Zumiez Inc (ZUMZ) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. fourth-quarter FY13 earnings conference call.

(Operator Instructions)

Before I begin, I would like to remind everyone of the Company's safe harbor language. Today's conference call includes comments concerning Zumiez Inc's business outlook, and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties, and actual results may differ materially.

Additional information concerning a number of factors that could cause actual results to differ materially 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 am joined today by our Chief Financial Officer, Chris Work. Before I get started on my review of the quarter, I want to once again express my condolences to the families and friends of Brianna Benlolo and Tyler Johnson, who as you know were victims of the terrible violence that ensued in our Columbia, Maryland store this past January. As you might imagine, given our culture here at Zumiez, the loss of two members of our tight-knit team is felt organization-wide.

While we struggle to understand the motivations or the reason behind this tragic event, we have done our best to provide support and counseling to members of the Zumiez team and have reached out to the victims' families to offer our support during their time of incredible grief. Brianna and Tyler and their families remain in our thoughts.

Turning to our fourth quarter results, as usual, I'll begin with some prepared remarks about the quarter and full-year 2013, and Chris will take you through our key financial and operating metrics. After that, we'll open the call up to your questions. Earlier this afternoon, we announced fourth-quarter sales of $227 million, in line with our most recent projections. Earnings per diluted share for the fourth quarter were $0.89. Included in these results but not in our outlook were net benefits of approximately $0.26 per share for the reversal of accruals related to the Blue Tomato contingent earnout, a correction of an error in accounting for leases, and a release of a valuation allowance benefiting the effective tax rate.

Excluding these item and their impact on the fourth quarter, our earnings were slightly above our guidance range, which can be attributed to expense management and a lower tax rate. With regards to the reversal of the Blue Tomato contingent earnout, we continue to be optimistic about our long-term prospects in Europe. However, the reality is the operating environment in the region, just as in North America, has been challenging since we completed the acquisition in 2012.

While our sales in Europe comped positive in Q4 and for the year, we are estimating our sales and earnings results to be below the thresholds that the contingent earnout are based upon, and the likelihood that we will now achieve those minimum levels required for a payout is low. As a result, we reversed the entire amount that had been accrued to date in the fourth quarter. Chris will take you through all of our fourth-quarter adjustments in a moment. Comparable sales for the quarter were down 2.2%, compared to our initial expected range of down 1% to an increase of 2%.

The fourth quarter was clearly more challenging than we anticipated. Mall traffic was weak between Thanksgiving and Christmas, and the trend continued into January, fueled in part by extremely cold and snowy weather throughout the majority of the Midwest and Eastern United States. As a result, promotional activity in the team space was at elevated levels for the last two months of the year.

While we did increase our promotional cadence in response to these headwinds, which weighed on our product margins, our teams did a great job balancing sales growth and protecting profitability in a difficult selling environment. Throughout 2013, we've been talking a lot about the investments we've been making toward creating a solid and sustainable platform from which to grow the business. One thing that has been central to that goal is enhancing our omni-channel presence.

We have seen success for our efforts in this area, and today our omni-channel strategy enhances our customers' brand experience while striving to provide a seamless approach to the customer shopping experience. And as such, our historic practice of reporting sales based on a fulfilled location has become almost obsolete. Developing a true omni-channel presence means reaching out and interacting with your consumers wherever they are -- in a mall or online, in the US, or abroad.

As a result this year we continue to grow our North American store base, opening two new stores in the fourth quarter to bring our total North American store count to 539 at the end of the year. In FY14, we intend to expand upon that base and are targeting 50 new stores in North America by fiscal year end. Strategically, we regularly evaluate our entire store portfolio. In 2013, we closed six stores and will continue to close or reposition underperforming stores as we maximize our total sales with the optimal number of stores in all markets.

In Europe, we doubled our store count having added six new stores in FY13. We will continue to take a well-thought-out approach to gaining market share in Europe, selectively opening stores as we see opportunity to capitalize on our position in this highly-fragmented market. We are taking care in this market to ensure a consistent and seamless extension of our Company culture and our unique approach to the action-sports marketplace as we execute our growth plans. In 2014, we are targeting five new stores in the region, focused on Austria and Germany. But the most important investment we've made and continue to make is in the Zumiez team.

It's this team of individuals whose insight into the local markets and whose dedication to our success as well as the success of their fellow team members that drives this Company forward. It is by their perseverance that we've been able to successfully expand our presence and marketshare while achieving operating margins in the neighborhood of pre-recession levels despite the choppy operating environment. As we look to 2014, we remain confident in our approach to the market.

In 2013, despite the challenging marketplace, we did not see the severe sales declines much of the teen retail sector experienced. And in this environment, we were able to maintain peak product margins in our North American business for the year. We continue to believe there is ample consumer appetite for our lifestyle-oriented approach, our diverse and locally-relevant product assortments, coupled with a great sales experience, both domestically and abroad.

2013 was all about investing behind these proven strategies and fortifying our Company so we can leverage our investments over the long term. In 2014, we anticipate we will reap some benefits from our efforts to date, while at the same time we will continue to build on the foundation and solidify our leading position amongst global action sports lifestyle retailers. We continue to believe that the consumer is more empowered than ever before and that retail must change to address the way people want to shop.

In this world, there are too many stores, and as retailers are forced to reduce their capacity, share consolidation will continue. To that end, we are convinced that the omni-channel initiatives we have been rolling out, designed to engage with our customer in the way they desire, combined with the proven product and sales experience we've been providing our customers for years is the winning formula.

I'll now hand the call over to Chris for a review of the numbers.

Thanks, Rick. Good afternoon, everyone. As usual, I'll start with a review of our fourth-quarter and full-year results. I'll then outline our first-quarter guidance and provide some thoughts on how we are thinking about FY14. Beginning with the fourth-quarter results, fourth-quarter net sales increased 1.1% to $226.8 million for the 13-week fourth-quarter 2013 compared to $224.4 million for the fourteen-week fourth quarter of 2012. As a reminder, the extra week last year was worth $8.9 million.

By region, North American sales decreased $1.6 million, and European sales increased $4.0 million in the quarter. Comparable sales were down 2.2% in the fourth quarter, including comparable eCommerce sales. In terms of Canterbury performance, mens, footwear, boys, and hard goods comped negative in the fourth quarter, while accessories and juniors comped positive. During the fourth quarter of 2013, we added 5 new stores, bringing our year-end store count to 551, an increase of 10.6% compared with the end of FY12.

Gross profit was $87.9 million in the fourth quarter of 2013, an increase of $2.2 million over the fourth quarter of 2012. Gross margin was 38.7% in the quarter, compared to 38.2% in the year-ago period. The increase in gross margin is primarily attributed to a $3.3 million correction of an error in the accounting for occupancy expense on a straight-line basis worth approximately 140 basis points as a percent of sale. Our previous method has been recognizing too much expense in the early years of the lease.

Excluding this benefit, gross margin would have decreased due primarily to deleveraging effect of our occupancy expense on a negative comp. Consolidated product margins were down slightly in the quarter. SG&A expenses for the quarter were $47.6 million or 20.9% of net sales compared to $49.6 million or 22.1% of net sales in the 2012 quarter. As Rick mentioned earlier, SG&A expenses benefited from the reversal of the Blue Tomato contingent earnout accrual totaling $5.8 million in the quarter, worth approximately 250 basis points as a percent of sales.

In the prior year fourth quarter, we adjusted the Blue Tomato earnout accrual, resulting in a $0.4 million benefit. Excluding the impact of the earnout to both years, SG&A expense would have increased as a percent of sales primarily as a result of deleveraging our cost structure on a negative comp. Also included in SG&A in the quarter is approximately $0.6 million for the amortization of intangible assets related to the Blue Tomato acquisition, which is comparable to the prior-year quarter. Fourth-quarter operating profit was $40.3 million or 17.8% of net sales compared to $36.1 million or 16.1% of net sales during the fourth quarter of FY12.

Finally, for the fourth quarter, net income was $26.9 million or $0.89 per diluted share, up from $22.9 million or $0.74 per diluted share during the 2012 fourth quarter. Let me again lay out the impact of some of the benefits and charges we recognized in the quarter. The reversal of the Blue Tomato contingent earnout accrual was a benefit in the quarter of $5.8 million or approximately $0.16 per diluted share. The correction for our lease accounting error was a benefit of $3.3 million in the quarter or approximately $0.07 per diluted share.

And the amortization of intangible assets associated with the Blue Tomato acquisition was an expense of $0.6 million or approximately $0.02 per diluted share. Additionally, in the quarter, we released evaluation allowance on our deferred tax assets primarily related to the net operating losses in foreign subsidiaries benefiting our tax provision by approximately $0.8 million or $0.03 per diluted share.

As a reminder, in the fourth quarter of 2012, we recognized net expenses related to the acquisition of Blue Tomato of $0.5 million or approximately $0.01 per diluted share. Turning to FY13 results, net sales were $724.3 million for the full year, up 8.2% over FY12. By region, North American sales were up $35.2 million, and European sales were up $19.7 million year-over-year. The sales increase for the year is due to addition of 53 net new stores throughout the year and a full-year of Blue Tomato sales, partially offset by one less week in FY13 compared to FY12 and a comparable sales decline of 0.3%.

Operating margin was 10.1% in 2013, compared to 10.2% in 2012. 2013 net income was $45.9 million or $1.52 per diluted share up from $42.2 million or $1.35 per diluted share in 2012. I will now lay out the impact of certain benefits and charges taken in both years that should be taken into consideration when looking at our annual results.

The reversal of the Blue Tomato contingent earnout accrual in 2013 was a benefit of $2.6 million to the year or approximately $0.08 per diluted share. The correction for our lease accounting error was a benefit of $2.7 million to the year or approximately $0.06 per diluted share. The amortization of intangible assets associated with the Blue Tomato acquisition was an expense of $2.3 million in the year or approximately $0.06 per diluted share.

And we recognized an expense of $1.3 million or approximately $0.03 per diluted share in the year for a conditional settlement of a previously-disclosed class-action lawsuit. Additionally, the impact to the year for the release of the valuation allowance on our deferred tax assets primarily related to the net operating losses of foreign subsidiaries was a benefit to our tax provision of approximately $0.4 million or $0.01 per diluted share.

In FY12, we recognized net one-time charges associated with the acquisition of Blue Tomato of $3.6 million or approximately $0.10 per diluted share and contingent earnout charges of $2.3 million or approximately $0.06 per diluted share, and the amortization of intangible assets related to the acquisition of $1.4 million or approximately $0.03 per diluted share, an exit cost of $2.1 million or approximately $0.04 per diluted share, associated with the relocation of our home office and web fulfillment centers. Turning to key balance sheet highlights, we ended the year with cash and current marketable securities of $117.2 million, up from $103.2 million at the end of FY12.

The year-over-year increase was driven by cash generated by operations, partially offset by capital expenditures primarily related to new store growth, and approximately $17.6 million paid to repurchase our common shares. Inventory increased to $87.2 million as of February 1, 2014 up 12.4% from $77.6 million as of February 2, 2013. Inventory per square foot was up slightly as of February 1, 2014, compared to last year.

During the fourth quarter, we spent approximately $15.4 million opportunistically repurchasing approximately 0.7 million shares of our common stock at an average price of $22.76. In FY13, we repurchased a total of 0.8 million shares for approximately $19 million. Additionally, in the first month of FY14, we spent approximately $9.3 million repurchasing approximately 0.4 million shares at an average price of $22.20. As of March 1, 2014, we had $5.3 million remaining on our stock repurchase authorization announced in December.

In addition, today we announced the authorization from our Board of Directors to repurchase an additional $30 million worth of our common stock. The new program will commence once the previous repurchase program is completed. We ended the quarter with $1.9 million in outstanding debt assumed from the Blue Tomato acquisition and no outstanding balance on our revolving credit facilities. Turning to guidance, as always, I will remind everyone that formulating our guidance involves 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.

As Rick touched on in his comments, the retail environment we are operating in has been challenging. With this backdrop, we remain cautious with our outlook for the first quarter and the remainder of the year. With that in mind, we are planning first quarter comparable sales inclusive of our February sales results released on March 5 to be in the negative low-single digit range and total sales to be in the range of $156 million to $160 million. We expect product margin to decline in the quarter between 150 to 200 basis points, primarily as we have been clearing excess inventory from the holiday season in the early part of the quarter.

We project consolidated operating margin to be in the negative 1% to positive 1% range, with diluted earnings per share between a loss of $0.02 and income of $0.03. Included in our first quarter guidance is an estimated $0.6 million or $0.02 per diluted share in a tangible amortization costs associated with the acquisition of Blue Tomato. Also, when looking at the monthly sales results for the quarter, keep in mind the Easter shift will be a detriment to the March comp result and a benefit to April.

As you know, our business is seasonal with the majority of our sales and earnings occurring in the back half of the year. Current trends are not a good roadmap for how the remainder of the year will play out, and the state of consumer sentiment is hard to gauge. However, I would like to provide some general comments about the year. With the uncertainty in the marketplace, we are not prepared to give comments on sales results for the year.

We believe there are proven strategies around product and people, coupled with the investments we have made to provide a great omni-challenge experience, will result in top-line performance ahead of the teen sector in general. We achieved record product margins in North America in 2013. And with a full year of results in Europe, our consolidated margins were down slightly to the prior year, excluding the prior year inventory step-up. Our product margins can be impacted by a variety of factors, most notably shifts in product mix.

Due to this, combined with the pressures on margins we are expecting in the first quarter, we are projecting product margins will be down moderately in 2014. 2013 was an investment year, and while we do not expect the same level of investments in 2014, our growth initiatives are on a continuum and will be funded as necessary. Also, to the extent our comparable-store sales results are low single-digits or below, our cost structure will deleverage. That said, we are planning SG&A growth in 2014 to grow at a slower rate than 2013, excluding the impact of the Blue Tomato contingent earnout accrual reversal and the legal settlement in the prior year. One other comment on our cost structure for the year.

In 2013, our results did not support a full incentive compensation payout. In 2014, to the extent sales and earnings grow at rates that would support target payouts, our expenses will increase. We are planning to open approximately 55 new stores in 2014 including up to 5 in Europe with a cadence similar to our historical openings of two-thirds prior to back-to-school. We expect capital expenditures for the year to be between $37 million and $39 million, compared to $36 million in 2013 with the major capital projects being new store openings and planned remodels.

We also expect depreciation and amortization to be approximately $30 million or an approximate 12% increase over FY13. We expect our annual effective tax rate to be approximately 38%. Lastly, our diluted outstanding share count for the full year is projected to be approximately 29.4 million shares, which includes the impact of share repurchases through March 1, 2014. Any additional share repurchases during the year from the $35.3 million remaining on our combined authorized repurchase programs will further reduce our share count.

Operator, we're now ready to take questions.

(Operator Instructions)

Your first question come from Sharon Zackfia with William Blair. Please proceed.

Hi, good afternoon. A couple of questions, I guess, probably for Rick.

I'm curious about stash. I mean, obviously mall traffic has been really challenging. It would be interesting to know kind of where you stand on Stash.

I don't know if you've ever talked about percentage of transactions that involve Stash at this point, or if you feel like it has been successful in driving traffic during times when you need it at Zumiez.

Thanks, Sharon, for the question on Stash. We are pleased with our efforts on Stash.

As I've said, I think on our previous calls, our primary focus on Stash has been to build the membership of the program at this point. We are in the process now, Sharon, of talking about how during 2014 we are going to be mobilizing to take advantage now of all the data we have been acquiring. And that really gets into then CRM strategies, customer communication strategies.

So those are going to be really more a focus for 2014 and 2015 than they have been in 2013. So we're pleased with the progress we've made, to date, I'll tell you that.

I think we added over 1 million members last year in the Stash program in 2013. I'm not going to share with you the percentage of transactions, but it's a great question because that is how we measure it. I appreciate it, but I'm not going to share that aspect of it with you other than to say, again, that we feel good where we're going.

We feel good about the momentum of the program, and we're now ready with -- we've accumulated enough of a base of consumers to really take the next step, which is about effectively and communicating in highly-relevant ways for this consumer base.

Okay, and then just a second question on new store productivity.

Are you happy with how the new stores are performing, and have your thoughts around CMOS changed? I know they've been pretty fluid.

I don't know where the six were that you closed, but what's your kind of updated thought process on -- I know you used to do really well on A, B and C. But I don't know if that's really altered for you.

Yes, thanks, Sharon.

It's too early to tell completely on our 2013 stores. Our 2012 stores did come in within the metrics we had outlined, and we still are looking at a range of different stores from A, B, and C perspective.

I think when you think about the six stores that we did close, this is both a closure as well as some repositioning as well in the marketplace. This is how we're going to look at thing goings forward as we continue to evaluate our stores overall, and then how we can best serve each marketplace in the way we're in.

I'll just add, Sharon, that I think, as we said in the comments, we are looking to actively manage the store portfolio base. So we do have our internal theories about which stores we ought to be particularly paying attention to.

And there is no clear, simple answer -- just C malls from that perspective, because we have some C malls in certain locations in the country where they are at the center for a wide range -- a very big circle of commerce in that center. So those are centers that frankly we're not concerned about at all. They tend to be performing very well for us.

It's more, I think, we're looking at where we may have overbuilt metropolitan markets where we're most sensitive to watching and paying attention to what is going on with the malls.

Okay, thank you.

Thanks, Sharon.

All right, and your next question comes from the line of Edward Yruma with KeyBanc Capital Markets.

Hi, thanks for taking my questions.

First, you kind of had inconsistent footwear results through 2013, some months stronger than others. I think they were somewhat weaker in February.

Which business was that, Ed?

Footwear.

Thank you.

We are constantly working to drive trends. We're working with brands at every level of the business. We are looking for next styles. We are going to take some risk with product.

We are looking for how we can have unique styles with our brand partners on the footwear business. We are basically going to do everything we possibly can to try to improve our footwear business. But that being said, I think at least for the first few months here, first few periods, I think it's going to be a challenging business for us.

Got it.

I'll say that's both men's and women's, Ed.

Got it.

Just trying to understand a little bit the error in the Italian foreign expense. How does that adjustment and prospective accounting treatment change COGS and SG&A going forward? Thanks.

Great, thanks, Ed.

There really is no change on SG&A as we record our lease expense all within the cost of goods sold line items. So as you think about it going forward, you think about the error overall, this is something that accumulated over a period of time.

As we consistently go through our accounting policies and refresh where we're at, we identified this in the back half of 2013. And as we performed our analysis and looked at it both quantitatively and qualitatively, it was an adjustment that we deemed not material or significant to any given quarter or year.

However, it was large enough that we thought it warranted call-out on our fourth-quarter results. So we went ahead and made the change.

As many of you are aware with lease accounting, it is really a matter of straight lining the expenses over the period of the lease. And we had certain expenses that we had included in the straight line expense that did not need to be in that.

So we have corrected that. And we will subsequently recognize that expense over the future remaining years of those leases, but don't expect it to be overly material to any one period going forward either.

Great, thanks so much.

Thanks, Ed.

Your next question comes from Jeff Van Sinderen from B. Riley.

Good afternoon.

Just a point of clarification Chris -- is the $0.24 the net impact on the quarter for the three benefits and the one charge? Is that correct?

That's correct.

Okay.

And then maybe you can just frame your planned promotional markdown levels on spring merchandise. I'm not talking about the carryover stuff that I know you had to push out or had to sell some of that in early Q1. Just really focused on spring merchandise where you think the promotional levels -- the mark down levels -- are going to be this year versus last year. Any color would be helpful.

Glad to try to help you, Jeff.

Again I would tell you at this point our plans do not call for any -- what we typically classify at this point here as we begin spring -- as any planned markdowns. Also what you are going to see in terms of our promotions are going to be bought-for promotions, so full-margin promotions.

At this point, it will all depend now on how spring goes forward from here. But certainly our plan is that we are going to -- we believe we have bought spring appropriately for where we are at, for how we thought about the season. We're seeing early reads on the product where we have better weather is fine.

So we're not anticipating any unusual level of markdowns relative to prior periods on spring product.

Okay, so the shift in the calendar -- obviously, you touched on March comps being weaker because of the shift in April comps benefiting. You don't get the sense that because everybody may be having a later peak selling period this year that promotions in the space might be more intense? Any thoughts on that?

Well, I think promotions in the space will be more intense. It's a great observation, Jeff.

But I'd also like to point this out as one of our real differences in our business is they may have been way more intense all last year and way more promotional than our competitors have than we have been in the marketplaces. As Chris and I, I think, both said in our comments -- we achieved peak product margins for all of 2013 in North America.

So we're not playing the game that everyone else is playing here. And a lot of what we've been doing is planning the value promotions we're offering to our consumers.

For this first quarter, I expect it to be incredibly promotional in the marketplace. We just have different strategies, and we believe we have different tools to bring to bear. So our anticipation -- our plan at this point would be we'd be no more promotional in spring product than we were a year ago.

Got it. Well, you are very good at your promotional messaging. I wish you the best of luck for the rest of the quarter. Thanks.

Thanks.

Your next question comes from the line of Steph Wissink with Piper Jaffray.

Thank you. Good afternoon, everyone.

Just a follow-up I think to the prior question, which was a good one related to merchandise margin. Rick, if I look at your business guidance of $160 million in rev, if I look at prior periods of that level of revenue, it seems like there was a little more profitability pass through. And it sounds like merchandise margins might be pretty consistent.

So help us understand the delta between the profitability of $160 million today versus what it may have been historically. Is there something that has changed in the cost model that we should be considering in terms of the deleverage effect on that level of revenues? Thank you.

I'll let Chris take most of this, Stephanie, but, I'll just start off by saying as Chris, I think, said in his comments -- we have some carryover product that we are liquidating through from the holiday season, winter carry-over product and other items, footwear, for example, which we are liquidating our way through. So that is part of what the margin impact is that we've laid out for Q1. And then there is a deleveraging aspect.

I don't know, Chris if you have anything want to add that to that.

Yes, I just think as we look at this model, there really has been no change in the model that, absent the unique charges that we call out, we believe that our model should have leverage at some point of between 3% comp and a 5% comp.

What we have experienced here over the last year and what we're guiding to in the first quarter, at a negative comp, we would not expect to leverage and model the way that we have been able to do historically.

Chris, could I just add a follow-up to that?

If the leverage point is 3% to 5%, has there been internal discussion about how to reduce that leverage point if we do stay in this season of kind of low single-digit to negative low-single digit as a range?

Yes, I think we're always having those conversations. And I think this is where we spend a lot of time internally balancing the investments that we believe are the correct investments for the long term as we're thinking about this business with the profitability in the short term.

And both are very important to us. You see us do that in the way we manage our product margins, as well as our cost structure. It's something that we do have a lot of conversations about. And we'll continue to balance those as we evaluate where the market's at

I guess I'd add to those comments, Stephanie that if you look at the last year and particularly our performance -- and trust me, I don't like relative performance measures. But think it's important for us to all to keep in mind that you look at our combination of sales performance, a slight negative, 0.3% negative comp for the year, and as we've said, peak operating -- or peak profit margins in the North American marketplace, there are few retailers that in this environment have been able to put those two things together.

So Chris is right. We are always looking to challenge ourselves on the cost basis of where we have an opportunity to take costs out of the business. And we're looking for those opportunities on both a structured basis as well as an add-hoc basis, if anyone's got any great ideas.

But I just want to put into terms for us that there is a relative perspective of how difficult the -- particularly the teen specialty retail world is right now. And we feel good that in -- we have been making this argument for about five years now that we have been in a share consolidation world.

And we think that is true for the next five years, that this is all about share consolidation, winning share in the marketplace. And I think a great way to evaluate your success in doing that is the combination of top line and your ability to maintain your product margin structure, your pure product margin.

Thanks. Best of luck.

All right, and your next question comes from the line of Dorothy Lakner with Topeka Capital Markets. Please proceed.

Thank you. Good afternoon, everyone.

I was just wondering -- obviously there's been a lot of discussion on many conference calls about the teen environment and how tough it is. And I wondered, given how well you're doing in this tough environment with the peak product margins and maintaining a level of sales that's pretty impressive, really.

I just wondered what you're doing in terms of training. Are there differences in the way you're training stores associates to handle what's clearly become a much more challenging sales and traffic environment?

Great, that's a great question, Dorothy; and thank you for asking it. Let me -- I guess I would like to respond, actually -- I'm going to broaden out my response a little bit for you.

Sure.

First, I will address the training first, is we have not changed anything. We continue to be incredibly intense about it, but that's nothing new for us.

That is our ongoing efforts to make sure we have an engaging sales environment at every consumer touch point. And so this is something that we have been committed to for decades. We are committed to it yet. It's expensive, I should add, as we talk about Stephanie's previous question. And Chris said, you have to know where you're going to invest.

Investing in training is a long-term payout, and it's not something you do one year and don't do another. You have to be committed to doing it, and we are committed to maintaining the pace and development of our training programs throughout the organization.

Then in terms of broadening my response a bit, we are very focused on trying to create great brand experiences at every consumer touch point in our business. So we are clearly challenging ourselves internally and have been working over the last 18, 24 months to really challenge ourselves about every aspect of the business at every consumer touch point.

How are we translating the Zumiez brand elements -- what we define as those unique, defining qualities that create the Zumiez experiential brand experience? So we're working really hard. There's a team actually offsite today that is doing that exact project for their team. We want to challenge ourselves because it is one of the key differentiating aspects that the Zumiez culture which training is a part of.

But then this idea of executing against our brand definition at a higher level, Dorothy, and it is those two things, I think, are real long-term drivers of the business. If you have a unique brand, and I think we do, and we can define it well, clearly define it, clearly define what those elements are, when we can do that then, you can challenge yourself about higher levels of execution.

That's what we're attempting to do in combination with our commitment to the culture at Zumiez. And that's, as I said, where the training component really comes into play again and is one of those key cultural pillars for us.

It's a great question, and we are focused relentlessly on how we are going to differentiate ourselves as a unique business model that is going to be tough to be commoditized. That's what we're doing, and we're working hard to do that and create really unique experiences for our customers.

Great, thanks. Thanks for all that color, and good luck for the rest of the year.

Thanks, Dorothy.

Your next question comes from the line of Dave King with ROTH Capital. Please proceed.

Thanks, good afternoon, guys.

I guess just first off I wanted to follow up on one of the earlier comments on footwear and try to hear some of your thoughts around where you are thinking you can take that. And without maybe going too much into the different brands -- and I understand not wanting to go there -- and specific styles, maybe you can just help us understand how you're thinking about it in terms of maybe larger brands versus smaller brands.

Historically I think that you've kind of gone toward some of those larger brands, at least in recent times. And just give us your thought process around that. And then is that going to be more core action, sports-oriented? Or are there other themes that we should be thinking about as we're out in the stores? Thanks.

Thank you, Dave.

Again, I'll give you a very short, sweet answer to your question. We go where customers take us, and we sell what customers want to buy. And we try to do that on a localized store by-store basis.

I know that probably doesn't exactly get at what you would like to hear in answer to the question, but that's the real root of great retailing, is localizing those precedents with the right brand mix at every location and following what your customers tell you they want to buy.

We're going to work, as I said -- I mentioned a few things we're going to do. We're going to work hard to try to make footwear as good as it can possibly be in terms of business for us.

But I'll also say that we've been through these cycles' ups and downs. And if it's not footwear, if it's footwear that's tough, that you need something else that's running gains. So we'll look to maximize other departments. I think that we've been saying for a while that our skate hard goods business has been good for a long time. Our women's business continues to perform well.

So we're going to look, as part of your answer to your question about footwear is about how we're going to maximize performance in other aspects of the business. That gets us back into talking about emerging brands and all sorts of other aspects of what we're trying to do.

It may not quite get what you want, Dave, but that's the reality of what we're trying to do. We're just trying to go where customers tell us and where they want to buy, where they want to spend their money with us. And we're trying to then do the best job we can of meeting their needs and doing that, literally, on a localized store-by-store basis.

Right. That's understandable. I appreciate that.

I guess, then, maybe touching on one on the hard goods space, Rick, maybe it's more helpful for some of us to understand your big-picture thoughts around -- I mean, if we just look at data, for example, and we look at action sports and participation rates and we look at hard goods, for example, it seems like there's less people skating, there's less people snowboarding, things of that nature. Yet you guys are seeing some gains on that side, and you talk about that being an area on a go-forward basis.

What is it about that you guys are you able to do to help continue to drive that? And is it you guys constantly evolving? Are there specific things you can point to, anecdotes from the past -- anything to help investors understand what it is about you guys that really sets you apart.

And again, to be clear, I'm not sure we're talking about skate hard goods because our snow hard goods business was pretty tough again this year.

Right.

I think there's a big distinction between those two businesses.

I think what we do on skate is, again, the localization aspects are critical in skate. There's another case where having the right mix of brands at each location is a real critical aspect of what you're doing.

One of the great things about skate hard goods, Dave, is it's a relatively quick turn business. And we're constantly bringing in new products, new screens on decks every week, literally, as we manage the business. So we do a very good job of pre-planning our buys with our vendors, giving them really good direction about what our needs are going to be.

And then working closely with them to get things and screens that are relative at that point in time. So, I think we execute it at a very high level. And I think our people in our stores are really great at getting the lifestyle and are really great at selling skate hard goods.

And then I would tell you that there's an element of share consolidation. This is another one of those areas that will harken back to some of those broad themes, and we can talk a lot about what drives share consolidation -- the behavior of consumers in this modern world of smart devices.

I think these are things which advantage Zumiez in the marketplace. And I think we take strong advantage of our size and scale to meet needs of our consumers. And I think skate hard goods is one of those areas that we are very, very strong.

And you're seeing all those aspects that I described. And additionally, you're seeing those aspects drive with the change in consumer behavior, share consolidation in the market.

Yes, that helps. I guess, kind of follow-up to that and also a little bit of a broader question in terms of share consolidation, obviously you've done well with that domestically. And then looking at your store guidance for next year, it's five stores let's say off a pretty small base in Europe, but it's still five stores.

To what extent have you guys given any thought to accelerating that trajectory at any point, given some of the challenges that you alluded to in your prepared remarks around Europe having it challenges?

And then also on the store growth, how should we think about that in terms of the overall number? How much of that is closings versus gross openings? Thanks.

All right, I'll let Chris handle last part. I'll talk a little bit about Europe and our plan there. Thanks for calling out that it's five stores on a very small base. It's a 12-store base, so it's pretty -- that's a lot of store growth to have in a marketplace.

We are always cognizant. Our goal is -- I mean if we try to go build 50 store in Europe today, it would be a disaster. That's just never been our mode of operation.

We want to grow and grow the culture and the teen with the store grow. So we're being measured -- I actually think five stores is a little bit slower pace than the doubling of last year -- but it's still a significant growth level on that base of stores.

So we want to make sure the main thing -- I think we've talked about this on previous calls -- we're experimenting with different formats in Europe, malls, street stores, different side-street stores, different markets. And what we're really trying to make sure we are doing is we're going to build the right formats of stores in the right kind of markets.

And so we're in a learning mode, Dave, with what we're trying to do there. So you should think about -- I think five as being a relatively aggressive pace for us in Europe; and in that, we're in a learning mode,

And we're going to stay in this learning mode to make sure that when we really do ramp it up, we're going to ramp it up in a high-quality and successful way for our business in Europe and our investors.

And then in regards to the store count number, as you talked about on the prepared remarks, 55 stores is our gross number that we plan to open this year.

And one of the things we believe is the advantage of our business model is that we still have room to grow. And we talked in the past about the US being a 600 to 700 store chain. And we continue to look at that on a regular basis, but we still feel like there is market and opportunities for us out there, and so we still have that room to grow.

As we think about any potential closures -- and we're not going to the talk about that today -- but for us it hasn't been a significant number as you've seen in our historical results. And it really just comes down to a market-by-market analysis.

You know, we're not planning anything significant for the year because we want to maximize all of our assets in every market.

All rights, thanks. Good luck on the rest of the year, guys.

Thanks, Dave.

All right. Your next question come from the line of Richard Jaffe with Stifel.

Thanks very much.

Rick, a little more of a philosophical question, if you don't mind. E commerce being an important part of your business and a growing part, and the talk of mall traffic industry wide being on the decline, are you guys in a position to reconsider the traditional mall-based Zumiez and think about it differently, whether you need to be more online, more alternative locations?

I know you just restated your square-foot aspirations, but wondering if that picture is changing in your own mind given what seems to be a change for this generation to visit the mall less frequently?

Thanks, Richard. Again, I always enjoy your philosophical questions. Keep asking them, because then we can have some fun herein the conversation.

Let Chris deal with all the boring stuff. You and I can have a fun-filled topic of conversation. We are thinking about these topics all the time on an ongoing basis. We're revisiting them not just within our formal long-term five-year planning process, but we're thinking about them throughout the year as we see results and we're tactfully talking about what do we need to adjust and why.

And so we are all, if you look back at some of the shop-to-shop data about mall traffic over the last three years, they're stunning numbers. I want to cover your question over a couple ways and talk about how we're thinking about these elements, Richard.

We're watching this and saying, okay, we look over the last three years, and we're actually running comp store sales gains in that time frame. So really, what's happening from our perspective is the omni-channel world.

Customers are engaging with us differently, both parents and teens. And we have to think about those consumers engaging with us differently themselves. Teens interact with us in a different way in the online world than the parents do. We have to be very cognizant then of trying to again identify -- being able as best we can to identify who the consumer is and making sure we are meeting their needs.

It's clear to us that many, many more people before they are pre-shopping using digital channels and then going to stores, and we believe the conversion rates are much higher now. So, yes, mall traffic is down over that three-year window; but we believe that, again, we know our comp store sales are up over that time frame.

And we believe what's happening, though, is the omni-channel world, the integration of the channels. And this is as we said in our comments why the idea of a breakdown between an E commerce channel and a store channel, let alone what you're viewing on your market channels, those concepts of measuring comps on those, from those perspectives, is literally, I think, an obsolete idea at this point.

It is about integrated experience. I can tell that you we have made, as we have said in comments, we have made tremendous progress over the last three years of omni-channel initiatives, and I think we've talked about last year the investment we made in new websites. Those investment are goes to lead to a whole other wave of omni-channel initiatives that are going to roll out over the next two years.

You're going to see us continue to push these areas to create a unified experience no matter where the customer starts with us, whether that be in a store, they start in the digital world, they start via marketing vehicles or social vehicles.

We want that to be an integrated both great brand experience, but an omni-channel experience that allows customers to get whatever they want, however they want, whenever they want, and for us to deliver it as quickly as they need it.

When we think about these things, there are few people can really do that. That's where the share consolidation aspect of the argument comes into play, combined with the fact that a lot of retailers just have too many stores.

We do not feel at this point, Richard, that we're in that camp of having too many stores. I will -- as Chris just commented, we have parts of the world or the market here in the US and North American and Canada where we're not even represented yet. So, we definitely have opportunity.

Now, I will tell you that we are contingency planning and trying to manage a downside risk of having more stores than we need. And I'm not going to tell you how we're doing it; but we're looking at it and saying, we want just the right number of stores for each market on an omni-channel basis.

Now allow me to expand my comments with that idea a little bit more. Because we have been experimenting over the last few years with off-mall locations, including strip center locations, including street locations, and one of those street locations is just south of Union Square in New York City. I think you'll see us at another New York City location this year.

We're going to continue that experimentation because you're right. We need to go, as I said, with the right number of combined omni-channel presence, both physical and digital presence, to serve customers wherever they may be in the markets that we're going to serve. And in the case of New York City stores, we simply weren't there serving them.

What we find when we add new stores, we find that within those zip codes, we find that our web business increases, omni-channel driven again. I give credit to our store team for creating a great brand experience for our customers that drives people to our website.

We're doing all those things you suggested and more. I think we've built out a great road map for where we need to go in terms of building omni-channel business.

Again, I'll remind you, we're not building an E commerce business. We are not doing many of the things that most E commerce retailers do. We don't even value doing it at this point. We're building an omni-channel model holistically to serve our customer. That's the focus of what we're doing.

Yes, and then no customer is ready it for more than yours -- that younger guy or gal who has a smartphone and is totally committed to shopping 24/7 or having that access 24/7.

That's correct.

They want to see it from you, and if they don't --

They'll go other places.

Yes, you lose. Exactly.

Exactly. So we're working on it really hard. We have been for the last two years.

As we've said in our comments, we think we've made significant progress, but we have a lot more to do, too.

That's great, thank you.

All right, your next question comes from the line of John Morris with BMO Capital Markets. Please proceed.

It's actually Janine Stichter on for John Morris.

I was wondering if you could talk a little bit about the juniors business. It's been so strong for you store many years, and I think you had the first negative month there in quite some time in January.

So just wondering if you were seeing additional promotional pressures versus the rest of the mix considering what's been going on in the teen space and just how you're feeling about that business in general and where you think it could go as percentage of sales going forward.

All right, and again, you're going to hear the answer, Janine, that Dave heard a little while ago. Our customers are going to tell us where we can go, and our job is to take it to the highest level you can possibly take it for our consumer.

January was partly a reflection of just -- it was difficult in every category of business and difficult for parts of the country to get out and even shop. And then we had a challenge in other part of the country, there wasn't a good winter, in fact a very poor winter, which as you know even our women's business, we sell a lot of jackets and outerwear.

So there's a number of factors about January that nothing was very good in January, frankly. But you're going to just have to ride with me on the comment that we're going to do everything we can -- a combination of great brands, great private label, how we use those two things together to sell a lot of product to our junior consumers.

I will also tell you I think we're benefiting from a cyclical shift probably to some consumers who are tiring of the fast fashion elements of the world. So I think that's been a benefit for us as a branded retailer, and we're happy to serve those customers.

How high can we take it? Customers will tell us that. Our job is to get there as fast as we can and continue building that business, and that's what our teams are working on.

Janine, I would just add to that from a staff perspective, as you mentioned, it has been an area that's driven growth for us for now over three years, and it ended the year around 12%. It's just a couple years ago, it was 10% of our overall sales. So you can see the impact of that growth over the last couple years.

Okay, great. And did you happen to quantify the store closures for January?

No, we didn't.

Okay.

All right. And our next question comes from Betty Chen from Mizuho Securities. Please proceed.

Actually, it's Alex Pham on for Betty.

I was wondering if you guys could maybe comment on how Canada is doing versus the US? And also, how weather has been impacting most retailers -- any call outs on regional performance?

And then just in regards to the men's business, maybe you can discuss a little bit more about sort of the competitive environment. It has been softener in the men's business for the past couple of quarters, and maybe any plans that you have in terms of reinvigorating that category, given that it is a good chunk of sales. Thanks.

Right. So I'll start with the Canada side and the weather component.

Overall, we continue to work on growing Canada. As you saw us open stores, we ended the year just under 30 stores in Canada and continue to work through that market.

As you would expect, Canada, like our European market, had some of the same trends as our US market; so it's been tougher. But we still feel like it's a great marketplace for us. We've got a lot of good things working there, and we continue to invest in those teens and execute our strategies there to continue to grow Canada going forward.

From a weather perspective, weather would trend very closely to what you would expect in the Midwest and the East, as hard as they were hit with the storms there. They were our most challenged regions, but nothing overall significant to call out from an overall variation. Those were just our lowest-performing regions overall.

Yes, and on the men's business, Alex, I mean, again, we're working hard here, trust me, on what we can do. As you said, it is the biggest part of our business.

We've had a great run in men's for up to the last 18 months or so. I would tell you that we have some unique challenges in our business on the men's side compared to others.

What typically happens in the men's business is we consolidate. You'll go through a cycle where you consolidate volume to group of brands -- that's still relatively small for us. And then you go through a process where small brands over a period of time are going to own a much larger piece of your business.

That's what we're seeing happen now from my perspective, having the advantage of 20 year of watching this. We're going to see our top ten brands probably lose share over the next few years to a group of smaller, emerging brands. And I have to tell you, that's a pretty exciting place for us.

We have some pain as we cycle through these processes, but that's a pretty exciting place for us to be because we've always been about those next-year brands, those next emerging brands. And just to be clear, we have many great brand partners and many of them large in our business, and we're going to maximize results, too, there as best we can.

But these are normal cycles we go through in the business, and I think that reflects on kind of at this point in time, when kind of, one of the challenges that we have in our men's business, is what I think over the next few years will be the disaggregation to smaller brands, and smaller brands becoming less concentrated than the top brands and smaller brands owning a bigger portion of the business over the next few years.

Chris, do you have anything to add?

No, I think that's absolutely right.

As we think about our men's business, it gets back to the category of performance that Rick talked about overall, even with footwear. This business was built on as brands go up and down, their growth curves. Over time, we anniversary trends and other categories step up and fill in.

I think that's part of the strength of our model. And you're seeing that today in the way that our women's and our skate business has picked up for some of the other categories.

All right, and your next question come from the line of Andrew Burns from DA Davidson. Please proceed.

Thanks, good afternoon.

Just a follow-up from Richard's question earlier about store potential. You'll end 2014 with just over 550 US stores and conceivably could be at the low end of your long-term target by the end of 2015. So my question is, when does the availability of locations that you actually want to be in and the site of locations start to be a limiting factor that would be a determinant of where you end up within that 100-store range?

We have identified all the locations we want to be in, Andrew. So we're not going outside of our target group of locations. So we're working as with our landlords on all of those locations at once to get the best locations within the remaining opportunities we have out there. So it will take us another three, four years to complete the cycle.

As Chris said, we're going to continue to reposition locations. Some of that is going to continue to take place in the market. And so it's not question of really of availability. We know where we're going to put stores.

I mean, the target is there. The opportunity will be to continue to re-evaluate that, as we've said, on an annual basis to make sure that we feel good about the targets. At this point, we still do. So then it's just working to get the best locations within those targeted locations that are in our market.

Great, thanks.

In the past, you've been very good at taking a conservative inventory approach. Just wondering, given the rough start of the year for the retail environment, I would assume you're trying to plan on store level pretty flattish from an inventory perspective. But I also found it interesting the comment about a little risk on the footwear side.

Are you looking to perhaps be a little more aggressive in pockets to try to find that next hit product or brand? Thanks.

No, I wouldn't characterize it as that at all. And thank you for, first, recognizing the fact that our teams are pretty good and have a good track record managing inventory levels. We are good at it. Again, it gets back to the very detailed level that we're sorting stores and planning stores and how we can roll that out in our world.

So when you talk about taking more risk, it is very targeted. And it is not outside the budget that we would allow in any one department or category of business.

We're planning the trends; we're adjusting now. But in aggregate, we're going to stay within the max limits that we allow for ourselves on our budget. Some things will go up; some things will go down. So think of it as more micro-targeting to find that next item that will work -- provide differentiation in the marketplace for us.

Thanks and good luck.

Thank you.

All right, your next question comes from the line of Maury Brown with Wedbush. Please proceed.

Thank you for taking my question.

I wanted to follow-up on the weather impact. Would you guys quantify at all either the under performance in the weather-impacted regions or the out performance in some of the warm-weather regions?

No, there's really nothing to comment on.

I think, as you think about Q4 alone, the snow business was challenged in the quarter. And it wasn't just challenged because of the weather conditions in North America. Europe also saw, in the locations that we're in, a pretty warm winter. So this is really the third winter in a row that we have seen that snow business be more challenged.

But there really -- we would not comment on the overall impact. It's not overly significant, but it's worthwhile to call out as you look at the regions of performance that -- specifically those areas hardest-hit by the storms -- impacted our results, and January was probably the biggest representation of that.

Yes. It's -- we have kind of-- I would tell you, the worst of all weather combination in that sense where it was really, really miserable -- as we've said I think in -- for prolonged periods of time -- stretches in the Midwest and new England states, the East Coast. But then where it was warmer in the West coast, that meant no snow. We had a tough snow year on the West Coast, because we generally were up to the last few weeks -- like up in the Northwest -- we barely had any snow in the mountains in January.

Now, we've gotten dumped here in February and a bit here in March. In that sense, you would say, well the warm weather region like California would do better. They would do better, but that's somewhat offset by the negative snow business in the marketplaces. It's all about the complicated balance of mix of categories and departments that make up our business, which again, as Chris mentioned a moment ago is actually I think one of our strengths.

Because we're so diversified in the types of things we're doing, this was the year where I would tell you the weather affected us negatively in both cases. Where it was warmer in the west it actually hurts our snow business. And the snow business in the East is not as big where it was incredibly cold and a challenge from that perspective. All right, that's very helpful. Thank you.

All right, and your next question comes from the line of Jennifer Black with Jennifer Black Associates. Please proceed.

Hi, thank you for taking my question. This is Carla in for Jennifer. You commented earlier about Blue Tomato, and it's not that they weren't potential earn out metrics being low. Can you expand on that? Is it is due to weather, challenging economic environment or other constraints and how you feel about their business going forward?

Thanks, Carla, and tell Jennifer hello for us, all right?

Thank you.

In the case of Blue Tomato, I'll start and let Chris follow up with it if I miss anything here. I mean, this was a business at the time of the acquisition that was absolutely killing. So again a very profitable business, a very successful business. So the earn our target as you might guess were very aggressive. As we said in our comments we comped up in Q4, and we comped up for the year in Blue Tomato. So it's a question that, like in the US, we have seen a major change in the general consumer environment driven by macro reasons, driven by fundamental changes in consumer behavior, and they're just not getting those targets that were set, which were very aggressive targets. So now, trust me, we would love them to be there. It would be great. But this is also the reason you do earn outs. That's the risk-sharing asset that you put into place when you look at acquiring a business.

I would just add to that, as we think through this, just thinking back to what we said at time of acquisition about what a great cultural match that Blue Tomato is, and I would just continue to echo that. This is a group that is hungry and working hard to go after it. And, you know, we are, we still are incredibly encouraged by the partner that we have there, and we think we absolutely have the right partner in growing out our business in Europe.

And what they have done in Austria and Germany and -- right now, quadrupling the store count in 18 months is really significant in the effort they've put in. We are very encouraged by the business and obviously, as Rick pointed out, is comping positively so, yes we take the earn out down, but we're still optimistic about our future there.

Yes. This is still the second-largest access sports market in the world. As we said in the comments, it's a highly-fragmented market, and as Chris just said, he's absolutely right. Gareth has just been here the last few days; these are great people who know what they're doing, incredibly driven, very much a culture match as what we're doing, and we do. We are maintaining, as we said, this is a long-term play, and we're very optimist from that perspective, this is going to be a great business over the long term.

Thank you very much.

Thanks, Carla.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I will turn the call back over to Rick for closing remarks.

Thank you. Again as I like to do here as we wrap up another year, I just want to make sure I say thanks to the entire Zumiez team, our partners and vendors that we work with. We greatly appreciate all your support of what we do here at Zumiez. And even in these tough times of the economic world, we're energize and really driven by what we think is just great opportunity actually in these challenging times. Again, I appreciate everyone's hard work.

The team is working incredibly hard, and we're looking forward to having a successful 2014, and we'll look forward to talking with all of you in our first quarter conference call. Thanks, everybody.

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