Zumiez Inc (ZUMZ) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated second 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 the Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez Incorporated's 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's filings with the SEC. I would now like to turn the call over to Mr. Rick Brooks, Zumiez's Chief Executive Officer. Please go ahead, sir.

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

Sales results for the second quarter were within our guidance range, and while it is our objective to outperform this level of comparable sales growth, we're pleased with our execution in what proved to be a tough retail environment. Earnings in the quarter exceeded our projections at $0.16 per diluted share bolstered by total sales growth of 17% and healthy flow-through to the bottom line. Now, with the back-to-school selling season nearing completion, we have seen sequential improvement of a 3% comp in August, demonstrating that when the consumer is shopping, we are capturing market share through our unique product offering and sales experience.

As we said over the past several quarters, our focus remains on building a sustainable long-term foundation for growth and we are making strategic investments along with the continued development of our people that we believe are critical to our ongoing success. To this end, we are dedicating considerable time and resources toward increasing the productivity of our current stores, developing a leading omni-channel platform and growing our footprint domestically and abroad. Let me just take a moment to let update you on our progress.

In North America, we continue to execute on the opportunity both in new markets and existing markets to build our portfolio of stores. This quarter we opened 26 new stores, including 21 in the US and 5 in Canada. We continue to plan our business in the US to be between 600 and 700 stores long-term with our Canada store count to be approximately 10% of the US.

In Europe, we opened one new store this quarter bringing our global store count to 529 locations at the end of the quarter. We anticipate opening five stores in Europe this year. We view our European business as a long-term investment and as such, our approach to growth in this region is deliberate and we're mindful of growing our business responsibly, keeping to our core values and expanding opportunistically to gain market share. In the highly fragmented European market, we believe we have a great opportunity and ability to extend our presence across the whole of Europe, and we remain optimistic about our positioning there. As we expand, we are evaluating the level of penetration we have in each of our markets holistically, meaning we consider web and retail in combination as we consider expanding our presence in any given market, allowing us to optimize our store portfolio, increased store productivity and target the right return on our investment. Our goal is to reach all of our gold markets with the right number of highly productive stores and a strong omni-channel presence that seamlessly extends our culture and our unique perspective on the action sports market wherever and whenever our customer interacts with us.

To that end, over the last several quarters, we have made considerable investments in our e-commerce channel, including the launching of new websites for both zumiez.com and blue-tomato.com in the second quarter. The launch of these sites enhances our omni-channel business by giving consumers quick, easy, 24/7 access to our highly differentiated assortments of products while enhancing the buying experience.

In the short-term, there could be variability in our sales results, particularly for our consumer resorts to pre-back-to-school shopping levels. However, we feel confident in our positioning for the back half of the year and believe our recent comp performance reflects the strength of our product assortment and our people as we finish the back-to-school season and prepare for holiday.

As a management team, we plan our business for the long-term, and investments we are making now towards strengthening the foundation of our business are born out of our ambition to be the leading branded action sports lifestyle retailer in each of the markets we sell. With each step we take towards that end, we are cognizant of the culture, people and unique approach that are fundamental drivers of our success to date and which we believe will be critical to our success in the long run. With that, I'll hand the call over to Chris.

Thanks, Rick. Good afternoon, everyone. I will briefly review our second quarter results, go over our August sales results, review our guidance for the third quarter and provide some insight for the back half of 2013. Second quarter net sales were $157.9 million, up 16.9% over the second quarter of 2012. Breaking that down by region, North American sales were up 13.7% and European sales were $6.0 million in the quarter. Same-store comps were up 0.9% in the second quarter and comparable e-commerce sales, which are included in our consolidated comps, increased 19.1%. E-commerce represented 8.8% of our overall business in the quarter.

In terms of category performance, hard goods, juniors and footwear were positive while accessories, mens and boys comped negative. Our topline also benefited from having 52 additional stores in the 2013 quarter compared with the year-ago period and the impact of the calendar shift moving the first week of back-to-school into the second quarter. Gross profit was $55.1 million in the second quarter of 2013 compared to $46.4 million in the second quarter of 2012. Gross margin was 34.9% in the quarter compared to 34.4% in the year-ago period. Gross margin improvement in the quarter was primarily a result of $0.5 million in prior-year costs associated with the relocation of our e-commerce fulfillment center and $0.5 million in prior-year inventory step-up costs in conjunction with the Blue Tomato acquisition. Consolidated product margins were down slightly in the quarter.

SG&A expenses for the quarter were $47.3 million, or 29.9% of net sales compared to $42.6 million, or 31.6% of net sales in the 2012 quarter. Included in SG&A in the current year period is $1.7 million in Blue Tomato acquisition-related costs made up of $1.0 million of contingent incentive payout accruals and $0.6 million for the amortization of intangible assets. Included in SG&A in the prior year is $2.4 million of Blue Tomato acquisition transaction costs as well as incentive payout accruals in the amortization of intangible assets. Also included in the prior year is $0.8 million of costs for the relocation of our corporate office. SG&A decreased as a percent of sales in the quarter as a result of the net reduction in these costs and leverage our cost structure on a 16.9% increase in sales.

Second quarter operating profit was $7.8 million, or 5% of net sales compared to $3.8 million, or 2.8% of net sales during the second quarter of last year. This brings us to net income which was $4.7 million, or $0.16 per diluted share in the second quarter compared to $2.1 million, or $0.07 per diluted share during the 2012 second quarter. Included in the results for the 2013 second quarter are costs of $1.7 million, or about $0.04 per diluted share related to the Blue Tomato acquisition. Included in the results of the prior-year quarter are Blue Tomato acquisition-related costs of $2.4 million, or $0.06 per diluted share and $1.3 million, or $0.03 per diluted share of costs associated with the relocation of our e-commerce fulfillment center and corporate offices.

Moving on to balance sheet highlights, we ended the quarter with cash and current marketable securities of $95.0 million, down from $96.8 million a year ago. This decline was driven by capital expenditures related to new store growth and approximately $30 million 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 assumed from Blue Tomato and no outstanding balance on our revolving credit facility. Capital expenditures in the quarter were $8.1 million, primarily driven by the buildout of new stores.

Inventory increased to $113.2 million at August 3, 2013, up 13.6% from $99.7 million at July 28, 2012. Throughout the year, our inventory balance may be impacted by the shift in the calendar resulting from the 53rd week fiscal 2012. Inventories per square foot was up slightly, and we remain confident in the quality of our inventory as we move into the back half of the year. Year to date, we have 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 August 3, 2013, we had $12.5 million remaining in our stock repurchase authorization.

Now to our August results, our comparable store sales increased 3% for the four-week period ended August 31, 2013 compared to the four-week period in September 1, 2012. In the prior year, comparable store sales increased 3.7% for the four-week period ended August 25, 2012. Total net sales for the four-week period ended August 31, 2013 increased 14.3% to $85.9 million compared to $75.2 million for the four-week period ended August 25, 2012. The increase in comparable store sales in the period was driven by an increase in comparable store transactions and an increase in dollars per transaction. Dollars per transaction were up for the four-week period due to increase in used units per transaction and an increase in average unit retail. During the four-week period, juniors, hard goods, accessories and mens posted positive comps while footwear and boys posted negative comps. Year to date, 2013 comparable store sales increased 0.8%.

Turning to guidance, as always, I'd like to remind everyone that formulating our guidance involves a some inherent uncertainty and complexity in estimating sales, product margin and earnings growth given the variety of internal and external factors that impact our performance. Before I delve into the guidance for the quarter, I want to just reiterate the comments Rick made earlier. As our August results demonstrate, when our customer has a reason to shop, we believe we are a prime destination for them. While our sales results have improved in this peak selling season, our outlook for the remainder of the year remains cautious, particularly during the nonpeak periods as we estimate there may still be volatility in the consumer shopping behavior. Likewise, because this is a heavy investment year, we do anticipate that the strategic initiatives we are currently undertaking to build a strong foundation for sustainable future growth will in the short-term create some drag on our margins.

With that in mind, we are planning third quarter comparable store sales to be in the range of flat to an increase of 2% and total sales to be in the range of $187 million to $191 million. We expect consolidated operating margins to be in the 10% to 11% range with diluted earnings per share between $0.39 and $0.43. Included in our third quarter guidance is an estimated $1.6 million, or $0.04 per share in costs associated with the acquisition of Blue Tomato consisting of $1.0 million in the contingent incentive payout 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 third quarter, we estimate an unfavorable impact of approximately $7 million as the back-to-school sales week moved out of the quarter into the second quarter.

Now, a few comments on our thoughts for the year in total. We are planning our comparable store sales to be positive in the back half of the year, but as I mentioned, we're being cautious with our outlook and we believe our 2013 comp growth will be lower than 2012. Our current projections for 2013 product margins excluding the impact of inventory step-up in the prior year are flat to down slightly.

We have been making strategic investments that we believe will reap long-term benefits focused on enhancing 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. The extra week in fiscal 2012 will impact the fourth quarter unfavorably as it is a 13 week period for the year compared to 14 weeks in the prior year.

We are currently planning to open 58 new stores in 2013, including 9 in Canada and 5 in Europe. Through August 31, we have opened 42 stores, including 8 in Canada and 2 in Europe. We estimate our net store growth after closures to be 52 to 54 stores. As a reminder, 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 will be between $36 million and $38 million, a decrease from $41 million in 2012 and will primarily be the result of new store openings and planned store remodels. We also expect depreciation and amortization to be approximately $27 million, an estimated 16% increase over fiscal 2012. We anticipate our annual effective tax rate to be consistent with our fiscal 2012 results. Finally, our weighted average shares of 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 the 0.2 million shares repurchased year-to-date. Any additional share repurchases during the year from the $12.5 million remaining in our authorized repurchase program will further reduce our share count. And with that, we will now open the call up for your questions.

Thank you, sir.

(Operator Instructions).

Sharon Zackfia, William Blair.

Good afternoon, hopefully you can hear me okay, I've got a weird connection. I actually wanted to ask more than one question. I just wanted a clarification on Blue Tomato and how the revenues trended in this quarter. I think it's -- you lapped the acquisition at the beginning of July. So, just any clarity there? And then secondarily, in terms of the trends you're seeing, it sounds like you had a good August and you want to be conservative on the thought process going forward. Have you seen any kind of waning in your business? Anything that particularly gives you concern relative to Zumiez's business rather than the overall noise we're hearing throughout apparel and mall traffic?

I'll let Chris handle the Blue Tomato question, Sharon. And we hear you fine, by the way. As we look at the guidance that we gave for the third quarter, again, I want to reiterate that we feel pretty good about the 3% comp relative to the sequential improvement over July. And as Chris said, when you see an increase in transactions, dollars per trends, unit per trends, AURs all rising, that makes us feel pretty good generally, Sharon. Now, that being said, if we looked at the weekly cadence throughout the four weeks of August, we would tend to see that the beginning of the month was stronger than the end of the month. And I think furthermore, that as we think about what's going on generally in the consumer world today with where people are spending their money, that no new fashion trends out there, really, in terms of major drivers of the business. I think from our perspective, we, as we said in the comments, can envision that consumer spending might revert back to the pre back-to-school trend line. And I think that's what's reflected in our forward guidance relative to the zero -- flat to 2% comp number for the full quarter. Chris, do you want to talk about Blue Tomato and any color there?

Absolutely. As we said in the prepared remarks, Blue Tomato sales in the quarter were right around $6 million. And as you recall, their business is heavier weighted towards the winter season and the late Q3 for us and Q4. From an overall perspective, their comp from July forward is in the comp guidance that we gave, but what I can tell you is that in a pretty tough European environment, they've performed very well and comped positively. We're still encouraged by where they're at, but it is a tough environment over there. They're comping positively ahead of the overall chain and are included in our numbers we provide today.

Okay. Thank you.

David King, Roth Capital Markets Partners.

Hi, this is actually [Cilla Soto] on for Dave King. If you could talk a little bit about the promotional environment and what you're seeing there?

Sure, I'd be glad to do that. I guess the story with back-to-school is the same story that it's been for the last few years, which is that it's been incredibly promotional in the teens sector. And our whole goal, as we've always said, is to position ourselves so that we don't have to be as promotional as the rest of the mall, and I think we continue to do a pretty good job around that effort.

I think that's reflected, again, in the free comp and again, the strong stats that Chris mentioned in his comments relative to, again, gain in transactions, gain in AUR, DPTs and UPTs, So, we feel pretty good about our own positioning, and I guess I would say our reason we're able to achieve that positioning is that we've always had a really simple goal which is, we want to represent our brand partners well and we want to be the go-to place for our brand of partners through having a unique, really distinctive culture, great sales experience in all of our channels of business. And that those things, when done right, and being the preferred partner for our -- preferred retail partner for our brands allow us to be more full price, and back-to-school not only full price, but our goal is to be full margin. So, as you see us construct promos around the back-to-school window, that is still our goal in terms of what we're trying to do from a product strategy point of view. But it puts us in that unique position where I think in spite of an incredibly competitive price-sensitive environment, we're able to distinguish ourselves in ways that I think a lot of retailers can't.

As we look at longer term scenarios, again, do we see this price competition waning over the next year? We haven't. In the past few years, my inclination is to say we won't over the next few years, and I think it's fundamental to some of the things we've been talking a lot about a for a very long time in our calls, which is that we think the last few years have been about share consolidation in the marketplace, the next few years is going to be about share consolidation. Driven a lot by fundamental changes in consumer behavior relative to new technologies, driven by -- not technology driving people, more to the direct channel, which is why we have such a strong emphasis on omni-channel and our positioning there.

That's why we believe that winners will win in the share consolidation game. They continue to win if you execute at a high level. And it's fundamentally why we think that there's going to be a very competitive marketplace. The root of it all, I think there is still, particularly in the teen world, too many stores. So, longer-term, I think were going to be facing a competitive marketplace. And our goal is to really go out and be uniquely positioned, and I think August is reflective of that our ability to do that.

That's helpful. And then if you could just talk about the negative footwear comp in August, we thought it would have been stronger given the strength in certain key brands at other retailers?

No. Certainly, I can give a little bit of color around that is for us, we're still facing some trends relative to the performance footwear, athletic footwear, that area. Although our biggest issue in footwear over the August time period related primarily to our women's footwear side and less so our mens.

Okay, great. Thank you.

Dorothy Lakner, Topeka Capital Markets.

Just a question, Rick, about juniors versus young mens. You saw a nice positive, from young mens, but juniors has been positive for some time. A lot of other teen retailers seem to be having their problems with that girls business, not the young mens business. So, do you have any thoughts on what's going on there and how you're able to really get both businesses going at a critical time for your business?

Sure, I have thoughts. I do have thoughts about it, Dorothy. Now, as always, I'll caution whether or not my thoughts have much substance to them, but I'll give you certainly my perspectives on where we're at and why I think we're seeing what we're seeing in the womens -- in our women's business and generally maybe more broadly in the womens business.

I think to a certain extent what we're seeing in our womens business is a combination of really two things; there's no doubt that we're executing at a much better level than I would say we did three and four years ago. And over the last few years, we've talked about some of the changes we've made in how we're managing the business internally, our change in our staffing. I think we've come up with a better long-term strategy in what we're trying to do with our womens product. We've become faster in terms of how quickly we're moving on the womens side of the business, and I think we found a good way to do all of those things and be consistent with our lifestyle orientation, which is very important to us as a lifestyle retailer.

Now, beyond our -- the second thing I think beyond our own ability to execute, I think there are some cyclical trends. I think that why fast fashion is still huge and driving a lot of volume, I think there is a trend back towards young women wanting to see more brands, perhaps better quality in some of the clothing that they wish to purchase. And so I think that's why you're seeing us be item focused in some key areas in our business as well as value focused in terms of how we think about putting those outfits together for our young junior consumer. So that's, in a nutshell, my take on it, is the macro side of it, what's going on. And I think you see that generally, I think that those of us that resell brands are doing a bit better on the womens side of the business and finding ways we can put together compelling strategies there, and those that are predominantly just fashion-based are in a very competitive marketplace.

And other young mens side, would you say it's a question of that particular customer is more volatile, more here at sometimes, kind of absent at other times versus the junior customer?

I think, again, we have some -- we have our, as usual, our own issues in mens relative to the strength -- the historical strength of our mens business, Dorothy, which is, as you know, the largest part of our business. And we have some challenging numbers we're going against in mens over the last few years. So, we have issues relative to some of the trends there in mens. But I think what is encouraging for us is, again, as we said about the August results, as you saw our mens business trend positive and comp positive in August, and I do think that speaks to what you're describing which is a young man that in this world buys when they need to buy, back-to-school they need to buy.

Yes. Great, thanks.

Thank you.

Betty Chen, Wedbush Securities.

I was wondering in looking at August, and I know it is one month and certainly, there were some drivers to get the traffic into the stores, but Rick, in looking back, and with all the metrics trending upwards during the month, were there any learnings for the team to think about some strategies to execute in the back half during some of the low periods to continue to entice that customer? And then separately, in terms of the omni-channel initiative, can you share with us any sort of reads so far from the revamped website and then what are some initiatives that we can still expect to happen in the back half? Since I think Chris had mentioned e-comm did increase by 19%, which is a really robust number. Thanks.

Okay. Let me see if I got all that, Betty, and Chris will help me out here as needed. So, we'll start with our learnings from back-to-school as we look into the back half of the year, particularly around what did we learn that could drive volume in the lower -- perhaps the lower volume time periods? We -- to be clear, we're not sitting still trying not to drive volume, we didn't, and by the way Betty, in the first six months of the year. We're thinking about the way we san communicate with our customer to try to present them with unique products that are -- will entice them to come in and purchase. But again, I think it's, as Dorothy was saying her comments, I think it's young men tend to buy, which is still the predominant piece of our business, tends to buy based on need. And I don't think there is a lot of unique fashion for young men right at this point in time and why we have a lot of brands that we're very excited about, up-and-coming brands that we see great opportunity with and some well-established brands that continued to perform well. There just hasn't been a lot of newness in that side of the business.

So, we are not going to stand still as we look into the back half of the year. We'll continue to try to do things through uniqueness of positioning. For those consumers who want value, we'll try to deliver value messages to them. We're in the beginning phases now of having anniversaried our Stash program, our loyalty program. I've seen how we can use those -- that information and those consumers to, again, appeal with more relevant messaging for them. So, with the very early stages of that effort, Betty, as to how we'll do that and again, our primary emphasis for Stash over the first year has been just acquiring members into the program. Now we're moving from that to, how can we really serve these members better through more relevant messaging and really delivering product that they find of value and is relevant for them. So, we're working hard to do all those things, and we're going to try to do all those things as we look at the back half of the year.

Comment on the revamped website, We had a few objectives with the revamp of both the zumiez.com and blue-tomato sites, and first and foremost was to provide a platform that would be -- have greater stability and higher levels of uptime performance. And performance across the statistics for what we anticipate over the next year and few years is going to be much, much higher volume for these platforms. That was really a very simple and important goal for us. In both cases we upgraded our platforms to the more current versions of the underlying platforms used in both sites. So again, that was really mission one. Let's improve the stability, improve the performance levels and -- because we expect that the direct channel is going to continue to grow over the next five years. So, let's position ourselves so we're in a good position to handle that growth.

The second element of the website was to, again, position ourselves for the website as the foundational pieces for our continued omni-channel evolution. We have lots of things that we're doing there. We're way more developed in the US, as you would expect, than we are in Canada or Europe because those are growing businesses at this point in time, and we need to establish the base of those businesses before omni-channel really becomes a major relevant piece of it. But we are looking at how we're positioning our ourselves through these new websites for further evolution again within our omni-channel efforts.

Which takes us to the last part of your question, which had to do with the back half omni-channel initiatives. And we have a number of them that we're shooting for in the back half of the year. I'm not sure, again, based upon how aggressive we try to be here, whether we'll get all of them. But right now our efforts are primarily focused on omni-channel features that we would be putting into place at this point for holiday, I'm not going to go into much detail about what those omni-channel efforts are going to be because that's a competitive issue for us. But we're encouraged and I'll just remind everyone what I frequently say about omni-channel efforts was is a simple message, is that even if it at some point in the future years we get up to 15% or 20% of our revenue in the direct channel, that still means that 80% to 85% it is going to be in our store, in our physical store environments. And in that world, we are making sure that technology serves our customers and serves our salespeople and does not go in front of those real human to human engagements. We're keeping that idea central to what we're doing in terms of how we're building our omni-channel efforts of really using technology to support human interaction in the physical in-store environment.

The things we're doing, we're were seeing very good results from, Betty. We're very pleased with our results there, but we have a long ways to go. I would tell you we're still in the early stages of how omni-channel is going to play out over the next five years. And again, I'm very encouraged because I think the quality of your -- of what people underestimate is the importance of the quality of sales teams in the physical stores. That's what really is going to drive omni-channel, because that's where most of that's going to be, that still where most of the customer is going to be even over the next five-year window, and we clearly excel at that -- at serving customers that are very high level in our physical stores. So, we have a long ways to go. I still think we're in the early phases of omni-channel. I'm not going to talk about the details of what we'll be doing for the fourth quarter; we're excited, we have a lot more to do for fourth quarter, we have a lot more to do over the next few years, so much more work to come.

That was really helpful, Rick. Can I sneak in a quick question for Chris there? When you mentioned that this will continue to be a heavy investment year, does that mean that we should look for the back half SG&A growth to be in line with the first-half run rate?

Yes. It actually -- the SG&A growth will be down slightly from the first-half run rate. And the main reason there is because part of our investment this year is bringing Blue Tomato into the fold for the full year. And as you can imagine, in a growth business, they are operating at slightly lower margins, and so we are now anniversarying that. So while there is still investments that we have in the back half of the year, the growth rate shouldn't be as substantial as it was up front.

Okay, great. Thank you so much. Best of luck for the rest of Q3.

Thanks, Betty.

Ed Yruma, KeyBanc Capital Markets.

Rick, it seems like other retailers are starting to copy from your playbook of getting exclusives from some of these emerging or more in demand brands. How do you think about that as a strategy for Zumiez? And has it been more difficult given that others are trying to copy some of these strategies?

I guess my initial response to the question is, that's always the nature of the world. What's really important is that you clearly want to be the retailer that people copy. I think that's foremost in our mindset, which is let's always be out there, let's always be thinking about what's next. Let's always be engaging with our brands and our customers in interesting new ways. And we think about that not only in what goes on in the in-store environment, that's what we think about relative to our omni-channel experiences and how we think about what we do online, whether that be at our web store or our marketing efforts through social channels, or the physical marketing efforts. We want these brand experiences to be unique and so while others may copy us, you are going to continue to see us push ahead, evolve, and you're going to continue to see us experiment with new things as we work over the next few months and the next few years. I'm pleased that we're in a position that people are copying us, I guess is the top, the most important message in responding to your question, Ed.

Got it. And you're a little bit different than some other retailers because you offer what you entitle Zumiez Outlet Product Online. Especially as online grows in its contribution to the overall business, how do we think about the mix of full price versus discounted goods, and do you expect that mix to change over time? Thanks.

Sure. So again, thinking about this online discount business, I'll take -- I'll broaden your question a bit. My answer to your question a bit more broadly, Ed, is when we think about our outlet business, our discount business, right? Again, as I said, while we do have some liquidation to do, our goal is always to minimize the liquidation have to do to try to maximize margins and in some cases, buying the product for our outlet efforts. Whether that be product we're making with our branded partners for that purpose or our off-price buys we are doing with our branded partners. So, our goal is to optimize the discount business relative to whatever channel makes most sense. So, there are some categories of product where we are much more effective selling it in the online world than we are in the physical world, and others we're more effective liquidating product or selling discounted product in the physical world.

I think from my perspective, this is one of those areas that we, with some hard work and effort that we can actually improve in our business over the next few years, is how we think about running the outlet side of our business. I think we can manage it more intensively than we have, I think we, again, using what I think are probably are industry-leading assortment planning tools here, that we have some real opportunity and increasing the effectiveness of this business in all channels. So, over the next few years, Ed, I'm hoping that, again, that we want all channels to grow in this world, but I'm hoping there's lots of ways we can continue to deliver value to our consumers again at full margins for us, and while at the same time, helping our brains out in terms of being able to liquidate product. And again, we want to do it in whatever channel makes the most sense at the highest margins for everybody. And that's simply is, a long way to say about it, that's what our goal is and again, we're trying to look at holistically and not on an individual channel basis, but on an integrated channel basis.

Great. Thanks so much.

Steph Wissink, Piper Jaffray.

Just a couple of questions on specifically the merchandise margin guidance. I think Chris, you mentioned flat to down slightly for the year. Is that based on mix or is that something pricing related based on the promotional cadence that you have? And then the second, just as a follow-up, I think you also indicated, Chris, that same-store sales, if they are positive for the year would imply some operating profit improvement year on year. Is that operating margin as a rate or are you talking about profitability in total dollars? Thank you.

Great. So, I'll start with the merch margins, I said they're going to be down slightly. That's excluding the inventory step up charges that we took in the prior year. And as you know our margins last year were some of the highest margins we've ever had. And we also -- we're anniversarying some pretty strong margins in the prior year. There's always mix shifts as our categories move throughout the year, which is part of it, I think the other piece of it is Blue Tomato at this point is operating slightly lower than our North American margins. So, as we include that as a higher percentage it will pull down the overall margins. It's really the two pieces there of being up against really strong margins in the prior year and then our Blue Tomato business coming into the fold. And in regards to the operating remarks that I made, assuming we have same-store sales, we expect to have higher operating dollars. As we mentioned, with the investment year we do expect to deleverage slightly, but we think we can provide a higher dollar range on a positive comp.

Thank you. Best of luck, guys.

John Morris, BMO Capital.

It's actually Janine Stichter on for John Morris. I was wondering if you could talk a little bit about the cadence of back-to-school spending. I know in past years you called out the fact that you felt like the customer was just shopping later and later for back-to-school, and I want to know, based on what you saw in your stores if you felt like that was happening this year? And if so, how you're thinking about September? Thanks.

All right. Again, I'm not going to make any comments beyond what I've already said, which is that we actually saw our sales decelerate across the four weeks of August -- our comps decelerate across the four weeks of August, and again, that thinking is filtering into our guidance that we provided for the full quarter. And again, as we said, we're not -- we think there is a possibility that with where the consumer is that at this moment, buying higher ticket items, that we could see it revert -- we could see consumer spending in our sales trend line revert to where we were in the nonpeak periods. So those pieces, Janine, are what are underlying that overall guidance, and we're not going to comment any more than what we've already said.

All right. Thanks a lot.

Christian Buss, Credit Suisse.

I was wondering if we could talk a little bit more about the guidance. Backing out the $7 million impact from the shift in sales, it implies a fairly substantial uptick in the comps into the double digits in August. I'm trying to understand how much conservatism is baked in to the comp guidance of zero to 2%.

Christian, I'm not sure I fully understood the question. Are you saying your coming up with a high comp for Q3?

Well, that 3% comp includes -- for August includes a drag of $7 million, correct?

No, no. The $7 million shifted into Q2 and out of Q3. So, when we talk comp, we're talking really date to date, not the calendar overall.

Okay. So, you're adjusting that?

Yes.

All right. That's helpful. Can we talk a little bit about systems investments that you've made? Where are some of the initiatives towards regional and merchandising going? Can you talk a little bit about what upcoming plans you have to improve the assorting and the regional merchandising abilities?

Sure. I'll take that, Christian. And again, as I frequently say here, relative to our thinking, our assortment planning is we -- I think we're again one of the best at microsorting of stores. And we don't think about it just on a regional level, we think about it more and more on an individual store level. I always want to try to encourage you to think about our abilities here on a continuum, because this is something we've been working on for the entire 20 years I've been around Zumiez, and every so many years we need to think we take a look at what we need to do some to support our buyers. And based on what's going on in the market, not -- which includes the scale of our business as well as changes in the marketplace.

So, the tools that we put in place about four years ago, which when we started making the latest upgrade to our assortment planning tactics, which was a tool we put into place about four years ago and then we spent the last few years implementing. I tell you today that is essentially fully implemented, that we are working through and constantly evolving our ability to microsort stores. I would tell you we had some very, what we believe is early indications back-to-school that we had a few key categories where we were able to use the tools in new ways on a very, very detailed level that we are very encouraging to us in these categories. Now, it's early, we'll wait till we get completely through the back-to-school to make our full assessments there. But we are working at -- again, this is not a place we've made investments we're stopping, this as we constantly are looking at, how can we continue to evolve what we're doing? I tell you that four years ago we didn't fully appreciate. We knew we needed to improve our planning abilities to microsort locations, but I don't think we fully understood what the shift towards omni-channel business meant in terms of our -- how important the change in implementing this new tool was. And it's become even more important as we think about planning in a channel-less world. Right? And how we think about our business from planning on an overall perspective. We're going to continue to evolve there, Christian. I think we have a really good roadmap for the next, I would tell you two or three years, in terms of what we need to continue to do in terms of microsorting stores.

I think there's still tremendous amounts of opportunity. In fact, I can never see the opportunities waning here, we can get better and better and better at how we think about microsorting stores. We have any new investment we need to make here? I don't think of any great significance, no. I think the tool we put in place, we will be making regular investments in it, but not of a major dollar -- no major dollar investments as far as I see at this point in time are going to be required to further enhance what we're doing. It's more how we execute now and then enhance the tool on an incremental basis than any major dollar expenditure that we'd be looking at.

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

Thanks.

Paul Alexander, Bank of America Merrill Lynch.

Chris, just to follow-up on this topic of investment, looking further out, do you see this just as a heavy investment year, or do you think see Zumiez as being in a heavy investment phase that could last multiple years? When should we think about the investment entering a less heavy phase or losing the word heavy? Thank you.

(Laughter) Yes. Thanks, Paul. It's something that we think about a lot as well. Clearly, the growth we're going through in Europe is part of the investment we spoke about, and that will be something that will take time. It's a long-term investment. As we're looking at it, while we always plan some investments in every year, this year it has more than investments than others. And I think as we think to the future years, there is going to continue to be some level of investment. And at this point, we don't have an expectation that it's greater than this year, but we'll continue to evaluate that as we determine what we need for our business long-term. But again, I'd just add to that when we think about these investments over the long-term, we look at these investments as things that we think will pay back over the longer-term model. And that's why we think they're important to do and so we really look at it with a longer-term focus.

I guess I'd add to Chris's comments, Paul, that we will give you greater clarity as we go through the planning process for '14 here and as we get into March of next year. But I would tell you as the CEO here, right, that you're constantly paranoid about where you're at and how fast the consumer world is changing. We need to continue to evolve and move quickly, just like my comments on assortment planning a moment ago. We've got a great platform in place but we've got to continue to work really hard. And the world, I would tell you from my perspective, you can't run -- we're running harder and faster than we've ever run and so that means as we think about investments, they're really going to fall into two areas, capital investments, right? And new locations, as Chris said, our investment in Europe. And human investments where we're going to need to look at, can we grow the talent we need to do the kinds of things we need to do or do we need to make investments in talent in specialized areas to really move the ball forward? In some of these ways that are going to be required by consumers, particularly prone from the perspective of omni-channel? So, from the paranoid CEO, worried that we have to continue to push harder and go faster. As Chris said, we're going to continue to see investments, but the goal is that they're going to have a payoff and a significant payoff as we continue to see over the next five years our business grow and operating margins increase.

Great. Thank you very much.

Jennifer Black, Jennifer Black and Associates.

This is actually Carla White for Jennifer Black. Thank you for taking my call. Just a couple questions. Can you talk about, I know you briefly talked about, Rick, the Stash loyalty program, but can you talk about what you're seeing so far as far as buying trends and any learnings that you've had since you've anniversaried that program? Thank you.

All right. I'd be glad to do that, Carla, and give you some sense of where we're at. It's been a, I would tell you, a good first year for us for Stash. Again, as I said, the primary emphasis has been on acquiring members in the program. And as you know, we're trying to do something fairly unique here, brand appropriate for the Zumiez brands and brand appropriate for our branded partners because our goal, again, is not to discount, it is to provide unique experiences and unique products for our Stash loyalty members.

Again, the first year has primarily been a focus on, let's really sign people up. And this gets back to the quality of your sales teams in your stores, people to be able to sell the approach, explain it because it isn't just as simple as get discounts, that's an easy thing. We have to explain something that's a little bit more complicated. But through, just going through the first year, which we anniversaried in early August, we achieved the 1 million member mark in Stash, which we're pleased with and think is a good first year milestone for us. We're now going to move and we're in the process of building out, and this is, as I said earlier, one of these areas where you also look at your internal talent needs. So, we've added some talent to our team that has experience with loyalty programs, and we're now in the process of saying, okay, we're going to move beyond -- we'll continue to add new members to the program, but now we're going to move beyond, how do we really engage in all new ways and find ways that we relevant in these consumers -- in relevant ways for them in not only what we may want to offer them in terms of the experiences of product, but doing it to make sure we're doing the right channel that each consumer prefers.

So, we're now moving to that planning phase of the program and we're excited about that opportunity. We think, again, over the next three years, three to five years, that the Stash program has a lot of potential for helping us build our business.

Great, thank you. And then can you talk about your Canadian stores and what you're seeing there as far as any traffic trends, any additional color you could provide versus the North American stores?

Great. In regards to Canada, I would say we are really thinking about that as North America at this point. We are about halfway through our growth process here, and our Canadian stores are operating on plan, where you think they'd be. Their comp rate is above the North American chain, which would make sense, where they are in their growth curve and our first stores there are just getting to where they would be in that more mature level. And so Canada's performing on plan and we're happy with how it's operating.

All right. Are there any additional questions?

Tom Filandro, Susquehanna Financial Group.

That was some odd silence. Congratulations, guys, for executing in a really tough environment. Two quick questions. Can you give us any update on the private label business, how that penetration has been like year-over-year and any go forward plans? And I was just curious in August, did you experience any regional variants in the business? Thank you.

All right, Tom, glad to take a shot at it, although I'm not going to give you much flavor about that. And you've heard me say over the years that we don't like to talk about private label on a seasonal basis because you've really got to measure it on a full-year basis because different categories solve different levels. So, anything I'd tell you relative to August may not be representative of a full year. So last year, essentially, we were pretty close to flat in private label as a mix. Chris, what was the number for private label last year? About --

17%, 18%

17%, 18%. I think just under 18% of our mix, and I think it actually declined just slightly, maybe a tenth of a point, something like that, Tom. We're always looking at how we can grow the private label business, but not at, so I'm clear, not the expense of our branded business. We'd like to see both grow, right? And private label, again, from our point of view serves to complement and supplement with our branded partners do. So, nothing's really changed, if you think about it. We'd love to see it grow, it's grown over the last five years, but so has our overall business. We'd like to see both brands and private label grow. From a retail perspective, we're not going to get too detailed about comments there because it's always moving all over the place. So, I don't have any great light. I don't know if Chris, you want to add anything there?

Nothing significant to call out.

Thank you very much, and again, best of luck to you guys. Thank you.

With no further questions, I would now like to turn the call back over to Mr. Rick Brooks for closing remarks.

All right. Thank you, Crystal. And again, we appreciate all the questions and comments today. And we have another week or so of back-to-school to go, and then we'll be looking forward here over the next couple months to finish this Q3. And planning for, as you would guess, holiday has been well underway and will continue so. And we'll be looking forward to talking to you at the third quarter conference call in late November, early December. Thanks, everybody. Much appreciated.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.