Zumiez Inc (ZUMZ) 2013 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Zumiez first-quarter fiscal 2013 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 this Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez 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 could cause actual results to differ materially from the information that will be discussed is available in Zumiez filings with the SEC.

I would now like to turn the call over to Mr. Rick Brooks, Zumiez Chief Executive Officer. Please go ahead, sir.

Thank you and welcome everyone.

I'm joined today by Chief Financial Officer, Chris Work. I'll begin today's call with some prepared remarks and then Chris will take you through our financial and operating highlights for the first quarter. After that, we will open the call up for your questions.

Our first quarter came in better than we initially projected with net sales of $148 million and EPS of $0.08. Both above the high-end of our expected ranges. Comparable sales were down 0.7% for the quarter, which was also better than our original guidance of a decline in the mid-single-digit range.

After a challenging month in February, sales trends improved during March and April. This was encouraging, given the unseasonably cold weather in the US throughout much of the quarter underscoring the strength of our brand and desirability of our diverse merchandise offering.

Over the past year, we've made strategic investments towards building and further enhancing our leading position in the global action sports marketplace. The largest of which was our acquisition of Blue Tomato last summer, followed by our ongoing investments to expand our eCommerce and Omni-channel platforms and of course, investments in our people.

These investments are critical to our long-term success. However, as we discussed in our earnings call in March, they will weigh on our short-term profitability compared with a year ago. That was the case in the first quarter as a combination of a comparable store sales decrease and increased cost structure resulted in decreased operating margins and earnings.

As I said previously, our focus remains on building a sustainable long-term foundation for growth. To achieve this, we continue to dedicate our time and resources towards increasing the productivity of our current stores, developing a leading Omni-channel platform and growing our footprint both domestically and abroad.

Let me take a minute to update you on those efforts. One of the key pieces of our differentiated business model has been and will continue to be investing in the Zumiez team. For example, a couple weeks ago we held our annual managers retreat where all of our managers engaged in an intense program of teaching and learning designed to empower our leaders to impact their teams on a daily basis. We truly believe this experience is second to none and this year was yet another statement of how we are successfully enhancing the training and growing our culture as we grow our Business.

Our employees are passionate about the lifestyle and it is our collective responsibility to ensure they have the training, tools and empowerment to deliver a genuine, high-quality, in-store experience for our customers. This unique customer experience is the lifeblood of our top line success and is a key component to driving consistent, long-term comparable store sales gains.

We are also investing heavily in enhancing and extending our unique perspective on the action sports lifestyle into the virtual space. During the quarter, sales through zumiez.com and blue-tomato.com brought our total e-commerce penetration to 11.8%. There's still a great deal of room to further integrate our selling platforms, but we continue to make important strides towards creating an Omni-channel business that gives consumers quick and easy access to the product they want, however they want, anytime they want, and also, delivers the same great Zumiez brand experience they've come to expect from us.

This quarter, we opened seven new stores, five in the US and two in Canada. This brings our total global footprint to 503 stores, including 22 in Canada and 6 in Europe. As we begin our third year operating in Canada, we continue to see tremendous growth potential for our brand in the Canadian marketplace.

We anticipate that we could nearly triple the number of existing stores we have in this market in the years to come. We also see room for new store growth in the US, and continue to plan our business here to be between 600 and 700 stores.

As we evaluate and execute on opportunities in the US, it's important to note that we will actively manage the entire store portfolio and we expect to close some low performing stores. Our goal, here, is to reach all markets in the US with the right number of high productivity stores and a strong Omni-channel presence.

In Europe, our focus has been and continues to be building out our infrastructure to support future market share gains. As the economy in Europe continues to struggle, we are leveraging our strengths as best in class operators to successfully navigate the near-term headwinds and position the business to accelerate, once the environment in Europe turns around.

In the face of this tough environment, Blue Tomato's sales increased 8.6% in the quarter, compared to the quarter a year ago. The nuances may be different, but the stories here hasn't changed. Our diverse and differentiated product assortments, combined with unique lifestyle focused culture that underpins the way we approach selling still guide our way as we expand our global reach and position our business for the future. We remain true to our vision to be the leading global action sports lifestyle retailer and every dollar we invest in our Business is dedicated to that end.

With that, I'll hand the call over to Chris.

Thanks, Rick.

Good afternoon everyone. Let me start by briefly reviewing our first-quarter results, reviewing our guidance for next quarter, and giving a few thoughts around fiscal 2013. Then, we will open up the call for your questions.

First quarter net sales were $148.5 million, up 14.3% over the first quarter of last year. Breaking that down a little further, North American sales were up $9.5 million, or 7.3% over the prior year quarter, and Blue Tomato added $9.1 million to our top line this quarter. Our first quarter benefited from the addition of 48 net new stores since the end of our first quarter last year, including the 6 acquired in Europe, offset by negative 0.7 comparable store sales.

Breaking down the category performance for the quarter, our men's, accessories, footwear and boys comped negative, while juniors and hard goods comped positive. Transactions were down in the quarter, while dollars per transaction benefited from higher average unit retail prices and an increase in units per transaction year-over-year.

Due to a variety of factors, many external, we believe our February sales results are not indicative of our long-term performance of our business. When looking at the March and April periods together, which we believe is more representative of our overall trends, comparable store sales increased 3.2%. And in addition to our juniors and hard goods business, footwear also comped positive in that timeframe. Comparable e-commerce sales increased 13.1% in the first quarter, which is included in our consolidated comparable store sales.

Gross profit for the first quarter was $48.0 million, or 32.3% of net sales, compared to $42.1 million or 32.4% of net sales in the first quarter of 2012. Product margins in the quarter improved 60 basis points, which was more than offset by the deleveraging effect of a negative comp and increased eCommerce facility and shipping cost as a percent of total sales. SG&A expenses for the quarter were $43.9 million, or 29.6% of net sales, compared to $34.8 million or 26.8% of net sales in the prior year quarter.

The increase over prior year quarter is a result of deleveraging our cost structure on negative comp, as well as the contingent future incentive payout payments and amortization of intangible assets associated with the Blue Tomato acquisition. First-quarter operating profit was $4.0 million or 2.7% of net sales, compared to $7.3 million or 5.6% of net sales during the first quarter of last year.

Net income in the quarter was $2.5 million, or $0.08 per diluted share, compared to $4.5 million or $0.14 per diluted share in the first quarter of 2012. Included in the results for the first quarter were costs of $1.7 million, impacted our diluted earnings-per-share by approximately $0.05, which included $1.1 million of estimated earn out and $0.6 million of intangible amortization related to the acquisition of Blue Tomato. Results in the prior year quarter includes $0.4 million or approximately $0.01 per diluted share for acquisition related costs.

Moving on to key balance sheet highlights, we ended the quarter with cash and current marketable securities of $97.6 million, down from $171.2 million a year ago. This decline was driven by cash paid for the acquisition of Blue Tomato, capital expenditures related to new store growth, and cash paid to repurchase our common shares. Partially offset by cash generated by operations.

As of the end of the quarter, we had $2.1 million in outstanding debt related to debt acquired from Blue Tomato, and no outstanding balance on our revolving credit facility. Capital expenditures in the quarter were $6.4 million, primarily driven by new store build outs since the end of our 2012 fiscal year.

Inventory was $90.9 million at May 4, 2013, up 29% from $70.4 million at April 28, 2012. In North America, on a per square foot basis, inventory was up slightly compared to the end of the 2012 first-quarter. Overall, we remain confident in the quality of our inventory as we move into the second quarter. During the first quarter, we repurchased approximately 0.2 million shares of our common stock, for an average cost per share of $22.36, for a total of $3.7 million. As of May 4, 2013, we had $12.5 million remaining in our previously announced stock repurchase authorization.

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 second quarter, we are planning comparable store sales to be flat to an increase of 2%, and total sales to be in the range of $155 million to $158 million. We expect consolidated operating margins to be in the 3.5% to 4.5% range, with diluted earnings per share between $0.12 and $0.14.

Included in our second-quarter guidance are an estimated $1.6 million or approximately $0.04 per diluted share in ongoing costs associated with the Blue Tomato acquisition, consisting of $1.0 million in contingent earn out costs and $0.6 million in intangible amortization. As a reminder, the calendar shift resulting from an extra week in fiscal 2012 will impact sales results by period and quarter throughout the year.

In the second quarter, we estimate a favorable sales impact of approximately $5 million to $6 million as a back-to-school sales week will shift out of the third quarter. This shift will have a similar, unfavorable impact on the third-quarter sales.

As Rick touched on in his comments, our outlook for the year has not changed. As many of you know, our business is seasonal, with the majority of our sales and earnings occurring in the back half of the year. While sales trends have improved during the past couple of months, consumer sentiment remains tough to gauge and there's still uncertainty about the sustainability of a global economic recovery. Because of this, we will continue our practice of not providing specific earnings guidance for the full-year.

However, I do want to reiterate that the thoughts we shared with you in March. We are planning our comparable store sales to increase in fiscal 2013, although we are cautious in our outlook and believe this could be lower than comparable store sales in 2012. Excluding the impact of the inventory step up associated with Blue Tomato acquisition, we achieved record product margins during fiscal 2012, and while our product margins were strong in the first quarter, they can be impacted by a variety of factors, most notably shifts in product mix both domestically and internationally.

Our current projections for 2013 consolidated product margins excluding the impact of the inventory step up in the prior year, are flat to down slightly. We plan to continue making strategic investments that we believe will reap long-term benefits, focused on enhanced the customer experience across multiple channels, growing our international footprint, and investing in our people and infrastructure to support our domestic and international growth in 2013 and beyond. We expect these investments to deleverage our overall gross margin as well as SG&A for 2013. However, to the extent we achieve positive comparable store sales for the year, we expect operating profit to increase.

As a reminder, fiscal 2012 included an extra week, resulting in a 53-week fiscal year. While this was a benefit to sales and earnings growth in fiscal 2012, it will be a detriment to sales and earnings growth rates in fiscal 2013. Estimated earn out expense related to the Blue Tomato acquisition is projected to be approximately $4.0 million in fiscal 2013, and the amortization of intangible assets associated with the transaction is expected to be approximately $2.4 million in fiscal 2013.

We are now planning to open 58 new stores in 2013, including 9 in Canada and 6 in Europe, with a cadence similar to our historical openings of two thirds prior to back-to-school and one third after. We estimate our net store growth after closures, to be 52 to 54 stores. As an administrative note, we have removed the two seasonal Blue Tomato stores from our total store count as these stores are not representative of our full-line store base.

We expect capital expenditures for the year to be between $40 million and $42 million, compared to $41 million in 2012. The major capital projects being the new store openings and planned store remodels. We also expect depreciation and amortization to be approximately $28 million, an estimated 22% increase over fiscal 2012. We anticipate our annual effective tax rate to be consistent with our fiscal 2012 results.

Finally, our weighted average shares used in the calculation of diluted earnings per share for the full year is projected to be approximately 30.3 million shares, which includes the impact of 0.2 million shares repurchased during the first quarter. Any additional share repurchases during the year, from the $12.5 million remaining in our authorized repurchase program, will further reduce our share count.

With that, we will now open up the call for some questions.

(Operator Instructions)

Dave King from Roth Capital.

Good afternoon, guys. I guess, first off, kind of digging into the guidance a bid for the flat to up 2% comp for the second quarter. To what extent is that a function of what you've seen so far in May? And I assume it includes some of your expectations for the higher back-to-school week and then, Rick, maybe, or Chris, you could just comment on or remind us again, when Blue Tomato and the eCom business is added to the comp base, what impact that might have. Please.

Great. Thanks, Dave. Thinking about May, we won't give any commentary around May yet. We will wait till we finish the month. In regards to the sales shift, the guidance does include the $5 million to $6 million that we laid out that will move from Q3 to Q2. So, that is included within our guidance.

Lastly, I think your question was when does Blue Tomato come into the comp? We closed that transaction on July 4, 2012. We'll start to anniversary that in both the stores we acquired, as well as their website will roll into our comp after the 4th of July, 2013.

Okay. That's helpful. Maybe, then, I understand you not wanting to comment on May, but we're I guess further into it now, so maybe asking the question a little bit, in a different way. I guess to what extent is that 0% to 2%, ex the other factors we talked about a reflection of May versus general consumer sentiment out there in the market that I think you kind of alluded to in just ongoing concerns, macro, et cetera.

Dave, let's say again, we are not commenting on May. But, it is -- we realize we said that the March, April period is running higher, but it's only a few weeks into a long quarter and we are just putting the guidance out there, 0% to 2% range.

Okay. Thank you. Then, maybe a follow-up. In terms of the categories you are expecting for growth, it seems that footwear seems to have now shown some improvement after some of the changes you've made there. I guess, do you expect that to continue, and maybe on the junior side, I think one of your competitors talked about some of the things they are seeing in terms of traction from existing action-sports brands rolling out product that's more well received or better received by female customers. Is it fair to assume that you guys are seeing some of that as well? If you could just comment. Thank you.

Well, thanks, Dave. I will just comment briefly again. We are encouraged with our first-quarter results around footwear. I think we said it last fall that we had some struggles here, but there are some things we thought we could do to address those issues and I think you are seeing our efforts come to fruition on those points.

I'm pleased with the hard work of our teams in getting, again, as we know the issue was men's footwear, I think we were clear about that in the fall. So, I'm very pleased. Again, the hard work our teams have put together, and the things they've done, and we've seen improvements there in Q1.

As it relates to the question on women's business, your question presumes that we haven't been doing this for a long time relative to our relationship with brands. We've been doing this for a long time. So, there is nothing new for us in regards to that. We're continuing to move forward as appropriate, based upon the trends. So, I'm glad people like to follow what we're doing.

Yes. But, I guess the other question I was asking was, do you think it's fair to say that the brands are also doing a better job, in terms of offering a good juniors offering? Which I think sometimes in the past you could say that some of them hadn't necessarily addressed it well enough on the junior side.

Again, those are brand by brand considerations and I will tell you there are some brands that do and some brands that don't. So, it's never a straightforward answer. Overall, of course, we are having a lot of success with our Women's business and we think it's -- we don't see that it's going to change here as we look into Q2.

All right. Thanks much, guys.

Sharon Zackfia from William Blair.

Hi, good afternoon. I had a couple of questions. First on gross margin. Can you give us more insight into how eCommerce effects that going forward? I suspect the mix is a bit different in eCommerce. If you could talk about that, relative to how shipping plays into that and how we really think about that as eCommerce grows more quickly in our margin assumptions going forward.

Great, Sharon. So, looking at gross margin overall, as we said, product margin was very strong. Yet, gross margin on a consolidated basis was down 10 basis points. In thinking through that, we mentioned two items. The first of which would be, obviously, deleveraging on the negative comp. As you would expect, there are fixed cost within our gross margin calculation that did not leverage, more specifically occupancy in that bucket. But, others, as well.

Thinking about the eCommerce side of it, which is the second piece we mentioned, clearly we have a mix change, most specifically with our Blue Tomato acquisition bringing on additional web dollars, as well as growth in our US business. So, in thinking about those long-term, this year, as we start to anniversary Blue Tomato, that should start to normalize a little bit. But we would expect to see some additional dollars associated with the distribution and shipping amongst those channels within gross margin.

I guess, in aggregate, is eCommerce on a gross margin basis, similar to your bricks and mortar? Or does it skew a little bit lower?

On a gross margin basis, it would be fairly similar. It would, I think, it's more of a mix issue at this point.

Okay. Then, I'm assuming you had a better snow board first quarter than you did last year, when it didn't snow at all. Was that material enough to actually impact the product margin that you referred to, given that snow boards are a lower margin business for you?

No.

Okay. Then, lastly, SG&A. I know you guys are doing a lot of investing this year. Is a cadence of year-over-year dollar growth in the first quarter pretty representative of what we should expect for the full year? I know you ramped that up as 2012 progressed. I'm not sure if we should expect that to abate somewhat as we get back into the back half of the year?

The cadence of SG&A growth is your question?

Yes. The dollars spent.

Yes. We will continue to ramp that up as we move throughout the year. More specifically, one of the things that we talked about in areas of growth is investments in our websites. We will be launching a new website here in the future and on the back half of the year, those will have a more significant impact on our cost structure.

Okay. Thank you.

Jeff Van Sinderen from B Riley.

Good afternoon. I know everybody's harped on the weather. But, Rick, any further thoughts on how the weather phenomenon impacted your Q1? I know the comparisons get easier for you for the next couple of quarters. But, do you think that the late arrival of spring weather helps your Q2?

I guess, looking forward to back-to-school this year, I know you have the one-week shift from Q3 to Q2, but any reason to think that the peak weeks might be generally later this year, or peak selling might be generally later this year for back-to-school? Do you think, maybe, that the spring purchasing activity could cause some sort of a push out of back-to-school peak spending? Any thoughts on that?

Sure, Jeff. I will share our thoughts. That exactly what they are, they're thoughts. Let me first start by -- with your weather question. Of course, if we want to talk about weather, right, I don't like to talk about weather, as a reason for business moving the way it does.

It is a factor, but if we are going to talk about weather this year, we also have to talk about how great it was a year ago. Right? So, that's where we have to start, because of course it's relative on a comparable basis. So we had a great year, a year ago, weatherwise, tougher one this year.

So, the heart of your question is whether or not that all is going to flow-through in pent-up demand as we move into better weather, here, in the rest of the spring season. It's probably a little bit will. I'll tell you, I don't believe it's -- you recapture all of it. When you go through a whole season as far as we are deep into the spring season at this point, you will get some back, but our experience is you typically don't get all of that back in terms of what you have for that season. I think some of those dollars are lost in the process.

We certainly consider that in terms of how we think about Q2, in our thinking. So, we internally, our experience says you don't assume you're going to get all that dollars swing back. You will get some, but not all.

Your second part of your question related to do we think we are going to see a shift later and later in the back-to-school around the peak back-to-school weeks. It's a good question, Jeff. I think you've heard us say for years, now, that that's been a trend that we've been seeing. So, again, our assumption there is that's a trend we will continue to see. Potentially, that may mitigate some of the moves of the volume back into Q3 relative to that last week.

But, that week we are talking about, that first week of August isn't that big a week in the scheme of the back-to-school weeks, at least for our mix of stores. So, answered your question is generally yes. I think if trends hold the way they have been for the last many of number of years now, we'll continue to see volume concentrate around the peak weeks of back-to-school, but happens to be that that first week of August is one of the smallest of the peaks in the back-to-school window.

Okay. That's really helpful. Then, also anything else you can share about recent trends with Blue Tomato's business?

Again, I don't want to over focus on Blue Tomato, it's still a relatively -- just so we're clear, it's a relatively small part of our businesses. But, as I did say in my comments, we comped up 8% plus --

Total sales were up 8.5%, comp was 5%.

On Blue Tomato.

On Blue Tomato, right.

Over the prior year, the total sales gain. As tough as it is in Europe at this point, this is again, as I said in our comments, it reflects the quality of the operator, I think, that we have partnered with here. We continue to believe these guys are the best operator in the action sports marketplace in Europe, so in spite of a shrinking market, they continue to grow sales. I think that's going to be the nature of the game in Europe for a while.

So, we are pleased with how we are doing there, Jeff. Again, I want to put it all in perspective. It's a very small part of our overall business and to put more perspective around it, this is a long-term play for us, right? We are talking about a five-year window to really see Blue Tomato continue to grow enough to be a meaningful part of our Business.

Okay. Understood. Thanks very much and good luck for the rest of the quarter.

Thanks.

Edward Yruma from KeyBanc.

Hi, thanks very much for taking my question. Congratulations on some of the successes you guys are now posting in footwear. I'm sorry if I missed this. I know that starting at the end of third quarter you began some testing, enabled some of your merchants to take more risk within footwear. I guess, at this stage, do you call a turn within that part of your business? And how much more can you do to kind of circumvent some of the athletic footwear trends that maybe have run against you for some time?

Sure, Ed. Again, I think our thinking on this, is -- and we are always -- so I'm clear, within our Business, we are always taking calculated risks. We encourage our merchants to experiment and play all the time, so there's really nothing new from that perspective. More, I think what we've achieved in footwear is getting the right mix of product amongst our branded suppliers.

So, that's one of the key reasons and why I can comment so confidently in the fall window and in November why I can say we are doing things, there's things we've identified and we believe we can execute against them that will make a difference. So, we did. We knew we could do those things and it's had the result that we would have hoped it would have on our business. So, we are encouraged by that. It's really, again, a repositioning of the mix between brands and styles. Again, for us, so I'm clear about that, on a micro sorted basis.

So, our teams are very focused on getting the right products at the right location, the right mix. So, it's always a little bit more complicated than I might say just with a quick comment. And again, that's part of the reason I want to reflect the good work our team has done there. So, are we ready to call a turn? We are relative, I believe, for our guidance in Q2. We'll talk more as we get into Q3 about -- we'll see how well we can do as we continue to drive that forward. For now, we are pleased with the result.

Got it. It seems like some of the larger more mature action sports brands are broadening their distribution, seeing some of it appear in even moderate department stores. I guess, how does that change your appetite for some of these big, well-established action sports brands?

Well, I guess I'd challenge you to find much product in our store that is from those large, well-established action sports brands. In most cases, we have moved beyond them pretty significantly. You won't find a very big presentation, if any at all.

Got it. Thanks so much.

Devin Prater from D.A. Davidson.

Hey, guys. This is Devin on for Andrew Burns. Just one quick question for you. So, we've been hearing all about the mall operators maybe gaining the upper hand as economic conditions slowly improve and new retail space is limited. So, are you guys finding it any harder to secure locations at reasonable rent rates to execute your US growth strategy?

All right. Thank you for the question, Devin. So, I've read that out there, just as you have, and seen that. And those articles typically tend to appear right before an ICSC convention, which was just completed, as you know, over the last few days, the big convention in Las Vegas.

I can tell you, we don't think of it like that. What we do, and we work -- we have a big list of target locations, right, that we would like to add into our network. We are working against that list all the time. Each deal has to stand on its own.

We know what the economics have to be, our mall partners know what those economics need to be for us to make our locations work. For us, it's -- we get down to more the micro level of we simply won't do deals if they don't work. They have to work and we have to get the returns on our economic metrics for the locations, and we have to be patient enough not to take deals that are in bad locations.

I think, again, we have a good track record that we do a pretty good job on that front. Against both the metrics as well as good locations in malls. While there may be macro issues, I'm not sure there are at this point, but there may be, that's not the way we think about it and we simply have to do deals that fit our metrics or we won't do deals.

Okay. Thank you very much.

Christian Buss from Credit Suisse.

Hi, thank you for taking my call. This is actually Darla Shea on for Christian. Speaking to the store growth opportunity, of the 40 or so new stores over the past 12 months, how are the new stores ramping that are new markets versus your existing? Are there any meaningful differences and some learnings that you can apply, maybe from the new markets to some of your more mature stores?

Yes, thanks for the question. We have a series of metrics we set out for all of our new stores. While the 2012 stores are still very early on in their growth process and many of them coming up on their first anniversary, our 2012 population is meeting those metrics. So, we are happy with how the 2012 population looks. We continue to learn from our new stores and new markets, as well as we've opened two street locations. So, we continue to monitor those and learn from those and take those results back to the Business.

Great. Thank you.

Stephanie Wissink from Piper Jaffray.

Great, thanks for taking my call. It's actually Maria Vizuete for Stephanie Wissink. I just had a quick question. As you think about the Women's business, currently, and where -- maybe if you can talk about where are you seeing that growing to over time, as a percentage of total? Thanks.

Sure. Maria, I think you are well aware that our Women's -- again, so we are clear, this is Women's Apparel. When we talk about this, our mixed structure, last year it was approximately --

11%.

11% of our sales. I thin it's bottom in this cycle had been around 10%. So, and historically, it's been as high as 15%. So, our goal is to get it as high as we can get it. Not as a mix, but we are hoping -- we are trying to move everything up at the same time.

Women's is clearly growing faster than other parts of our Business right now, so it's gaining share within that mix. Of course, our goal is to lift everything, which makes mix share a little bit tough to measure in that sense. We clearly would love to get it back to the 15% range over some period of time, and we are not limited by that at all. Again, our consumer will tell us how high it will go and how fast it will go there. Our merchants are working hard to make sure we are delivering just really great product that is relevant for our consumer to purchase.

Great. Thank you so much.

Paul Alexander from Bank of America Merrill Lynch.

Hi, thanks for taking the question. Fully appreciating that Blue Tomato is a long-term growth vehicle. Could you just maybe expand a little bit on what we might see stage by stage there? It is a compelling -- as you said in the past, compelling action sports market. What might we see in terms of acceleration over time? What might you change about the stores that are there or about their assortment or anything like that? Thank you.

Sure, Paul. Again, we are not going to open our play book here on what we are doing, necessarily. I will start by saying that, again, we have six stores in Europe, currently. Blue Tomato off stores. We said we are going to add six this year. That's 100% growth rate. That's pretty huge. You know that we've always been one of those companies that likes to make sure we are managing the growth so that it is quality growth. So, you are going to see us be just in general, very cautious about making sure that we are going to grow the business in a smart way.

I will tell you that Gerfried and his team and our team here, we are all believers in the Omni-channel model and that's the reason, I think, as you know, Gerfried has a very strong eCommerce business working across the Eurozone, and so we want that to continue to grow. So I'm hoping that as we talk about what we do here, you're going to see his eCommerce business continue to grow and flourish, it's, again, they really know that business very, very well.

But, again, because we both share the Omni-channel vision, you are going to see Gerfried and his team open more stores, but again, we're going to do it ion a way that we can -- that we want to maintain the quality of the operations. So, the goal will be about opening stores to support not just the local markets, but the idea of Omni-channel retail in Europe.

So as you think about how we're going to do that, again, I'd make sure that you're putting in parameters the idea that we're really trying to build the Omni-channel platform in Europe. We have a well-established eCommerce space to do that and now we need to do the physical part, which is build out key markets with physical stores to show first that we can do it, we can really operate all these stores we intend to build, we can do it the smart way with good-quality and that we can add the Omni-channel components to it.

So, those will be the things I would -- and that's why we say you have to have a long-term view on this. We are not going to grow the business so fast that it's a detriment to the quality of the operations. So, that's going to be the balancing point that we are going to have to balance here over the next couple of years and the next five plus years. Is the right level of growth that the team there in Europe can handle, but is pushing forward so we can build that Omni-channel market.

Great. What are the major differences about opening in Europe versus opening in the US, that you are staying aware of and that we should be thinking about?

Sure. There will be -- again, we have a real advantage here in that the Blue Tomato team has such a strong eCommerce business across the Eurozone, because we clearly have a map for key markets and the importance to the Business and how we are doing it. One of the key things from an operating perspective is going to be, again, you have to evaluate on market by market basis, what is the right way to build stores.

In some markets, they are going to be a predominantly street-based locations where we'll be on high streets. In other markets, it will be a mix that may be more mall-based. So, those are things that we are experimenting with, including even with the six stores this year to make sure we understand how the metrics work and we understand our ability to operate in each of those environments. That will depend on literally a country by country basis, what the right mix is.

Now, also, as again Gerfried's team has in the eCommerce operation, they have a very strong customer service department that serves multiple languages and all the technology to port that. As we build out the physical world, those will be some of the continuing challenges we have to think about too, will be operating in countries that the primary language isn't German and how we think about international point of sale or internationalizing the point-of-sale functions there in Europe. As well as there will be legal structure issues, marketing issues that will all be resolved on a country by country basis. It is definitely a more complex growth environment from most aspects. But, obviously, it can be done and that gets back to the idea of doing it with good quality and making sure again that we're doing it at the right speed and we can execute at a high level.

Thank you.

Betty Chen Wedbush Securities.

Good afternoon, everyone. Thanks for taking my call. Just kind of to follow-up on the earlier question, Rick. It sounds like, certainly, you are being very cautious, the team is being very thorough in evaluating the store opportunity there. So, I don't know if we are too early to talk about this, but could you share with us any initial thoughts on what is the eventual store opportunity that you could see in the Eurozone?

Then, related to that, as we think about the Company longer-term, when you've got a mix of Blue Tomato stores, Canadian stores, and then US domestic, for Chris, how should we think about the four-wall contribution. Tell us, if you could, is the US highest, Canada, Europe, et cetera, or are they fairly similar? Thanks.

Thank you Betty. We are not prepared to talk about the total European opportunity at this point, other than to say it's significant. We're talking about hundreds of stores, not in the double-digit number, but in the triple digit number of store opportunities in Europe. We don't want to get too far ahead of ourselves, again, because you've worked with us for a long time, you know that we like to show results.

As we are able to show results over the next year and two years as to what we can actually do, we can actually talk to you about the metrics then relative to what are the four-wall contributions and how we are thinking about them. Then, we will really firm up the numbers about, I think and firm up how big the opportunity is but it's got to be based upon our ability to execute successfully. We like to demonstrate that in there.

We know the potential is huge, right, in Europe and also, we need to see part of our opportunity there is about a share consolidation plan. Europe is a very tough market now. Again, that's the advantage of partnering with a team as strong as the Blue Tomato team. They are really great, not just in terms of operating, but a great cultural fit with the way we think and the way we act. So, we are encouraged about the base and the platform we have.

And then we are going to go as fast as we can go, Betty, as long as we don't do it in a way that reduces the quality of the operations. So, and then I will let Chris talk a little bit about how we think about four-wall contributions. Again, that's going to -- I can tell you, the headline is going to be, that's going to depend on the market and how we think about it. Is not going to just be the four-wall contribution percent, it's going to be about the contribution dollars. Chris?

That's correct. As we think about both Canada and Europe, from a global perspective, as Rick mentioned, it will be different within different pieces of those markets. We would expect those to be higher contributors on the top line, with a more -- with a higher cost structure. So, that the overall four-wall contribution on the bottom would be a little bit less than you would expect from where we are today. But, the dollars would be more or comparable.

I'll preface that with also saying, in this Omni-channel world, you also have to look at these two playing together. That the web will be helped by the stores and the stores will of course be helped by the web. It's hard to totally look at just the four-wall contribution because there is integration between those two channels. That's how we are looking at it, as we move forward.

That's really helpful. If I could have a follow-up with Rick again in terms of I think one of the key areas again is investing in talent. Clearly, I know you've listed a number of strategies. But, are there really key areas where you really like to further strengthen the team and that you can share with us?

I would tell you, Betty, that I think the leadership roles in the executive level are set and we feel comfortable with where we're at there. There will be a number of key technical needs that we are going to have within the organization and this really relates to our ability to execute in the Omni-channel world. And the US, right now, is leading the way in the idea of Omni-channel retail.

I have to tell you, I am very pleased with where we are at in this effort. I think we are moving towards being one of the leaders here in the US and I know we don't always share all the things we are doing, but we are doing a lot. A lot of what we are doing is we are seeing very strong results from. To execute in this, you really have to view it -- you have to -- you can't view it as web commerce and POS commerce. You need to view it as commerce.

To do that and make that come alive, we need a number of technical resources and you should think about those are the kinds of areas I think that will be key growth areas for us, will be our ability to support this from a technological point of view and then, from a particularly, from potentially a marketing point of view as it relates to direct marketing tactics and more personalize messaging for our consumer base.

Of course, as you know, that's one of the reasons the loyalty program is such an important foundational piece. Because, we need to -- we need to, in exchange for learning more about our customers, we are rewarding them for sharing more of their information so that we can, over the long term, be more relevant in how we communicate with those customers.

It's going to not really, I don't perceive it as much at the executive level, in terms of the talent needs we talk about. It's more about talent needs throughout the organization to execute again, all these initiatives. We have a lot of ambitious goals. It's how we are going to execute all these initiatives across the organization. Again, when I say across the organization, I mean both here in our North American team, as well as in our European team.

That was very helpful. Thanks so much. Best of luck.

Thanks.

Jennifer Black from Jennifer Black and Associates.

This is actually Carla White for Jennifer Black. I just wanted to ask about you, I know you talked about your strategy on 500 to 600 stores. I wanted to find out about what you were thinking as far as the Outlet business and how that performed in the quarter? Thank you.

All right, Carla, thanks for the question. Again, to be clear, we are talking about 600 or 700 potential stores in the United States. Then, Canada and Europe would be additional on top of that. Again, I would like to add to what Chris said in his earlier comment about, as we think about this, I think you have to think about it as stores in our eCommerce operations as integrated selling platforms. So, when we talk about adding stores, we are talking about, also, implicitly adding volume online, too, so we're clear, and as Chris said, they always go both directions.

Now, as it relates specifically to Outlet business, our target list of stores, and when we talk about the 600 to 700 number, includes outlets. Outlets is not in addition to those -- to that target group of stores. It is inclusive of outlet, our outlet program, and we have a very significant outlet business today. To sum it up quickly, it would be -- kind of as Chris described earlier -- in many cases, higher average sales results in our outlets, slightly lower margins, but more gross margin, more contribution dollars from the outlets.

So, there would be an example in the US, something we've done that would be reflective of how other, potentially other countries like Canada may have higher rents because they're from very high productivity centers, how we expect those centers would work there in Canada would be more analogous to our outlet business here in the US on average.

Ladies and gentlemen, this concludes our question-and-answer session for today's conference. I would now like to turn the conference back over to Rick Brooks for closing remarks.

Thank you Phil, I appreciate that. Again, we just appreciate everyone's interest in Zumiez and we'll look forward to talking with you in August for our second-quarter results. Thanks everybody.

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