -- we're not, as we said in the comments, we're not going to comment a lot specifically about where we're at in Canada, because we need to get through -- not only do we need to get through this very important holiday season in Canada, but we need to see the rest of the year play out, and see the seasonality of our stores to really get a solid understanding of them.

Again, as we said in our comments, we're -- we feel encouraged by the results to date.

Good question -- good question relative to product strategy, people strategies. We chose to go up there as Zumiez, take our same strategy out there and adjust, and what we're finding is that a lot of what we do down here is working up in Canada from a product perspective, Dorothy.

We are making adjustments, and I know all of you would expect us to. I think it's one of the things that we do really well as a Company, is to adjust to the needs of markets.

I would tell you that many of the kinds of adjustment we would expect to see, some being country specific, but some are west versus east specific, and are similar to adjustments we would deal with here in the US. So we are making adjustments on the product side. We'll continue to make adjustments as we go forward on the product side.

The people strategy side of it, we want to be cautious, making sure that we -- we are respectful of the Canadian culture. We are being cautious, and I can tell you that I have had the chance through both being up there in our Canadian operations, as well as having our Canadian managers here for meetings, very, very encouraged by the quality of our managers that we have been able to attract in the market. We feel good about the talent that we have in place.

There obviously is, like there is in our maturation cycle in our stores, there will be a maturation cycle as we find the ways to bring our Zumiez culture and our sales culture.

But I feel great about the people we have, and it's just going to take that maturation process and time to fully find the right way to put our programs in place that's right for our Canadian staff and again, it's respectful to Canadian culture.

Great. Thanks so much, and good luck for holiday.

Thanks.

Thank you.

Christian Buss, Credit Suisse.

Hi, congratulations on a nice quarter. Wondering if you could provide some color on how your relationships with the vendors are shaking out this holiday season with your open-to-buys?

You know, Christian, we're not going to talk a lot about any, of course, as you know, any specifics relative to what we're doing with vendors. Again, I'll say what I always say on that front, which is relative to our diversity of brand selection, and I remind everyone that last year, no more than I think our largest vendor was less than 7% of total sales. It goes way down from there as we progress down the list. Our vendor relationships, on a macro basis, definitely a factor.

Only thing, not going to say anything about vendor performance, but stepping back from that, and relative to open-to-buy, we have very strong relationships with our branded partners, partly because, again, Christian, I think we do it -- we are a good partner for them in the way we approach the business, our respect for the pricing structures, and the value of the brands that they bring to the market.

So I think because of a long track record with our branded partners, a position, I think, in the industry that is recognized as a good partner, that recognizes us as a good partner for young brands, in terms of helping brands develop, and again, doing it the right way and localizing the presentations where it makes sense for those brands.

I think that -- our way that we work with them -- makes brands very willing to work with us from an open-to-buy perspective. I think we make a good partner. I think we're an important partner for our brands. This is -- they are very important to us.

Those combinations, I think, give us a very strong work of a ship in categories where we can chase product with our brands. We certainly do. I think that certainly puts us in a good position with our branded partners.

That's helpful, thank you, and best of luck.

Thank you.

(Operator Instructions)

Christine Chen, Needham & Company.

Thank you. Congratulations on a good quarter and a very strong start to holiday.

Thanks.

Wanted to ask, have you seen any meaningful difference in the performance in your stores between mall types, A malls, B malls, C malls? And as you continue to grow your footprint going forward into 2012, is there any change in strategy as far as mall type, and given your performance, are you able to get maybe better lease terms from the mall operators? Thanks.

All right. I'm assuming the last part of that question you were like was a joke, right, in terms of better lease terms from mall partners, Christine?

The landlords, as we've said many times before, they are as tough as ever. Again, while they're good partners and we're respectful, I think healthy relationships between landlords and even strong tenants like ourselves are always -- in some ways, I think it make it tougher than potentially other tenants who are struggling, in terms of the structure with landlords.

So landlords continue to want to drive the best deal they can drive for their mall space, and of course we want to do the same. Deal-making is, as always, as tough as ever.

In terms of differences in A, B, and C malls, there are always differences in some respect, Christine, in terms of performance. We'll look at outlets different than we'll look at full-price locations. We'll do all sorts of cuts on our data. And there's also fine differences, some of it might vary across the country as to what those differences are.

It's not only differences that we look at say necessarily in sales performance, but of course even you would have to look at difference as relative to operating performance, in terms of contribution margin.

So even on stores, obviously C malls do less volume than A malls. That doesn't mean that from a percentage basis, they are less profitable. In fact, in some cases on a percentage basis they are more profitable, because of our leverage with landlords in those cases.

You might say the opposite on the top-end malls, we might find the percentage is not quite as profitable, but on a contribution dollar basis, they are obviously way more profitable. So there are many variables of the structure and it would be hard to say, I think, much more than that in terms of just how, because of the number of variabilities there are across that.

Then the last part of your question relative to 2012 strategies and relative to A, B malls -- A, B and C malls, other types of opportunities in real estate.

And I think we said previously that we would love to experiment with different kinds of venues. We don't intend on doing it at this point in any significant numbers, but we would like to experiment with different kind venues just to see how we would perform, and we do have a handful of locations in off-mall centers, primarily power centers and in many cases, have had them for a long period of time.

Those are things that we periodically sit down and we'll be doing it again here, and looking at how collectively are those types of centers performing relative to the mall performance, and should we be doing more of those? I can tell you that we will again in small numbers. We did a few of those kinds of centers this last year within the total number of new stores.

We will do a few more of these different kinds of real estate venues next year, in 2012, to experiment with how we perform outside of the malls.

Within the mall strategy for next year, we are holding true to our long-term strategies around real estate, which is trying to diversify our presentation across A, B, and C centers, trying to diversify our geographic mix, and trying to diversify our mix between existing markets and new markets, a roughly 50/50 kind of ratio.

So all those things remain true and very consistent with the prior year, as Christine -- and then again, we are experimenting with some off-mall, outside-of-the-mall formats. Again, that's nothing new, and I'm not going to share with you any color on those at this point, because they are not significant numbers, and not worth spending I think -- not material enough in terms of spending our time on at this point.

Great, and then maybe just a few housekeeping questions, if you could give us ending square footage and D&A and CapEx for the quarter, if I missed those?

Give me just one second on both, as I track that down. The square footage is 1,301,500. And then in terms of the quarter depreciation, amortization -- one sec while I pull that through. Sorry. I'm just trying to find it here in my records, but I will add that as soon as we get that on the next question.

Okay, great. Thank you, and good luck for the holiday.

Thanks.

Adrienne Tennant, Janney Capital Markets.

Good afternoon, and congratulations, particularly on the gross margin performance.

Rick, my first question is a little bit more color on the passing-through of some of the price increases. Can you give us -- I know you probably won't talk about specific categories, but perhaps can you give us percentage of the product that was passed-through to, and whether or not you passed the vast majority of it through to the consumer.

Then, Marc, if you can just talk about your ending fourth-quarter inventory plans, if you can help us out with that. I think typically, you've given us the direct-to-consumer business, so if you have that, that would be great. Thank you.

All right. Thank you for the question, Adrienne. Again, our business, as you know, Adrienne, is so complicated in terms of the number of brands and in terms of the diversity of our categories, that when we look at our ability to pass through pricing, in our world it's a fairly complicated question, because we have mix shifts, significant mix shifts every year taking place, and we had some tough ones working against us in terms of obviously the declining (inaudible) tends to be higher margin business as it moves, versus moving into apparel, and the still growing footwear business.

There are lots of things, and we can't necessarily parse it probably out as fine as you would like it for us to do this. Some brands, we tended to be very -- we tended to take the marks we needed to take based on a competitive basis in the marketplace.

It's as simple, I think on the other side, as saying those brands that had pricing power, we passed it through and were successful in doing that. I think that is, frankly, a credit to those brands, for the strong position that they have put themselves in the marketplace. So where we could do it, we did.

Those brands where we had overlap with other retailers and they were discounted, then we would in those cases try to wherever we needed to, where we felt appropriate, we would take price, we would match prices, if we needed to, and then we would have conversation with the brands about their performance in the mall setting, and the implication on our margin from a broader distribution of their business.

So it's kind of a number of factors in there, Adrienne, that makes it -- it's a very complex question actually, to try to answer over a call like this. But suffice it to say, again, where we had pricing power relative to the quality job that our brands have done, we were able to pass the pricing on.

Okay. I guess one of the things I was just curious about was whether -- because third quarter had a tough, a very tough compare on shrink, if I recall correctly. I believe it's even more impressive than at first blush, and I guess I just wanted to know whether there was something specific to the back-to-school time period, or whether this type of passing through could be replicated for the next few quarters that have cost inflation as a pressure point.

I'll let Marc make a couple comments relative to our future view on inflationary issues. Now, we certainly hope that we can continue to follow the success we had in third quarter here in fourth quarter.

I will tell you that the two quarters are different, though, in the sense that, in back-to-school, it is our young customer, our actual customer that is making the decision about what's important for them to wear and what brands are important for them to wear.

In holiday, particularly leading up to the Christmas holiday, it tends to be the gift-giver that's doing the buying, and our assessment has always been that the gift-giver is a little bit more, particularly over the last few years, a little bit more price-sensitive.

Right.

Those will be areas then, Adrianne, where again, we would hope -- where our brands -- it doesn't make sense for our brands to play in a price-sensitive way, that our private-label products will play in a positive way with those consumers.

Then as you know, we have a history, I think, of post-Christmas of seeing -- of being very successful in the post-Christmas season relative to high redemption rates on our gift cards in the first few days, and of course of getting our core consumer back in the store.

So you kind of have to parse the season from that perspective over pre- and post- Christmas, and the sensitivity of each of those consumers to price.

Marc, do you want to comment a little bit more broadly on sourcing?

Yes. No, I think certainly as we look at all of the market information, there's been several reports out recently of decreasing cotton, and I think that certainly will help us as we book our orders here into spring and early next year.

The flip side is true when it comes to some of the manufacturing costs, and so we have yet to really be able to put a firm line on what those costs are going to look like as we look forward.

The fact that we run the branded model we do and that we purchase very close to the cycle gives us a lot more flexibility than some of the others in our peer group. Our goal is to capture what we can and pass it through, but it's also to pass the best value on to our customer, and that's going to be very representative of what the entire environment and the macro condition is doing.

So, I think in addition to what Rick said, it just is trying to make sure that we take those cost inputs, but then also just keep our competitive position.

Great. Then really quickly, inventory and then the DTC number?

Sure. On the inventory, I think you saw in this quarter, the inventory growth was a rate just under the sales growth. For the fourth quarter, our expectation is to expand that spread a bit more and have our inventory grow at a rate a bit more slowly than sales.

I think, just like you said, as we position ourselves for our direct-to-consumer business for the fourth quarter, and we look at how it exits the third quarter, we begin to have more and more focus on inventory, and it does affect things.

I don't think that I have anything to add any specific figure for direct-to-consumer inventory or position. We try to look at both of those and have our inventory positioned for where the consumer is going to be trying to access it, whether that's the store or the web.

Factored into my overall statement of what we're trying to get the fourth quarter inventory to grow at a better spread against sales is included in our direct-to-consumer channel.

Okay, thanks so much, and best of luck.

Great. The other thing I might add, just answering the earlier question, the depreciation and amortization was $5.0 million in the quarter and approximately $19 million for the year, as I had stated in my earlier remarks.

Edward Yruma, KeyBanc.

Thanks very much for taking my question. I'm not sure if this was asked already, but I wanted to focus a little bit on the accessories business.

Obviously, this has been a category that you had some phenomenal success in last year, and has been going through some degree of slowdown this year. Is this a product cycle issue? Is it distribution? Or is there something you can do to help improve those results? Thanks.

Okay, Ed, this is Rick. First, I think just so we're clear, and we got it out there, we did comp up in accessories here in the month of November. We're obviously, again, proud of what our buyers have achieved in that, because as you say, we had some very difficult comparisons a year ago in this category.

Yes, these are product cycle-driven changes that we have in place. As we look at what we do in every category, typically we always have categories that we were going to plan down, and have categories that we know are going to plan up based upon the trend cycles. Usually those will wash out within departments.

Sometimes you see these department-driven cycles where you'll be more of an apparel-drive business than you are an accessories business. Last year, we clearly had a major run in terms of a trend in accessories.

This year, that has obviously switched out into more apparel-driven and footwear-driven trends and accessories has gone down as that particular category trended down. Our buyers have done a really great job, I have to tell you, of repositioning what we're doing within accessories to get that accessory numbers to actually be a positive comp here in period 10, in November.

So we did it again. I'm not going to tell you which categories drove those changes, but we had a few categories that combined were able to make up for the strong trend we had last year, and as that trend starts to lessen over the next number of months, we hoping that again we can see accessories come back to a more steady growth rate.

Great. Thanks very much.

Erinn Murphy, Piper Jaffray.

Great, thanks, and good afternoon. Congrats on a great quarter. I just had a follow-up question with respect to the eCommerce business.

Clearly, a very strong channel for you guys, and with 6% of your overall sales and kind of growing at the rates you've described is very impressive. If you look at that over the next two to three years, where do you think that could go from a percent of sales penetration?

And then with respect to that business, what are some of the investments that you're making with that, whether it's with mobile shopping, or whether it's personnel, or just how are you thinking about building that infrastructure for that business? And then I have a follow-up on December.

All right. I would tell you, Erinn, that we, again, credit to our team here and that we've built over the last number of years and our leader of our eCommerce team. They've done a great job and they -- we're bringing, as we said in some of our comments, we're really working hard and we still have a lot more work to do.

I'll add to that comment, but we're working hard to bring the Zumiez experience alive in a new way on our eCommerce site. What you're seeing reflected in our success, is again, is a consistency of what our strategies are across our channels.

As we said in the comments, we're annualizing the structure to say that on a full-year basis, we're about -- well, we're just over a 6% penetration at this point. Where do we think that can go? We do have a target, a five-year target for that number. I'm not going to share with you what it is. I still think we have a long ways to go in terms of where we're at. We've achieved -- I can tell you we've got to where we are much quicker, more quickly, I should say, than I thought we'd get here.

But clearly, it's higher, Erinn, than where we're at today. We have a lot more to do in this area, again, over the last -- our efforts over the last three years. Again, done I think -- very proud of the team again, long-term focus, building the business, the right way, doing the right things in the right order.

We still have some things we haven't even gotten to yet in terms of initiatives in our eCommerce business. So I think our path to driving this number higher is pretty clear, and I would say that both from the terms of a pure eCommerce operation, as well as from the perspective of a multi-channel, omni-channel business.

We have initiatives under way that are multi-year initiatives for across the whole Company to drive this business ahead even more. I expect that the penetration will be higher.

Ultimately, as we always say, the consumer will tell us how high it's going to go. But we have a clear path to execute against in this area, and again, I just really appreciate the quality effort of our teams and the consistency, again, of executing our Zumiez strategies on the online environment, and they've just done a great job as we've built this over the last three years.

On the investment side, the answer is we're making investments everywhere, Erinn. Again, we are building, typically as we do at Zumiez, we don't go put in the Taj Mahal solution in place that costs tons of money. We're building our site incrementally and making incremental investments in the technology that underlies it in support of the volume that we expect to do as we look forward at each year.

And additionally, as I said, we are adding talent to our team as we execute new phases of the growth plan in our web operation.

Again, it's very strategic, very -- and then each year becomes tactical in terms of what we're going to do and how we're going to do it, what the infrastructure needs are, both from a technology perspective, software perspective, hardware perspective, and most importantly, the human perspective of what investment we need to make.

We are constantly in this area investing and we will continue to do that I think for the next number of years, and probably as far out as we can see.

Okay, thank you. That's very helpful. Just one quick question, maybe Marc, if you could remind us, with December of last year, very strong first week and fifth week -- I think a lot of that was calendar. But was there anything else with respect to the cadence that we saw last year, with respect to the weekly sales as we head into December this year?

No, in fact I think you highlighted what I would have said about the month of December in general. Really strong first week, really strong final week, a little bit of shift early and late in the cycle.

Certainly our eCommerce channel plays into that, and we are preparing for how the store and how the eCommerce channel will ramp up and ramp down against each other, in serving the customer. But I don't think there was anything to call out last December, other than just the early and the late spike that you mentioned.

I guess the only thing I would add to that, I think Marc's exactly right, there's nothing unique. In fact, I would say this is a continuing trend, just like we talk about with Thanksgiving weekend -- we have those, historically we look back over the last number of years and we've seen those early weeks in December tend to be a bit tougher, and then volume accelerate as we approach those peak, the peak days before Christmas, and of course then the peak days post-Christmas, when the kids are out of school and want to use their gift cards. They come back in that week.

From my perspective, Erinn, those are just ongoing trend cycles and Marc is absolutely right then, there's channel shift also taking place across these different weeks.

Okay, great. Thank you. That's helpful, and best of luck for the holidays.

Thank you.

Randy Konik, Jefferies.

Hi. This is Amanda Sigouin in for Randy. Clearly, great results. I just had a question on the transaction counts, the negative for the last couple of quarters, and you're up against some tough compares. What do you think needs to happen, or when do you think these will start to be positive again? Is this kind of a traffic issue, or just wanted to get some thoughts on that? Thanks.

You know, Amanda, we're a business about running top-line sales gains. In many cases in large regard, we don't care how we get there, we just want to get there, and we're going to get there through what our consumer is telling us.

As we were talking about earlier, in an earlier question relative to the accessories trend is, we're not too concerned about what we're seeing in transactions because of the unique trend item in accessories last year that drove a lot of small-dollar transactions.

So what we're seeing is a reversal of that, and that's why you're seeing what would appear to be a significant AUR shift, but it's really not. It's a mix shift in terms of what's going on relative to trend cycle.

We're not concerned about that from our perspective. We anticipated this. We knew this would be what would happen through this cycle. We've been adjusting how we set goals in our stores relative to performance of our sales teams in stores to account for it.

So nothing unanticipated from our side on this, and we're just going to continue to have to ride out like we would a lot of trend cycles that take place like this over time, over the next few months.

Pamela Quintiliano, Oppenheimer.

Great. Let me add my congratulations on a great quarter and great start to the holiday season.

Two questions, one, can you talk a little bit more about juniors and give us an update on what you're seeing there? Then second question was just granularity on November. A lot of others have indicated some choppiness. That was pretty impressive, your week-to-week performance. What do you attribute that to? Was there any change in the timing of the flows, or the types of bundling and promotional cadence you're doing, or maybe some new brands that you put in the stores? Just any clarity would be appreciated.

All right. Let me hit the juniors topic first. Again, we are pleased that we've made progress in what we're doing in our juniors business, and I would tell you that the strategies we've been executing in juniors over the last number of quarters hasn't changed. We've seen greater consistency I think in terms of our results. It's still a small part of our business and I think relative to like in the action sports industry itself, that's probably an appropriate comment.

I think we're obviously more of a male-driven business relative to the sports themselves.

We are still trying to work through the development of our strategies relative to which brands are presented on our women's side of the business. How we're presenting them, we're continuing to play with fixturing on our women's side of the business, signage on the women's side of our business, experiment and test in those areas to try to see if we can improve and continue to improve results on women's.

Finding that right mix between being action-sports-brand driven on the women's side of our business, but yet providing the fashion cycles and the unique items that are appropriate for the fashion cycles for our juniors consumers.

We're really not doing anything differently, I would tell you, than we've been doing over the last few months. We just continue to evolve the strategy.

In terms of the week-to-week November cadence of the sales results, again, I think what you're seeing from my perspective here is we're in a great spot, because we are not a price-driven, promotional-driven retailer.

When you have brands that consumers want, I think what our sales reflect is more pattern. Our sales pattern is more reflective of demand for brands, and that we have the right brands that consumers want to buy, whether that be a small brand that's only in 10 stores in a certain market or whether it be a brand that's an all-store buy. Our buyers are doing a great job of positioning the product, of micro-sorting stores as best we can at this point. We continue to try to make progress in that area.

I think there's demand for the brands and the product that we have out there. I think the consistency across the weeks in November for us reflect fundamentally our business strategy at the heart of what we're doing.

Our customer knows, I think, and we're working to help make sure they know, that we're not going to be -- and it doesn't even make sense for us to be 40% off the whole store, buy one, get one off the whole store. That's not a rational strategy for us, and it would make -- and it's not a rational strategy for our branded partners, and the quality of their brands and the quality of their business.

I think it reflects, in my mind, our strategies. That's -- we have a very unique model.

The only thing I would add to that is, you don't achieve the comps for a week based on one overall objective. You achieve it, as Rick said, in each of the categories. We have an organization focused on assorting down to the store level. We have a buying organization really in touch with their individual brands, and a back-end supply chain that's really focused on getting those right products there quickly.

So I think we've been able to mitigate what some in our industry are seeing on a week-to-week trend by really very much focusing down to the individual consumer and down to the individual category of responding quickly and keeping the moving items in stock and in front of the customer.

So whether we look at just a one-year trend, which is always going to show some volatility, we're looking at two and three-year trends and seeing how those are playing out. Quite honestly, the month of November, on any way you want to slice it, was a really strong result and it was made up by all facets of buying through the supply chain than the stores. So I think it's -- it just is a really strong result.

So with the micro-merchandising strategy, are you guys feeling like you're fully there, or is there some more --?

Oh, no.

How much more room to go, I guess? Where are you in that?

This is a never-ending process. I like to remind people that we have been trying to micro-sort stores since the Company began, under a very simple philosophy, that we should put things in stores people want to buy.

This is not something that's new for us, and so what you have to think about relative to micro-sorting for us, is you have to put it on a long time frame, on a continuum. It's a never-ending mission. People have heard us talk about it now for about three years. We have been in the process of implementing new assortment planning tools that we expect will take us up to our 600 to 700 store range and be able to improve the micro sort of our stores as we grow our business over the next few years.

We are still in the process -- we have implemented various phases of this new tool. We have still not yet fully implemented the tool across, planning all seasons yet. There's a very rigorous schedule implementation of the tools as we roll out now the detailed assortment-planning process.

I think we mentioned previously that it also included a BI tool that was integrated with the assortment-planning tool itself, and that BI tool is fully up and running for our teams.

So I would like you to think about this as a never-ending, ongoing process. Ultimately, we have about 10 more things after we get this tool up to speed that we would like to do, that we're not capable of doing today in micro-sorting stores.

Okay, thank you so much. Best of luck.

Thank you.

Jeff Van Sinderen, B. Riley.

Hi. I guess one of my questions is, it appears like you're guiding to a slightly smaller comp increase for December and January. Just wondering if that's sort of your usual conservatism? Then just to clarify, it sounds like you really don't expect anything unusual for the typical weekly peaks and valleys for holiday this year, is that correct?

Yes, and let me take the first part of that. I think what you hear in our guidance is exactly what we've been seeing, and that is notwithstanding what we saw in November, I would be expecting a mid-single-digit figure. And November certainly was a strong performance, but we come out of November with 75% of the quarter yet to happen.

So with everything we've continued to see in the marketplace, increasing promotional environment, yes, I don't think that it is conservatism as much as it is just cautiously planning the business and making sure that we're prepared.

Should the sales be stronger, we're ready to get them. But we also are planned from an expense structure and our earnings per share to make sure that we know where we expect the comp growth to be. I, for one, would love the November trend to continue, but December is such a large period, it gets concentrated down to such a few days heading into that final week. We're just trying to be realistic in what we think.

I would add to that, Jeff, again, our experience is that the nature of the buyer changes as we get closer to Christmas. I do think there is a value orientation for all consumer groups to some extent. As you get in the higher volume periods, that will probably play out a little bit more.

Now we hope we're prepared for that, relative to our positioning --our product positioning, our private label positioning piece of our business for that value consumer. We hope we've anticipated for that. But that is out there, and we're also, as I mentioned earlier, we would love to see it get colder and see our winter business improve in that area, so that is part of our thinking, too. We need it to be colder in more broader areas of the country to move through our winter product.

In terms of peaks and valleys, as we would think about December -- again, we're not going to get too granular about that, but as we said earlier, we would expect, and based upon what we're seeing through November, that those kind of patterns we'd see where the first few weeks of December tend to be weaker. Obviously the days, as Marc just said, in advance are better, and we have a history of doing pretty well in the post-Christmas period.

Now, obviously the other factor that's tied into that is the extra day before Christmas. So that is something everyone [in the house] will have to model into their thinking.

Okay, and then I know you mentioned gift cards and I might have missed it, but did you say how gift card sales are trending? Maybe it's a little early for that, but also, what is your outlook for the gift-card business, given the consumer focus on, as you mentioned, deals and value, and then how you're thinking about that as it relates to the post-Christmas business and the channel shift to eCommerce?

We expect our teams to drive gains in gift cards like we drive gains -- like we intended and planned to drive gains across our product categories. We have had a history of being successful there. Again, we're not going to comment on where we're at, at this point. It's way too early in the season, and the vast majority of gift cards in the entire year are sold in the week leading up to Thanksgiving and through Christmas Eve.

So it's too early in the cycle to comment on where we're at and then give you -- it just wouldn't meaningful relative to the cycle. Again, you have to factor in the extra day between those in terms of how that spreads out over the cycle itself.

Again, as we think about our gift card business, like we think about everything, this is a sales-driven place. We expect gains from our teams. We expect -- I mean, we're very structured in how we approach it, in terms of incentives and targets for our teams across the Company. That includes what we do online with our web team.

Okay, good. That's helpful. Thanks very much, and good luck for the rest of the quarter.

Thanks, Jeff.

Thank you.

Ladies and gentlemen, that does conclude the time that we have available for questions. I would like to turn the call back over to your host for any closing remarks. Please proceed.

Thank you. Again, we just, as always, we appreciate everyone's interest, your good questions, and your interest in what we're doing here at Zumiez. We will all take your best wishes for a good holiday season, in terms of our sales results.

So thank you all. We appreciate it, and we'll look forward to talking to you again when we report fourth-quarter results in March. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.