Zumiez Inc (ZUMZ) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated fiscal 2012 second-quarter earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's 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.'s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call, 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's filings with the SEC.

And now I'd like to turn the call over to Rick Brooks, Zumiez's Chief Financial (sic) Officer. Please go ahead, sir.

Thank you, and welcome, everyone. I'd like to start the call by introducing our new CFO, Chris Work. As you've likely seen from our press release last week, Chris has been with Zumiez for about five years; and, as a result, has had the time to fully embrace the Zumiez culture. Chris has been a key contributor to our financial operations, and more recently, played a major leadership role in the Blue Tomato acquisition.

I want to point out that this is our first internal promote to our executive team in many years. This promotion reflects our core values and our focus on developing our team and talent in the organization over the past few years. I look forward to all of you getting to meet him over the next few months.

Now let's begin with our comments. I'll begin with thoughts about back-to-school, followed by highlights about Blue Tomato. And then we'll discuss the Q2 results. After that, Chris will review our financial and operating highlights for the second quarter. After our prepared remarks, we'll open the call up to your questions.

Earlier today, in our press release, we announced the sales results for August, with a 3.7% comparable store sales growth. As we've discussed over the past couple of years, the back-to-school season continues to shift later into the season. This year was no exception. The first three weeks produced essentially flat comps, followed by a high concentration of sales in the final week of the period. And while the back-to-school season is not over, when all is said and done, I expect the results will once again show that we are a key destination for our customers' back-to-school fashion needs.

I should also point out that the first two weeks of September represent, for us, nearly one-third of the entire back-to-school business. At the end of August, approximately 40% of schools in our store base had yet to start the academic year. We're not only seeing the shift in sales moving later each year, but also that the back-to-school sales are becoming a smaller portion of our annual sales, a trend we've now seen since 2009.

Part of the annual decrease is offset by the strength in our non-peak season results, due to the increasing speed that the omni-channel consumer can find what they're looking for and complete their purchase in real-time throughout the year.

As you know, we closed our acquisition of Blue Tomato on July 4, 2012, for a total purchase price of EUR59.5 million. We're thrilled with this new addition; it is complementary to Zumiez geographic footprint, and a logical and consistent extension to our operating philosophies.

We're in the early days of our combined business together. But Blue Tomato is continuing to show year-over-year growth, and is well-positioned heading into the important winter and holiday season. I should point out that Blue Tomato has a higher concentration of sales in the fourth quarter than Zumiez operations, which is consistent with predominantly e-commerce business.

The addition of Blue Tomato added a compelling mix of e-commerce expertise and an expanded geographic footprint to our North American business. Although the business represents a small portion of our overall sales and earnings currently, the potential for this business, both online and through growth in bricks and mortar, have us excited about the future. We're now working together to build upon their existing business plans to form a joint view on growth, including the many ways we can leverage our independent strengths to improve not only Blue Tomato results, but all facets of the Company. Having a foundation of shared values and culture positions us well for many years of future success together.

Now let me speak to the second quarter. We delivered solid organic results again in the second quarter, with sales up 20% over the second quarter of last year, with strong comparable store sales gains and productive new stores. At the same time -- excluding the one-time expenses related to the relocation of our Web fulfillment and home office, and costs related to the acquisition of Blue Tomato -- operating margins continued to improve, driving better-than-expected bottom-line results. This quarter's results are reflective, once again, of the strong execution by all of our teams.

We've continued to stay focused on the key business drivers we've been talking to you about all year -- higher store productivity, domestic new store growth, greater penetration in e-commerce, and international expansion. I'm pleased to report that this quarter produced positive momentum in each of these areas. Our highly differentiated product assortments and exceptional in-store experience continues to attract and engage our core consumer, evidenced by the continued strong comparable store sales growth.

Empowering our managers to impact and lead their teams on a daily basis is not only what makes our Company culture unique; it's a critical topline growth driver. Currently, we continue to invest in our team members, seizing their potential by promoting from within, and recognizing that our passionate team is essential to our growth as a Company and as a leader in our space.

We opened 15 new domestic stores in the second quarter, working towards our long-term goal of 600 to 700 domestic locations. As I mentioned before, the ultimate store count in the US is a moving target. And we regularly evaluate our current and potential store portfolio to ensure that we're building the correct number of units to maximize productivity in an omni-channel world. Today, our total US store count is at 463.

In Canada, the second quarter marked our first full quarter with comparable store sales results in this market. And this back-to-school season is the first comparable busy season, although only for a few stores. Overall, Canada's performing on-plan for the quarter and year-to-date. We continue to show progress, and we have confidence in our long-term strategy in Canada, where we see the potential for 60 to 70 stores.

As we take these important steps towards building upon our position as a global action sports business, our commitment to our product, culture and operating philosophies has never been more important. We're dedicated to continuing to invest in our people, our infrastructure, and in those things that make the shopping experience in our stores -- both in person and online, extraordinary. This relentless commitment to our fundamental principles is what got us here today, and is what will continue to drive this business going forward.

With that, I'll pass the call over to Chris to review our financial results from the quarter. Chris?

Thanks, Rick. Good afternoon, everyone. I'm excited to be here with you today. And as Rick mentioned, I look forward to meeting you in the coming months and years. I'll begin by briefly reviewing the second quarter. Then I'll move onto guidance before wrapping up our prepared remarks.

Net sales for the quarter were $135.1 million, an increase of 20.4% compared to the prior year. Excluding the impact of Blue Tomato's revenues, organic net sales were up $21.3 million, or 19%, over the comparable period last year. The increase in sales was driven by a 9.5% comparable store sales increase, and the addition of 50 net new stores since the end of the second quarter last year.

Breaking down our North American results further -- our men's footwear, juniors, hard goods and accessories all comped positive in the quarter, and boys comped negative. Second-quarter sales from our domestic e-commerce platform grew 40%, and contributed 1.7% to the second-quarter comp. We continued to see increases in dollars per transaction, primarily as a result of higher average unit retail prices. This was the primary driver of comparable stores' same-store sales gains in the quarter. Partially offsetting these gains were decreases in transactions and in units per transaction.

Second-quarter gross profit increased $9.4 million in the quarter to $46.4 million, or 34.4% of sales; compared to $37.1 million, or 33% of sales, in the comparable period last year. The 140 basis point improvement was primarily driven by improved product margins and leveraging our occupancy and supply-chain costs on a 20.4% sales increase. Offsetting these improvements were $0.5 million of costs associated with the relocation of our e-commerce fulfillment operation to Edwardsville, Kansas; and $0.5 million charge related to a step up in inventory to the estimated fair value, in conjunction with our acquisition of Blue Tomato.

SG&A expenses for the quarter were $42.6 million, or 31.6% of net sales, compared to $33.5 million, or 29.8% of net sales in the second quarter last year. The increase in expenses was primarily due to $2.4 million of costs associated with the acquisition of Blue Tomato, consisting of $1.5 million of transaction costs incurred in the quarter; $0.7 million of estimated future incentive payments; and $0.2 million of amortization of intangibles. Additionally, we incurred $0.8 million in costs associated with the move of our corporate offices to Lynnwood, Washington, from Everett, Washington. Excluding these costs, our SG&A expenses leveraged on higher net sales.

Operating profit was $3.8 million, or 2.8% of net sales, compared to $3.6 million or 3.2% of net sales during the second quarter of last year. Also in the quarter, we recognized a $0.5 million foreign currency benefit in other income as a result of the timing of closing on the Blue Tomato acquisition. We generated net income of $2.1 million, or $0.07 per diluted share during the second quarter, compared to $2.6 million or $0.08 per diluted share during the comparable period.

As expected, costs associated with the acquisition of Blue Tomato, and the relocation of our Web fulfillment facility and home office, weighed on our net income this quarter. For clarification, let me lay out the impact on the quarter that should be taken into consideration when looking at our results. One-time costs associated with the acquisition of Blue Tomato, including the $0.5 million step up in inventory value, and the offsetting $0.5 million foreign currency gain, were $1.5 million. The impact of these costs on our diluted earnings per share was approximately $0.04.

Blue Tomato operations, including the $0.7 million of estimated future incentive payments, and $0.2 million of amortization of intangibles, negatively impacted diluted earnings per share by approximately $0.02. In the quarter, we had $1.3 million, or approximately $0.03 per diluted share, of costs associated with the relocation of our Web fulfillment center to Edwardsville, Kansas; and our corporate offices to Lynnwood, Washington.

Looking now at our key balance sheet highlights -- we ended the quarter with cash and current marketable securities of $96.8 million, down from $131.9 million at the end of fiscal 2011. This decrease was primarily due to the acquisition of Blue Tomato, offset by cash generated by operations. As you know, the acquisition was funded with cash we had on hand.

We had $2.2 million of debt at the end of the quarter, resulting from outstanding debt that we acquired as part of the Blue Tomato acquisition. We had no outstanding balances on our revolving credit facility. Capital expenditures in the quarter were $13.4 million, primarily related to 21 new stores we opened since Q1, and the build-out of our new home office. Inventory was $100 million at July 28, 2012, which included $7.1 million of Blue Tomato inventory acquired during the quarter. In North America, on a per-square-foot basis, inventory was down slightly compared to the end of the prior-year second quarter.

Now, to our August results -- our comparable store sales increased 3.7% for the four-week period ended August 25, 2012. In the prior year, comparable store sales increased 4.3% for the four-week period ended August 27, 2011. Total net sales for the four-week period ended August 25, 2012, increased 15.2% to $74.7 million, compared to $64.9 million for the prior-year four-week period.

On a weekly basis, comps were 0.6%; negative 1.2%; negative 1.6%; and 17.6% in weeks one through four, respectively. The increase in comparable store sales in the period 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, juniors, footwear and hard goods posted positive comps, while accessories and boys posted negative comps. Year-to-date 2012 comparable store sales were 9.4%, on top of 8.6% for the same period last year.

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

For the third quarter, we are planning same-store sales to increase in the range of 3% to 5%, and total sales to be in the range of $181 million to $185 million. Operating margin for the quarter is expected to be between 12% and 13%, and earnings per diluted share are projected to be between $0.42 and $0.45.

Included in this guidance is a full quarter of Blue Tomato results, which are expected to be dilutive to consolidated earnings by $0.09 per share. This is primarily due to approximately $1.4 million, or $0.03 per diluted share, of expense projected to be recognized for the step up in inventory to estimated fair value, as part of the accounting associated with the acquisition; approximately $2 million, or $0.05 per diluted share, for the anticipated expense to be recognized in the quarter for estimated future incentive payments; and approximately $0.5 million, or $0.01 per diluted share, for the amortization of intangible assets associated with the transaction.

In reviewing these costs, it should be noted that the effective tax rate in the jurisdiction where these expenses are recognized is lower, and therefore more impactful to earnings. Excluding these costs, we are expecting Blue Tomato to have a nominal impact to earnings in the quarter.

In regards to Blue Tomato, at the time of the acquisition, we estimated that the impact of Blue Tomato would be slightly accretive in the second half of the year, inclusive of the estimated future incentive payments. At that time, we did not have full visibility to the accounting or tax impact of the acquisition. As a result, the inventory step up impact and the effect on our effective tax rate associated with the non-deductibility of certain costs, have us now projecting the impact to be approximately $0.09 per share dilutive in the third quarter of 2012, and slightly accretive in the fourth quarter of 2012.

Operationally, the business continues to show positive year-over-year growth. We will continue to refrain from providing specific guidance beyond the immediate quarter. But I do want to make a few additional points about the full year. We continue to plan a comparable store sales increase for the year, including the back half of the year.

Cotton prices are currently expected to be down in the second half of the year, although this will be partially offset by increases in labor costs and other raw material costs. And while we saw a nice margin appreciation in the second quarter, I want to reiterate that we are up against record product margins in 2011. And our product margins could be impacted by a variety of factors, most notably shifts in product mix. That said, we are planning our product margins flat for the remainder of the year.

We plan to continue making investments in people and infrastructure to support our growth in 2012. However, excluding the impact of the Blue Tomato acquisition, we also expect SG&A expenses will grow at a lower rate than our sales growth.

As a reminder, there will be an extra week in fiscal 2012, resulting in a 14-week fourth quarter and a 53-week fiscal year. The extra week will benefit sales and earnings growth in fiscal 2012, and will be a detriment to sales and earnings growth rates in fiscal 2013.

Excluding the impacts from the Blue Tomato acquisition, we believe we can leverage our cost structure and achieve operating margin improvement with a mid-single-digit comp increase. To the extent we are able to exceed a mid-single-digit comp, we expect incremental sales to flow through at a rate of 25% to 35%. We are planning to open approximately 50 new stores in 2012, including up to 10 in Canada. We are not currently prepared to discuss a timeline for new store openings in Europe.

We expect capital expenditures for the year to be between $45 million and $47 million, compared to $25.5 million in 2011. The major capital projects being the new store openings; planned remodels; and the build-out of our new home office facility in Lynnwood, Washington. We also expect depreciation and amortization, inclusive of Blue Tomato, to be approximately $24 million, an estimated increase of 20% over fiscal 2011. We estimate our third-quarter and annual effective tax rate will be higher than the 35% US Federal statutory rate and our fiscal 2011 effective tax rate, primarily resulting from the tax effects of the acquisition of Blue Tomato.

We will now open up the call for some questions.

(Operator Instructions). Betty Chen, Wedbush Securities.

Thank you. Congratulations, everyone, on a great quarter. I was wondering, Rick, if you can give us a little bit more color. I think it was really helpful for you -- for us, especially, to hear about the timing of back-to-school. And, certainly, we've seen that shift later and later every year. Can you share with us, by any chance -- certainly it looks like August ended with a very strong sales number of [up] 17% in the last week.

What have you seeing in early September trends, if anything you can share with us there? And then also, as we think about the business in the back half, if we should be looking for maybe flattish AUR gains after some very strong trends there. What are some potential drivers for comps? Is it traffic? And if that's the case, how is the team thinking about driving traffic or transactions to kind of offset the AUR piece of the equation? Thank you.

All right, thank you for those questions, Betty. Much appreciated. And I just want to say, again, I think we've kind of laid out how we're viewing August results, and how we're thinking about the execution of back-to-school flowing through. As you said, it's definitely happening late for us, as evidenced by that last week. And we'll see how it plays out as we move through September. But we're not going to comment yet about any specifics around -- as is our policy -- around September results. We will wait till we get the whole month in, and then we report to you later in the year.

As relates to thinking about the back half a bit further out -- and, as you all know, our business had been AUR-driven for a number of quarters now. And, as we've said over the last few calls, we expect to see that start to transition. And a lot of this has to do with mix shifts in our business relative to trends; relative to accessory trends; relative to the pricing changes a year ago. We do expect to see that, over time, transactions will take a lead versus AUR.

Now, I really don't think that -- again, I think a lot of this is really being driven by the mix within our business; not necessarily that, per se, there are fewer transactions in that sense. It's that we're just capturing the share of wallet differently with our consumers. So I think that will be a natural way for it to play out. We've seen these cycles over the years in the past. And so I don't anticipate, Betty, that we'll see anything unusual but a flow-through towards [lower] transactions as those AUR gains change, and our mix flows through the new categories that are driving the business today, that will be a very natural transition in the business. And I don't think, hopefully, it's anything we'll be having to focus on too much. I hope this will be a natural flow into a transaction-led trend.

Sharon Zackfia, William Blair.

Hi, good afternoon. I had a few questions. I think the gross margin gain, year-over-year, if I excluded everything correctly, was the strongest gain we've seen in close to two years. And I know you said merchandise margin was positive. It seems like it was pretty significantly positive. So I'm not sure if that is mix shift or if there is something else that you plan for really well in the July quarter. What's driving that?

And then, secondarily, I think accessories were negative in August. If you could talk a little bit about what's going on in the accessories business, if that's just a function of the late back-to-school, or help us understand a little bit about what's happening in that important part of the business.

All right, thank you, Sharon. And, again, you're right about margin in Q2. So it was a very strong performance at the product margin level. And there is a lot of mix shift that's involved in there, as it relates to that. As, again, categories move around and we move more towards apparel-driven departments of business, Sharon. So a lot of it is relative to mix. And, again, as you know, our business is so diverse in terms of the breadth of categories that we represent, that -- I know this gets hard for everyone to understand and appreciate how complicated it is. But fundamentally, there is two things happening here.

I think our buyers do a great job in terms of driving our margin forward and negotiating with our partners on price. I would also add that our inventory levels are, in terms of the quality of inventories, are in very good shape. I think we all feel very strong about our position, so I think that reflects in markdown levels, and the kinds of promotions that we do, when we have that strong of a position. And then, lastly, again, you're right, there are some mix shifts relative towards our apparel --

We lost the presenters once again, ladies and gentlemen. One moment while we get them back on the line. I apologize.

All right, it looks like we have the presenters back in the room.

All right, thank you, Keith. And I think we have solved our problems here on the phone. So, Sharon, I was talking about your question, and I don't -- I normally do hang up on you most of the time, Sharon. But I am going to finish my question for you here, on this. I'm not going to dodge you. I've tried everything else, Sharon, but I'm not going to do that, hang up on you.

So again, it is -- it's a combination of those three things, Sharon. We do a great job of working margin through our buyers, the mix itself of products, again. Again, the category mix of the business, and it was a very strong performance in margin for the second quarter.

As it relates to accessories going negative, some of it is definitely related to the late back-to-school, because we think we have a lot left to go yet. And there are some key drivers, as you know, in our accessories categories that will drive that volume as we get deeper into the back-to-school window. I will say, though -- and I think most of you know that we've been in a real accessories cycle over the last, really 2 to 3 years.

And, again, this is part of the shift in the volume and the mix shifts we're seeing in our business. So accessories is coming down and then apparel is coming up in our business. So it's a combination of both, I think, Sharon, as you say; potentially the late back-to-school relates to key back-to-school accessory categories, as well as a mix towards apparel.

Okay, thank you.

Edward Yruma, KeyBanc.

Hi, thanks for taking my question. I guess I'm trying to understand, you talk about trying to drive transactions as you move away from AUR toward the back half of the year. Is that possible, given the current accessory trend, I guess? And is that too stiff of a headwind for you?

Well, no, I think -- in fact, I think you've got to reverse your thinking there a bit. Part of the challenge in driving the transactions related to previous accessories trends, Ed. And so as those trends play out, we're going to see a natural -- where we had a lot of small-dollar transactions, that is going to change. And we are capturing the wallet share differently as we start to anniversary our capture of the wallet share differently relative to higher -- fewer transactions, but higher value transactions relative to apparel. That's one of the biggest shifts that is taking place in the business.

Got you. In terms of the incentive comp payments that you are expensing now, as it relates to Blue Tomato, is this -- I would assume you would normally expense it on kind of an ongoing basis. But have you accelerated the accrual of that? And then I guess as we think about that going forward, will that be a continued headwind? Thank you.

Again, I'll just make a quick comment, then ask Chris to comment on how we're thinking about the incentive structure. But it was important in the Blue Tomato piece -- we have a great partner in our team at Blue Tomato. I'm very excited about the team, great cultural fits. And of course, as part of the structure of the deal, we wanted to try to incent them, not only for performance, but to incent them to stick around with us for a while. So that is the whole point of the incentive structure that's been put in place. So I'll let Chris talk a little about how we're thinking about the timing.

Yes, as far as the timing of the incentive payments goes, the incentive period runs through April 30, 2015. So as we are planning and modeling the business, there are certain metrics that the incentive payments are tied to. And we will be estimating the probability of hitting those metrics throughout that time period and accruing accordingly. So as we move through the future quarters here up until that date, we do expect to see charges related to these types of incentives.

Mitch Kummetz, R. W. Baird.

Yes, thank you. I guess I've got one multipart question on Blue Tomato; so, if you'll allow me to kind of just ask it one piece at a time. So, first, it looks like you, now, for the second quarter, it was a $0.07 hit to earnings. I think initially you were saying a $0.04 hit; $0.03 being acquisition-related costs, and $0.01 of operational drag. So, again, you guys gave a lot of Blue Tomato numbers. I don't think I have them all clear in my head. So can you just, again, starting with the second quarter, just kind of walk through what was the impact from acquisition costs versus the impact just from an operational standpoint on the quarter?

Yes, sure, I'll take that question. I think the important way to look at this is there's probably three pieces, when you're thinking about the transaction. The first piece is the general operations of the business, which, as we disclosed to you in June, is a growing business; and a business that we're excited about merging with ours. The second piece that I look at when I think about this is the one-time transaction, which we laid out of, it's about $1.5 million of transaction costs in the quarter; about $0.5 million of inventory step up offset by $0.5 million of our foreign currency gain that we experienced during the quarter.

So if you take all of those pieces together, you're right about $0.04. And then, if you look at the ongoing charges, the incentive payout that we just discussed, and the impact of the intangible amortization, which was about $0.2 million during the quarter, that's going to round out about $0.03 and equal your $0.07 that you're reconciling to there.

Okay. And on the back half, you mentioned -- I mean, Rick mentioned -- that it's more weighted towards the fourth quarter than the core business. Could you give us some sense as to how either the sales last year broke out by quarter, or how you expect the sales to break out by quarter for the back half of this year?

You know, Mitch, we don't want to get that granular about this. I want to remind everyone again, this is a relatively small part of our overall business. But I will give you some general direction on it, relative to the fourth quarter. As you look at our e-commerce business, our pure e-commerce business, net of some of the omni-channel things we're doing, it has a very similar mix in the November-December-January time frame, as our pure e-commerce business does.

Okay, that's helpful. Thanks, Rick. Again, just to reconcile everything, it looks like it's a $0.09 hit to earnings in the third quarter, the way you've outlined the guidance. And then I think you guys made the comment that it's going to be slightly accretive in the fourth quarter. Is there any way you can kind of break out how you're thinking about the fourth quarter in terms of those buckets? Whether it's inventory step up, or incentive comp or amortization of intangibles, in case we want to make any adjustments to those numbers as how we're modeling Q4?

Again, let's focus on Q3, where we've given more direction there, Mitch. And then I think it's -- I'll let Chris walk you through the Q3 change there. And I think some of that will fall out automatically as we're thinking about that, particularly relative to the stepped up basis of the inventory. So Chris, why don't you go ahead?

Yes, absolutely. As we mentioned, we had about $0.5 million in the second quarter related to the step up in our inventory basis. That is something that we would expect to see continue into the third quarter. And we're currently projecting about $1.4 million of inventory step up that will be expensed in the third quarter. And then we have, outside of that, one time-charge that we'll only experience this year. We're also estimating about $2.5 million related to both the incentive payout as well as the amortization of the intangibles in the third quarter. And those charges, as we're classifying them, are going to be the reoccurring charges that we'll see in quarters -- each quarter to come.

Stephanie Wissink, Piper Jaffray.

Thank you. Thanks for taking my question. Rick and Chris, could you just talk a little bit more about your current inventory position and how it relates, Rick, to what you're talking about in the shift mix from apparel -- excuse me, to apparel, from accessories and footwear?

Again, when we talk about inventory positions, Stephanie, I always want to start with the comment that we feel that we've managed inventories very well over the last number of years. And, as you've heard us say for many quarters, we feel very good about the quality of our inventory. And I'm going to start there, because that's where we're going end Q2 at, is that we feel very good about the quality of our inventory position going into Q3.

And now, to follow the second part of your question, Stephanie, is this idea that, of course we are reflecting the trends we're seeing in the business in the mix of the inventory itself. So, obviously, in accessories, while we are playing the key categories in back-to-school are very important accessory categories to play out.

There are other categories that have been the trend categories of the past, where inventories are way, way down from where they were a year ago at this point in time, or two years ago at this point in time. So we are merging and moving that inventory around, I think, very effectively. And our buyers are doing a terrific job in doing that. And that is one of the primary reasons that we can continue to give comfort around the quality of our inventory.

Okay, Rick. And then just one follow-up for you, given what you're seeing in your apparel trends, what is it that's giving you confidence regarding the key classifications, or what do you think from a fashion standpoint that's getting you excited about what's happening in apparel? Thanks.

You know, for us, again, we have to break it down in a couple -- think about it a couple different ways, Stephanie. So, first, I talk about on the men's side of the business, I think we feel good about brand positioning, how we are positioned with our brands; the assortment of brands we have in our mix, some unique brands we have in our mix. I'm hopeful that over the next year and two years, we have a good group of brands that continue to grow in our business on the men's side.

On the women's side, in apparel, I would say that we are executing, as we've talked about over the last few quarters, a new strategy relative to the team that has been in place there now for a couple years. It is both a branded strategy, and both a strategy focused on key items and key categories. While I'm not going to get into the details, obviously, of how we're executing that, let's just say that we've experienced some good success there in our women's business. And it's complementing what we're doing on our men's side of the business.

And that is a really important aspect -- as you all know -- for us, is that we're an action sports lifestyle retailer. And what we're going to do on women's side of our business needs to be reflective of the lifestyle itself, just the same as it is on the men's side of our business.

Christian Buss, Credit Suisse.

Yes, I was wondering if you could talk about assortment planning and whether there are any major changes to the playbook when it comes to plans for fall and holiday?

Sure, Christian. And, again, I always want to remind people -- as we've been talking about, for probably I think the last three years, that we have been in the process of acquiring, installing and implementing, and now training on, as we execute our new assortment planning software tools, BI tools, assortment planning tools, and these are very -- this has really given our buyers all new levels of ability to dynamically assortment plan our business.

We're talking about being able to, at a SKU level, be able to assortment plan on every brand, category combination, by week, by location. So very powerful tools that allow us to build up from those base level assortment plans up to what our overall open to buy planning is. And of course reconciling those things together. So I think what you've seen, and I think over the last -- particularly a year and 18 months, has been a reflection of some of our success in assortment planning, in the better micro-sorting of our stores, because we are working at a very detailed level.

So, now, that being said, we have a long ways to go in terms of thinking about how we assort our stores, and the tools -- there are still many facets of this tool that we have yet to fully exploit. In fact, 2013, next year, will be the first year that we really are going to pretty much have all -- most all of our categories planned through the new assortment planning tools.

So, Chris and I -- and that's a broad overview of what we're trying to do with assortment planning. It's a very key part of it. And I might add, it's even more complicated now by the omni-channel piece, as a combination of looking at the sophistication of assortment planning that's needed when you break it down by channel. So that's a whole new intricacy to assortment planning, I think, that we're still getting our hands around how we think about that, how we incorporate that into the detailed planning of the business.

Now, naturally, it does affect how we think about -- how we planned, going through, going forward to the back half of this year. But I'm not going to actually share a lot of details with you about what that plan is. That's partly our competitive advantage for what we're doing in using our tools. But, yes, it is; and it reflects, again, some of the broad shifts I think I talked about in Stephanie's question just a moment ago.

Great, thank you very much, and best of luck.

Adrienne Tennant, Janney Capital Markets.

Hi, this is [Brian Senzack] calling on behalf of Adrienne. My question relates to price competition. Zumiez has consistently been one of the least promotional retailers throughout the mall. And I was wondering if you could talk a little bit about how you see your plans holding up as the price competition especially heats up during the back-to-school season; particularly in categories like denim, which we've seen a lot of aggressive price points around the sector. If you guys see any changes to your plans, or if you're confident with that fourth week trend coming out of August -- that it will continue into September, and you can maintain that less promotional plan that you guys have continued to have shown.

And then also, on the backend of that, I also wanted to just ask about the Zumiez Stash program. I know that's been an effort to build a more consistent and loyal customer base, which I'm assuming would also then help give you the ability to focus even less on the need to compete with promotional activity. And so I was just wondering for an update there, if you guys have seen any signs of benefits or success thus far with that? Thank you.

All right, thanks, Brian. Yes, first I appreciate you paid attention that we have been less promotional than a lot of our competitors, on the mall and in many categories. And, again, as we talked about way -- much earlier in the call, I think that's reflected in some of the success we've had in Q2 in growing our gross margin as part of our business.

Again, we plan at a very detailed level. And I think our buyers are very astute about trends and cycles. And there are certain categories of business that we anticipated would be very promotional on the mall. They have been the last few years, and we anticipated they would be this year. In most cases, when we look at that, we try to look at our business and say how can we drive gains without having to play at the deep-discount price-promotional business?

And so one of our goals is always to be different, to be unique in what we present to our customers. So we try to plan and run our games and forecast our business in a way that we don't have to be as promotional. And then that gets to, again -- coming back to the earlier question that asked, relative to inventory positions, and the quality of inventory, of how we're planning those positions relative to assortment planning open to buy.

So I guess a long way of saying, Brian, that we anticipated these trends in the discount level. It's planned into what we had expected to do here in Q2 in August. And it certainly is continuing to be part of our plans as we look forward for the rest of back-to-school and the rest of the year.

Now as it relates to Zumiez Stash program, I love it when you ask me a question and answer it yourself, Brian. So you saved me a lot of work on that side. Yes, our intent is clearly that there are other ways to reward customers. And there's a sense again about the uniqueness of our business, uniqueness of the product, the uniqueness of the experience, and we want to -- the Zumiez Stash program reflects that same uniqueness. So we're doing something in -- what we're calling rewards and recognition program, or more commonly referred to as a loyalty program, that is also very unique.

And the way we're approaching it, the way it is living in the world that our customer lives in on the Internet; the way we're allowing them to participate in the program through, not only being in-store and shopping, but through their activities and things they do with us and how they interact with us, and rewarding them for that loyalty, in terms of their interaction, and rewarding them with things that are distinct and unique that they can't get from the in-store environment.

We hope that, over the long run, again -- I just want to emphasize again that we don't do these things for the short-term; we do these things for the long run benefit of the business. Long-term thinking, long-term strategy. We hope that, in the long run, that these are the programs that will allow us to, again, gain share of wallet with our customers because they believe in what we're doing and they value the uniqueness of the Zumiez experience -- products, people and place. And whether that place be on their phone, or that place be in our store, or on some other mobile device, or at one of our events, wherever it may be. And that's how the program ties it all together.

It will be interesting to see how it's going to work. I think we're pleased with the launch. And I am very thankful for all the hard work our team has put into getting it launched for back-to-school. But realistically we aren't going to know -- we're not really going to be able to use this data until we develop the baseline of the data over the next 12 months. And then we'll expect to be able to analyze the data, look at how people are using it, and be able to use it as a lever within the business, in the way that we can't do that today.

Great. Definitely. Thank you, that's very helpful. And good luck for the rest of fall.

Dorothy Lakner, Caris & Company.

Thanks, and good afternoon, everyone. I wondered, Rick, if you could maybe speak a little bit about juniors and young men's. Your juniors business is significantly less as a percent of sales than a lot of the other retailers out there. And I wonder if there's, in addition to some of the other factors you've talked about as to back-to-school getting later and later -- is there something in the patterns in which juniors are shopping versus young men's are shopping that also tends to push your business more -- later into the season? So that's one question.

And then, Chris, just a little bit more color on the second half and the product margins. And you were talking about flat product margins in the second half of the year. Just if you could go over that for me one more time, in terms of the cost inputs and the difficult comparisons, why you think product margins should be -- expected to be flat in the back half of the year, given how well you did in this quarter, and even first quarter.

All right. Thank you, Dorothy. I do think you bring up a good point in juniors versus men's. Let me talk a little bit about, again, fundamentally those two pieces of our business. And I think last year, our juniors business was approximately 10% of our revenue mix. And when we talk about this particular -- when we talk in terms of this particular number, that is -- represents juniors apparel. And then we have other juniors categories, and our footwear department across the business.

Now, in past years, our juniors business has been as high as, I think, 15% to 16% of our revenue mix. So we really stepped back over the last few years. And, as I think I've said over previous calls, I think that we didn't really understand what business we were in, in our juniors business. Over the -- what we achieved the previous peak, we were more driven by hot brands, brand launches, or brands driven off of mass media, MTV-type programs.

So I think what we've tried to do over the last few years is develop a clear strategy about how our women's business is going to be different and how it -- hopefully we can sustain that women's business on a more stable basis going forward. Now as you know, women's, that's always tough, right. Women's by nature is going to be more volatile than the men's business.

But I am very encouraged by the progress that our women's team has made in rethinking what our women's business is. And we've had good success around our women's business through the first six months of this year.

Now, you bring up a good point in that men shop a lot differently than women. And it would be true that I would expect that men's business would be more affected by the later back-to-school than our women's business is, and our data through August would probably support that assertion. So that's my thoughts there, Dorothy. Did that cover it for you?

Yes, yes, that's helpful, thank you.

Okay. And then I'll let Chris talk a little bit about the thinking on the second half and product margins.

Yes, sure. Thanks, Dorothy. As we did mention, Dorothy, we are planning margins pretty flat on the back half of the year. And you said some of my answer there, in saying that the 2011 margins were at record levels, so while we do anticipate some of the inputs and the cotton prices and items like that on the back half of the year, and we're hoping to get some benefit there.

We also are seeing some increases in labor costs and other costs as well. So as we looked at 2011, we were able to hold some prices up on areas where we had purchasing power, and the product that was more competitive across the mall, we tried to hold prices and sacrificing margin and really -- as we look at 2012, we're going to have some of the same challenges. And so going up against record margins, there's nothing out there right now for us that would indicate that we would bring those margins above the levels that we've seen in the prior year.

And we did have, I think too, Dorothy, in the last year number, it was a tough snow year and we talked about that previously. There may be some potential that it could be better, but that's just not the way we plan our business at this point. And as Chris said, there's a lot of moving variables in our business. That's the unique thing about our business, the diversity of brands, the diversity of categories, that make us -- both gives us some safe around the diversification of those trends, but can also expose us in different ways to -- relative to things like snow. We plan the business and we communicate the assumptions that underlie the guidance. And then of course as you all know, we hope to outperform the guidance.

Right. Great. Thanks, that's helpful. And welcome, Chris.

Thank you.

Pamela Quintiliano, Oppenheimer.

Thanks so much for taking my question, guys, and congratulations on the promotion, Chris. So it's great to see that footwear is doing so well. And I'm sure you guys are aware that there's been a lot of concern out there regarding TOMS and how important it really is for you guys. So if you can help us just understand that, and any other major brands that may be skewing either footwear or apparel results. And then, I just have a follow-up on Blue Tomato from there.

Okay, Pam, so you want me to tell you about our playbook on how our key brands are performing. That's a good try. I always like it when you analysts try to get me to answer that question, and I'm just not going to answer it. Again, I want to go back to the point that our whole strategy is about being diversified in brands and about taking advantage of trends -- whether it be category different trends, brand different trends, that may play out.

And I think, as we talked about here earlier in the call, our goal is to always capture share of wallet. So when trends change, whether it's a TOMS driven change or if another category trends down, there is always another one in our world that we believe is going to be trending up. Now, can I always tell you what those are going to be? No. I mean --- I don't think that's -- I'm not that smart. But we're so diverse in those brands; we're so diverse in the young brands coming up; we're so diverse in the categories reflecting everything in the lifestyle that I think we have a good chance to see where those next trends are going to emerge, and to take advantage of those trends.

So I have confidence, based on the quality of our teams, quality of our historical performance, that we can take advantage of those trends. And that is the key reason that I don't want to talk about any particular brand's performance, in terms of the overall strategy we're trying to execute in the business.

Can I ask just -- and this is a historical question -- when TOMS actually began to flow in -- I know there's a statistic out there about not one brand accounting for more than a certain piece of the business. I know I've heard it from you guys before. And I don't know if that's something that you could share with us again.

Yes, I'd be glad to. Again, we always have to look at it as a full-year basis because of seasonality of the business. So at the end of 2011, our largest brand was approximately 6% of our total sales. And I can tell you that it was not TOMS, to be clear, in that mix -- so, 6%.

Great, that is very helpful. And then my next question for you, which hopefully -- I don't think it's trying to get anything sneaky out of you. And I apologize if it is. But just when I think about Europe being a bit ahead of us in terms of the trends, when do think you can take the learnings you have from there and try to apply them to the domestic business, particularly for the snow season?

It's really -- that's a great question, Pam. In action sports, it works a bit differently. Action sports is an American-driven lifestyle, with brands that primarily are built and emerged from the West Coast of the United States, primarily Southern California. So in action sports, I think it actually works differently, in the sense that brands tend to start here in the US; tend to grow, if they're successful, grow in the US first, and then move to the international markets, particularly probably first Canada and then Europe.

So in our world, it kind of, I think, works the opposite direction. Now that's not to say that there aren't some brands that are European brands that are very good brands. In the Blue Tomato business, there are. But in most cases, it's going to flow the other way, where the mix of brands in our business -- and particularly, again, as you know, we are very good at working with young brands -- but those young brands are going to flow from the US business to Europe. That would be more of the predominant trend here in our action sports lifestyle business.

Andrew Burns, D.A. Davidson.

Thanks, and, Chris, congratulations on your promotion. I had a question for you on Blue Tomato. With some time under your belt here, do you have a better handle on the upcoming hard goods season in Europe? You hear a lot about carryover hard good inventory in the channel, due to last winter. Do you see this as a potential issue? And are you planning the business conservatively as a result? To ask another way, would this fourth quarter be indicative of a normal Blue Tomato season? Thank you.

Well you know, again, some context for your question, Andrew, is the early part of snow season in Europe last year was pretty terrible. And then in the latter part of the year, it got better in Europe. I don't want to get down to too nitty-gritty on talking about a particular department of goods, and the Blue Tomato business, when it represents for Blue Tomato in total, it doesn't represent that significant part of our business at this point, let alone the snow category.

So I don't want to get too detailed. But I will say that, in broad terms, we are very fortunate to be partnering with the Blue Tomato team. This is -- Gerfried and his team are very, very culturally similar to us. They run -- he has run a great business with great profitability, built upon that great cultural foundation and the authenticity of being an action sports retailer. They run a great business. And I can tell you, they have a number of strategies for managing their exposure in their snow hard goods business. Because, as we said, they are -- that is a significant portion of their business in the winter months.

But Gerfried has been very smart and very clever in how he's managed inventory, and how he intends to extend that experience. So we don't anticipate, and we're very comfortable with our position currently; and, now, as we look going into the season, so now will be a function of how the season is going to turn out. And I wish I knew what that was going to be. I clearly don't. But I know that Gerfried has a great team that's well experienced in managing through all sorts of different kind of snow seasons in Europe.

Thank you.

Richard Jaffe, Stifel Nicolaus.

Thanks very much, guys. Just a follow-on thought regarding the juniors or young women's business and the possibility or opportunity of more private label to keep the product unique, differentiated and exclusive. If you could give me your thoughts on those two factors?

Sure, Richard. Again, our juniors business, we've said, we've been -- we have worked hard over the last couple years -- our juniors team in conjunction with all of our buying team and our private label team -- in trying to establish a more sustainable, unique strategy relative to what we're doing in women's. And I'm not going to get again into exactly what it is, but obviously it would be clear that private label is a part of that strategy.

So the coordination that takes place with our teams there is very important. As you know, that overall last year private label was just under 18% of our revenue mix. And while we don't break it down to men's and women's, I think you can probably make some logical conclusions about that in our women's business by just going through the stores. And I think your question kind of draws the point that you have made some conclusions about the women's private label business.

Our team's done a great job executing on it. Now I'll say what I always say, though, when it relates to a penetration of private label overall; or whether it's men's or women's, is that it depends upon the cycles. If we can sell the branded product, then we want to sell the branded product. Our private label strategy in that sense hasn't changed, in that we want it to supplement and complement our overall branded action sports lifestyle business. Probably doesn't help you much, but that's kind of how we think about it internally.

It's helpful. And I will go in and start counting hangers. Thanks very much.

Dave King, ROTH Capital Partners.

Thanks. Good afternoon, guys, and congrats on the promotion, Chris. First, I have you guiding to a 3% to 5% comp for the quarter, which -- taking a step back, seems a little bit lower than your traditional guidance in the mid-single-digits. I just want to get a sense of how you're thinking about that. Is that somewhat of a new run rate that you guys are going to be guiding to as we think about it? Or is it more of a function of the August -- month of August, which, as we've talked about, is mainly because of later back-to-school. Can you provide some context around that and how we should think about that going forward?

We said mid-single-digit in a lot of the previous quarters, Dave. So 4% or 5% is still mid-single-digit, I think as we ---

I agree.

(multiple speakers) previously. I'm not sure it's that significant a change, in terms of how we think about the guidance. Then again, I don't know how the rest of back-to-schools turn out. I'm not omniscient in that sense. We need to see it play out. So I think that we reflect what we believe now. And then we see what happens. I think that's how we set the guidance, how we think about it. And we need to see how it plays out here over the next couple, few weeks.

Yes, fair enough. And then, Rick, I noticed in the release there was no material number of new stores planned for Europe this fiscal year. But maybe as we look out going forward, have you had a chance to look at all the total market opportunity? Or do you have a better sense of that, and given any thought to how we should think about future growth there and build-out plans for next year, etc.?

We're not ready to talk about that in detail at this point, Dave. We clearly have -- and, in fact, as you would anticipate -- we had done a lot of work in advance of getting involved with Blue Tomato. And have worked, particularly, in the large markets in Europe, at looking at what the potential is in each of the large markets, particularly Germany and France.

So we've actually been working quite -- probably for the last 18 months on that project and looking at that. So I think we have a good idea of what, particularly in Germany and France, the capacity for that market is, for locations. But as we said in the script, this is something we want to -- again, in our world, our Blue Tomato team is going to lead the charge here. They are the empowered ones in our world, and, again, they share our value set. They share our culture.

So we're working with them, again as we said in the script, to build out, to take their growth plans and to add to it our joint thinking about where we think we can go and what the potential is. Now, it will be different, I can tell you that, as we think about what stores will look like in Europe. There will be some markets that will be much more driven towards street stores, because that's the nature of the market. There simply aren't many malls structure. And there will be other markets that will be more mall-driven, because that's the nature of those markets.

So I think -- and then, of course, we have to also look at the density of the population in Europe, which is different than it is here in the US. So all these factors will contribute to our end strategy as to how we think about growing units in Europe. And again, we're far too early at this point to draw any conclusions. We have some ideas; we've done a lot of research. But we also have some experts in doing business in Europe, in our Blue Tomato partners, who happen to have a very large e-commerce business, which is a huge advantage for us in Europe, because we know where their customers are.

As I think you know from our previous releases about Blue Tomato, is that they have done an exceptional job of internationalizing their website. On their website they sell in 14 different languages. So they have done a great job of helping build that road map for us, as we think about the long-term growth for physical stores, brick-and-mortar stores. And again, we're going to work together with them, and they're going to be a big driver of the thought process here, about how we do that, and where we go, and why we go there, and then, of course, eventually how it leads into omni-channel strategies also. So a lot more to come, Dave, is basically the upshot. I don't really have anything to tell you at this point, but that's how we're thinking right now.

That's all extremely helpful. Is it fair to assume then that maybe we'd get that a few months down the road? Do you think it's more of a next year kind of thing where you start to have some numbers you can give us around that, or is it --?

I think it will be more of a next year; this is going to be a multi-year evolution here, as we think about building their business. Blue Tomato has some very successful stores today. But we need to continue to learn, and build off of their knowledge base and incorporate our expertise, because we are pretty good at opening stores on our side.

As we said in the call, there's opportunity for us to leverage each other's strength in the process of working together. A lot more to come; we will have more to say, obviously, as we get into next year. And, of course, we need to build the plan out and involve our Board, and their thinking about -- their expertise as we think about building this business, too. When we do talk about it, we're going to talk about it on a long-term basis, and not just about next year, but what we think we can do over the long term.

Jeff Van Sinderen, B. Riley.

Rick, to what do you attribute the big jump in the week four this year versus last year? And also, I would assume transaction count was up in week four. How do you think about that? And does your Q3 guidance assume the transaction count is up? Or what timeframe are you thinking about there?

I'm not going to get down to that level of detail, Jeff. But, clearly, as we view what's going on in week four, as we've talked about earlier in the call, it's a number of factors moving these trends towards later back-to-school shopping. Consumers are very smart. They know that deals get better the longer they wait. There's also this trend that I think everyone has seen, is that not only is your shopping peak only now right before schools go back, but the peak extends after schools go back in each market. And we can measure that, because we can look at -- we know for every location we have out there, when their schools are going back. And we measure the plus and minuses from that date on every location we have in the marketplace.

So we can see that, that post-back-to-school, the buying continues. So we're definitely seeing those continuing shifts, Jeff, as they play out. And as I said too, earlier, we've seen that the overall importance of the four weeks in August, the first two weeks of September, has been declining overall in our business. And that gets to the nature of the world nowadays, of the empowered consumer, smart phones, mobile devices. Kids want to know what's hot now. And then, they'll come buy it now.

We definitely are believing that things are extending, that the dollars aren't as concentrated as they once were. And they're extending into the rest of the year. I think that's a long-term trend, Jeff, that we are going to continue to see over the next 5 and 10 years of our business, that back-to-school will continue to shift, much like holiday has -- to a certain extent, over the last decade -- shift to just at the peak; and back-to-school, right after the school goes back. And then we're going to see the spending spread out based upon -- kids want that new brand when it's new and when it's viral, when it hits. When it hits their smartphone and they see it, they want you to have it then, and buy it then. And they're not going to wait until August to do it.

So those are the kinds of things I think that we expect to see on a long-term basis, those kind of trends continue to slowly pay out over the next 5 and 10 years. I don't want to get too detailed about week four. But obviously when you run up a 17.5% comp, yes, you've ran a transaction gain. Logic just tells you, you have to, based upon the fact of how we talked about the business against the 3.7% comp for the whole period.

Yes, there was a transaction gain; day was an AUR gain in that window. We'll see how it turns out. We'll be able to tell you that a little bit more as we get through September. But at this point, we just have to let it play out.

Okay. And then, a clarification on promotional levels, this year versus last year. Did you say that your overall promotional level is down in Q2 versus last year? And how would you characterize the promotional backdrop this year versus last year for back to school? Do you feel that promotional levels have eased in your niche versus last year? And then also, any planned change in your overall promotional levels in Q3 this year versus last year?

Okay, as it relates to Q2, obviously, as we know, we got a pretty decent improvement in gross margin percentage. We think about promotional levels in multiple ways. Our goal is to be able to have exactly what every location needs for their customer base. The right mix of product in the right mix of categories; that's the holy grail of any retailer. And we are certainly not perfect at it, to say the least. But we're working towards making that better and better all the time. And we have a long ways to go on that front.

But our goal is to be a full-price retailer. And because we represent brands that have value, brands that have equity, brands our consumers want to buy. We hope to be a full-price retailer, Jeff. That being said, there are certain categories of product that brands don't mean much in certain categories in our business. So those areas, then -- what we try to do is, we try to plan that business so that we can sell the product at the right value to the consumer, but yet maintain a very healthy margin in the business. And those are categories where private label would naturally play a bigger part of our business.

When we think about that, and when you look at the promotions in our business, as we plan on -- many of what you see in our stores are planned promotions. Things we planned to do, rounders we plan to feed at those price points that have -- that show value to the consumer, but yet reflect a good margin performance for us. Our business is kind of unique, I think, because we are so brand diverse, so category diverse, relative to most of our competitors.

As we look into Q3, I'm not sure we that we see a significant change in our promotional cadence. As I talked about earlier in the call, I think one of the other analysts called it out, that we seem to be less promotional. I think that would be true than a lot of our competitors. And I would characterize the competitor environment as continuing to be very competitive, promotionally, particularly in denim. I think that's pretty obvious to everybody. I would have hoped it wouldn't be as promotional. But that's clearly the play out that way. And unfortunately our buyers didn't plan it that way. So we expected it, from a product perspective, to be a promotional environment on key categories -- some key categories; in particular, denim.

Paul Alexander, Bank of America Merrill Lynch.

Hi, thank you. Can you discuss your new store opening planned for 2013 yet? And if it's too early to talk about that number of stores, maybe you can just talk about the real estate environment, and your 8% to 10% annual domestic store growth number? And how that projection or goal might change over time, as your chain gets closer to ultimate potential? And then, are you seeing any kind of change in the maturity curve you're seeing from young stores? Thanks.

Okay, there's a lot there, Paul. So let me take a shot at it. No, we're not prepared to talk about our plans for 2013 at this point. In fact, we probably won't come out with what we believe we're going to do there until our March discussion, after we share with you the year-end results.

So I'm not going to talk about it at this point. Obviously, we are preparing, making deals, at this point. We're a long way through thinking about the plan and working with landlords, which takes me to the second part of your question, relative to the real estate environment.

We have great partners in our landlords. And we always appreciate their support in helping us with our business. But I can tell you that in the real estate world, that doesn't mean that doing deals is easy. Our landlords, they are good partners for us. But they have high expectations of their performance, too. So we're always having to look way out, as we think about deals and structuring deals. And you have to look at a lot of deals to get the deals you want done. Our landlords are as tough as ever, is what I would tell you. And kind of always, as you would expect, bifurcates into two kinds of centers -- centers where the landlord has the leverage; and centers where we have the leverage. And then, of course, we try to work both those together, to get deals on both sides that are good for both of us; and where we can help each other out in terms of that overall meeting our both sides economic needs on the real estate deals.

I characterize the environment, Jeff, as similar to what it's always been; which is, landlords are tough. And they certainly need to achieve their objective as we need have to achieve ours. And that's why dealmaking takes so long for us to do.

Maturity of our new stores -- I think we feel good about where we're at. I don't think there's been an major change in the curve itself. So we're basically satisfied. We feel good about where we are at. That's something, by the way, we look at on a regular basis, that our Board reviews on a regular basis, for how are those new stores performing. We do it by class. And we look back over the last 4 and 5 years, of how those classes are trending. We feel good about it. I don't think there's been any major change, really.

The major change was in 2007 and 2008, related to the recession. Those stores got worse. But since then, we've actually been back to more of our historical levels of maturity curves for new stores.

Lastly, as it relates to the 8% to 10% growth rate, I'm not prepared to talk about that at this point. I think that's a very complicated question. As we've said in the script, we are constantly in the process of looking and thinking about our current, existing portfolio stores; as well as what we view as the mature portfolio, what the potential stores yet to be done looks like. That's what the involvement is in the next 5 years, Paul. I think that's something that we're always thinking about. We're thinking about more than 2013. We're thinking about that as it relates to the next 5 years, what that's going to look like.

We have to think about what that looks like relative to the growth in Canada; and what, ultimately, our plan will be for growth in Europe. Very complicated, in terms of our thought processes there. I won't tell you that we're expecting any major change for 2013. But I will tell you that something that's constantly being thought about, obsessed, and evaluated relative to all of our growth objectives.

That's helpful. Thank you very much.

Simeon Siegel, JP Morgan.

Thanks. So, Chris, how are you going to account for Blue Tomato in the comp calculations? I assume the 3% to 5% doesn't include the Blue Tomato. So maybe can you share the implied store-related comps you guys are using to get to that third-quarter sales range? And then, sorry to belabor the point, I'm just trying to understand the implied overall gross margin guidance for the third quarter. I think your gross margin compares ease in the back half. I thought you should be getting some gross margin lift from Blue Tomato. Because I think we had said that was accretive on the gross margin line at least. So if you guys could talk about the consolidated assumption for the gross margin, that might be a little helpful. Thanks.

Let me start, and then I'll let Chris add some comments to -- a little more detail than I'll give you. Clearly, the 3% to 5% does not include the Blue Tomato. And typically, as we've managed acquisitions previously, particularly the Fast Forward one, we want to begin including Blue Tomato's results in the comparative numbers until we anniversary the acquisition next July.

Looking forward, when we talk about our guidance and future comp projections, they will not include any of the Blue Tomato data. That will be included in the overall total, as if they were new locations. So that's how we think about the comp side of the business.

The margin side of the business, I'll let Chris give you a little bit more color around it, particularly we revisit a little bit on Q3, Chris, as we think about it; and then the implications of that for Q4. There are some of these intangibles that hit this, particularly the inventory step up basis, that will hit -- that are going to affect the overall gross margin. And that's why, when we gave you the guidance, we broke it out between the guidance for our margin excluded the impact impacts of Blue Tomato, particularly because of the stepped up basis of the inventory for the purchase accounting here in Q3. Chris, do you want to give him a little bit more color?

Yes. Thanks, Rick. We had two items impacting our margin in Q2 that were sort of one-time in nature. The move costs as well as the inventory step up that we mentioned. As you forecast into Q3, the move costs, we believe are behind us. But you do have a fairly significant impact from the inventory step up. I think we said earlier on the call, about $1.4 million. So as you are looking into Q3, we're going to have -- up against a stiff increase there, related to this one-time in nature challenge.

Additionally, as we look in the back half of the year, as we mentioned earlier, our 2011 margins were strong. And I think that's given us reasonable thought process as we look to the back half of the year, to plan accordingly, and to plan margins mostly flat on the back half.

All right, thanks. So just on that first part of the question, can you share with us what you're thinking, in terms of the store-related comps within that 3% to 5%, where you are seeing those?

No, we're not going to get down -- you mean, in terms of product categories, or regional, or --?

No, since you guys include that online segment within there --

We do?

So the online within the Blue Tomato won't to go in until next year as well. I'm just trying to think about, from pure store-level comp, what we can be thinking about in terms of the trends.

I have to tell you, we need to break you guys of this habit of asking about that there's -- we want to know about it relative to channel, or peer stores versus e-commerce. It's an omni-channel world. And, as we said over the last number of quarters, we are attacking this idea. We are embracing this idea of an omni-channel environment. And we need to think about these as, on an overall basis, because they're very, very integrated. And you're going to see us integrate these channels much more closely over the next year, and the years after that.

I'm not going to get into talking about how that breaks down between what our stores and what's Web, because it misses the point that these are integrated channels going forward. They're integrated today. And they're going to be more tightly integrated going forward; both for the back half of this year and for the next few years, to the point where I'm not sure we're going to be able to tell you, in the future, what's driving volume and transaction in stores and what's driving the volume and transactions online. Because they're going to be that tightly integrated.

The consumer gets to choose. And all that's important is that we are in every channel they want, in the way they want us, with a great brand experience and the product they want. So that's the reason we're not going to parse that. Because in our world, already, that's a question that isn't as relevant as it was four years ago. And it's going to become less and less relevant, and less and less of a distinction, as we look forward.

Got it. All right, good luck in the fall.

Thank you very much.

And I'd now like to turn the call back over to management for some closing remarks.

All right. Thank you, everybody. We really appreciate your time today. We realize this was -- Q2 was a bit of a challenging quarter, to understand all the moving parts. So we appreciate your time and attention to the details. Thank you very much for that. And we'll look forward to talking to you as we wrap up the Q3 results in late November. Thanks, everybody.

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us. You may now disconnect, and have a great day.