Zumiez Inc (ZUMZ) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated first quarter fiscal 2014 earnings call.

(Operator Instructions)

Before we begin, I would like to remind everyone of the Company Safe Harbor language. Today's conference call includes comments concerning Zumiez business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements may be made on this call that are not based on historical facts, and 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 like to turn the call over to Mr. Rick Brooks, Zumiez's Chief Executive Officer. Please go ahead, sir.

All right. Thank you, and welcome everyone. I am joined today by our Chief Financial Officer, Chris Work. I will start the call today with some prepared remarks about the first quarter, and then Chris will take you through our key financial and operating metrics. After that, we will open up the call to your questions. First quarter net sales of $162.9 million exceeded our guidance, as comparable store sales increased 1.8% in the quarter versus the mid single-digit decline we initially projected. Importantly, after getting through some excess inventory early in the quarter, the upside was earned by in full price selling in the back half of the year. This along with better expense management, allowed us to deliver earnings per share of $0.09, $0.06 above the high end of our guidance range.

While the first quarter is a seasonably small quarter for us, we are certainly encouraged by the consumer response to our merchandise and selling strategies. We believe our ability to exceed our sales and product margin projections in the current retail environment is a testament to our highly differentiated product assortments, and the seamless shopping experience we provide our customers, regardless of which generally choose to engage with us. We have talked a lot over the past few years about the investments we have been making in developing a strong omni channel presence, inclusive of highly productive -- of a highly productive store base, and a robust e-commerce platform both domestically and abroad. I am pleased to say that as anticipated, these investments are starting to pay dividends, and are further separating us from the competition.

This quarter, while it appears mall traffic remains sluggish, our business performed better than expected in the first quarter, with total sales up 9.7%, as our customer connected with us across all channels. In North America, we opened five new stores in the first quarter, including four in the US and one in Canada, putting us on track to add 50 new stores between these countries this fiscal year. Regards to our store count, I would remind you, we continually evaluate our portfolio as a whole, in effort to optimize our physical presence in all markets. As such, we may reposition or close underperforming stores throughout the year, in order to maximize long-term productivity. Although our European operations are still a small part of our business, this region again comped positive in the quarter, and was a key driver of our sales performance. Not only is this encouraging for the near-term, but it underscores our decision in 2012 to extend our reach globally, and highlights the long-term potential for this business. In the quarter, we opened two new stores in Europe, and we remain on track for the planned addition of five new stores in 2014 which will bring our total physical European store base to 17 locations.

One of the unique things about Zumiez's culture is that our success is not simply predicated on investments in the markets or infrastructure. We are also passionate about investing in our team, and empowering them by providing the right tools, training and support so they can deliver a genuine high quality experience for our consumers. Two weeks ago we held our annual miniature retreat, where we bring in all of our store managers for an intense teaching and learning experience that takes place over several days. Our culture is on full display at this event, and it always reinforces with me how important our focus on people is to the success -- to our success as a lifestyle retailer. The impact our national events have on our store team is meaningful, long-lasting, and it feeds the passion our employees have about the brand, the lifestyle and the Company. The passion our employees bring to the job, is not only the driving force behind our top line success, but enables and encourages good stewardship of the brand and our unique perspective in the marketplace.

Obviously, we are excited by the progress we continue to make on our growth initiatives, and we are encouraged by first quarter results relative to expectations. That said, we remain cautious with our short-term outlook as the uncertainty surrounding the retail environment persists. As always, we will continue to focus on the long-term, and believe the investments we have made in strengthening our omni channel capabilities will play a significant role in propelling our brand forward. We are increasingly able to bring our differentiated and compelling product offering and superior service model to our customers, wherever and whenever he or she chooses to shop, which will provide us with meaningful opportunities to grow as we continue to evolve our retail model in the years ahead. I will now hand the call over to Chris for a review of the numbers.

Thanks, Rick. Good afternoon, everyone. As usual, I will start with a brief review of our first quarter results, and then shed some light on how we are thinking about the second quarter. First quarter net sales increased 9.7% over the first quarter of 2013 to $162.9 million. By region, North American sales were up 8.1%, and Europe sales were $12.3 million, an increase of 34.6% in the quarter. Comparable sales increased 1.8% in the first quarter inclusive of e-commerce sales. The increase was primarily due to an increase in comparable store transactions, partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction was primarily due to a decrease in average unit retail, partially offset by an increase in units per transaction.

In terms of category performance, accessories, hard goods and juniors posted positive comps, while footwear, boys and mens comped negative. We finished the quarter with a total store count of 558 stores, up from 503 stores a year ago. Gross profit was $50.5 million in the first quarter of 2014, an increase of $2.5 million over the first quarter of 2013. Gross margin was 31.0% in the quarter, down from 32.3% in the first quarter of 2013, primarily due to 130 basis point decline in product margins, as we cleared through excess inventory early in the quarter.

SG&A expenses for the quarter were $46.8 million or 28.7% of net sales, compared to $43.9 million or 29.6% of net sales in the 2013 quarter. Included in SG&A in the current year period was $0.6 million associated with the amortization of intangible assets associated with the Blue Tomato acquisition, while the year ago period included $1.7 million in acquisition-related costs, which included the contingent earn-out and amortization of intangible assets. First quarter operating profit was $3.7 million or 2.2% of net sales, compared to $4.0 million or 2.7% of net sales during the first quarter of last year. Finally first quarter income was $2.5 million or $0.09 per diluted share, which includes $0.6 million or approximately $0.01 per diluted share of Blue Tomato acquisition-related costs, compared to the first quarter of 2013 net income of $2.5 million or $0.08 per diluted share, which included $1.7 million or approximately $0.05 per diluted share of acquisition-related costs.

Turning to key balance sheet highlights, we ended the quarter with cash and current marketable securities of $107.8 million, up from $97.6 million at May 4, 2013. 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 $32.8 million paid to repurchase our common shares. Inventory was $97.6 million at May 3, 2014, up 7.4% from $90.9 million as of May 4, 2013. Inventory per square foot was down slightly at quarter end compared to a year ago. During the quarter, we continued to buy back shares opportunistically and repurchased approximately 0.8 million shares of our common stock for an average cost per share of $23.03 for a total of $17.4 million. As of May 3, 2014 we had $27.2 million remaining in our current stock repurchase authorization.

Turning to guidance, and 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, our short-term outlook remains cautious in the face of an uncertain retail environment. With that in mind, we are planning second quarter comparable sales results in the range of a low single-digit decrease to flat, and total sales to be in the range of $167 million to $171 million. We expect gross margin will be down 100 to 150 basis points compared to the prior year second quarter, primarily due to deleveraging effect of store occupancy, and to a lesser extent lower product margins, although not to the extent we saw first quarter product margins declines, as we sold through excess inventory.

We project consolidated operating margins to be in the 3.5% to 4.5% range, with the diluted earnings per share between $0.12 and $0.16. Included in our second quarter guidance, is an estimated $0.6 million or $0.02 per diluted share in intangible amortization costs associated with the acquisition of Blue Tomato. As many of you know, our business is seasonal with the majority of our sales and earnings occurring in the back half of the year. 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 reiterate some of the general thoughts from our March call about the year.

With the uncertainty in the marketplace, we are not prepared to give comments on sales results for the year. We believe that our proven strategies around product and people coupled with the investments we have made to provide a great omni channel experience will result in top line performance ahead of the teen sector in general. We achieved record product margins in North America in 2013. While we are a full price retailer, our product margins can be impacted by a variety of factors, most notably shifts in product mix. As a result, we are projecting product margins will be down moderately for the remainder of 2014. 2013 was an investment year, and while we do not expect the same level of investment 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 or negative, 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 earn-out 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 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 fiscal 2013. 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 29.2 million shares, which includes the impact of the share repurchases through May 3, 2014. Any additional share repurchases during the year, from the $27.2 million remaining on our authorized repurchase program will further reduce our share count. Operator, we are now ready to take questions.

(Technical difficulties - no audio)

Mr. [King], are you there? You may proceed with your question. Your phone may be internally muted.

No, I am actually here now. Thanks, can you guys here me okay?

Yes.

Okay, perfect. I guess, first off, my question was on the product margins guidance that you had both for the year, and I guess, then for the quarter. It sounds like for the year, some of that is due to mix. But then if I think about the second quarter, is that fair to assume that that's what's driving that there? And just more color around what specifically is driving that, would be helpful? Thank you.

Certainly, so as you probably recall, when we came into the first quarter, we gave product margin guidance in the range of down 150 to 200 basis points. We specifically gave that guidance based on some of the pressures in the environment, but more specifically because of the excess inventory we were carrying, as of the end of the quarter. So our approach has always been to keep very clean inventory, so we knew we need to move through that pretty aggressively, and because of that, there would be an impact on product margins in the first quarter. As I indicated in the prepared remarks, we ended the quarter with product margins down 130 basis points.

As we think about this, into the second quarter and beyond, we feel much better about our inventory levels, as we closed the first quarter. So while we still anticipate some pressure on product margins as we move through the year, partially due to mix, and there is other factors as well, we do not expect them at the levels that we experienced in Q1. And I think it is important to note that as Rick has pointed out in his comments is, we aim to be a full price retailer. And that is very important for us, full price and full margin. And so, as we plan the business going forward for 2014, we do expect there to be some deleverage on the product margin level, but we are aiming to be at full price.

Okay. So it sounds like then there is some carryover inventory that may be impacting that to some extent, that in the second quarter specifically?

Yes, I would say there is some, it is a very small piece. We feel very much better about our inventory levels ending the first quarter, than where we were at the end of Q4.

Okay. Thanks for the color, Chris. And then, in terms of the footwear business, I think last quarter we talked about maybe some increased risk that you might be taking, but still within budget in terms of what you are looking to do. And then over the course of the quarter, I think footwear, I would say is probably was one of the underperformers versus maybe some of the other segments. Rick, could you just sort of update us on what you are thinking there about the footwear business? Are you having any success at some of those risks that you are taking, and just sort of the outlook kind of going forward for that business would be helpful?

Sure. Footwear as you correctly got from our comments, in the way we order the category performance, it was a tougher category in Q1. We are doing things trying to target -- to target improvements in the footwear business. I would tell you that we have had marginal success at those, but we are fighting an uphill battle in both men's and women's footwear. So there are just some trend items that are against us. The hot brand on the women's side is not quite as hot as it once was. And on the men's side, I think we all are aware that athletic performance footwear, basketball shoes and things like that are actually more in trend than our typical product that we carry. So while we have had modest success, we are still fighting those upward battles in both the men's and women's side of the business.

Now that being said, as we pointed out, we comped positive for the quarter. So I would just like to remind everyone that we ride trends. We ride trends around brands, and brands will go up and down. We ride fashion trends, and we take advantage of those. And we also are subject to category trends in things like footwear. So for number of years, we talked about how footwear was a driver of our business from a category perspective. We are going to recycle that.

We are finding that other categories that we have been talking about like skate and women's have been leading the way over the last few quarters. So this isn't unexpected or unanticipated, we expect to go through cycles like this. We try to minimize those trends on the downside, by pushing hard in the other departments that are going to trend up to maximize those cycles. So I would like to just make sure we all think about this, from the perspective again of managing a portfolio of brands and categories, and that together, we are pretty good at driving out gains.

All right. Thanks so much.

(Operator Instructions)

And your next question comes from the line of Steph Wissink with Piper Jaffray. Please proceed.

Hello, good afternoon, everyone. Just a couple of questions if I might. A follow up to an earlier question on inventory. Chris, I think you mentioned maybe this notion of balance and comp, with the merchandise margin. Can you just talk about a little bit more about how we should think about that through the balance of the year? Are you working inventory to a level that you feel like you can control merchandise margin a bit better, even if it comes with the expense of comp? That is kind of one question. And then, Rick, a question for you, just on the run rate of the business on a longer-term basis, as we see this high single-digit top line rate of growth, merchandise margin, but this current level, does this alter the cost assumptions of the business model? Are you thinking any differently about how you invest through the interior of the P&L to really support maximizing profitability potential? Thank you.

Sure. I will take the first part of your question here, Steph, on product margin. As we think about product margin for the remainder of the year, and I will remind you, our North American product margin for 2013 were at a record high. So as we look at how we are planning product margin for 2014, we do expect product margins on a consolidated basis to be down moderately. So what -- will have some impact there, albeit this is something we will continue to manage. In regards to comp, our business is to sell brands that have great equity, and marking them down is not what we think is in the best interest of the brands that we work with. So we are going to continue to find great brands to work with and partner with, that we can sell their inventory at full price, and give a great presentation to our consumer. And so, when we do, do more promotional things, those are things that we hope we can plan into, and to manage the business. So we are not, managing it to mark inventory down just to drive comp. We are managing it to what is right for the brands, and what is right for the long-term brand at Zumiez.

And let me take the -- obviously, Steph, the last part of your question there relative to our thinking around -- on long-term run rates relative to comp sales. And if I got your question right, then does it alter some of our thinking around cost assumption, investments we need to make in terms of maximizing productivity? Well, the answer is, yes, we think about all of those things. And we think about that a lot, because retail over the last two years, we do also and destock in low gear here. So it tells us, I think a couple things from that perspective, and I -- while I say that, I do want to -- I just want to make sure point out, that our low gear appears to better than most retailer's low gears, in terms of how we are performing, both at comp and profitability perspective. So I just want to make sure I am clear about that.

We are -- and that is because we are doing something very different out there, in terms of what we are doing in our business model. We are differentiated, unique in terms of the experiences -- we always talk about it relative to product, and relative to what we do with our people, and the integration of a multi-channel selling platform. So but, yes, Steph, we are thinking about all of these things. And we, of course, are challenging ourselves around, what can we do around the cost assumptions? Now as you know, having been around us for a long time, we don't have a lot of fat here at Zumiez. So we always have been a very lean organization. So for us to look at cost, we are going to have to look at things very creatively, and I think where we can, we will do that.

Now while I say that, I will tell you that, there still will be more investments to come over the next few years, because the business will require it. And I think those investments are what is going to separate the great retailers from everyone else, because you have got to keep moving forward. You got to keep putting yourself in a position to maximize your interaction, and relate -- in your relationship with your customers. So we will be making some more investments -- on as Chris said, on kind of think of these things on a continuum over time. And if there are things that we can do to change the cost curve in our business, we will -- we are looking for those opportunities, and we always do stuff. So, and we are planning our [business] as you might guess, to try to drive us to those, for those opportunities that we think about the business.

Now all of that being said, I think we are aware that -- as we know we peaked a couple of very big brands for us in mid 2012. And so, we are working through that cycle. And I think as we have said before, we are seeing the de-concentration of sales amongst our top 10 brands -- and I think top 22, Chris? We view that as very positive, because that means that young brands are taking a larger share here of our business through 2013 -- the full year, again, we measure on a full year basis, we look at 2013. And I expect, Steph, as you know well too, there hasn't been a lot of fashion cycle change. So we expect that those things are going to happen. We will see some movement in fashion. We expect that we will continue to see small brands gain share, emerging brands gain share. And as Chris said, we want to be a great partner for those brands, and make sure their product is well-represented in the store, represented by people who really get it, and what they are doing, and understand the brand presentation, and with the uniqueness around it for our customer. So I do think that some of there -- there tends to be these I think, this long-term idea around run rates, but we are going to see these other factors move and change too over time.

All right. Thanks, best of luck.

And your next question comes from the line Mitch Kummetz with Robert Baird. Please proceed.

Yes, thanks. First question, I guess, has a couple parts to it. So on your Q1 performance, I am just curious, how much did weather play into it, was it a net positive, negative? And then, in terms of exceeding your comp plan on the quarter, I know Rick you talked about better performance in the back half on full price selling. But as you think about the upside relative to your major product segments, was there anything that stood out from a product standpoint that drove the comp better than planned? And I got a follow up.

All right. I will let Chris talk about if there is any -- if we did see any regional differences, Mitch, but I am not sure we have any great insights here. Clearly the weather, I think was a factor, but we are not going to, probably I think we will tell you anything great, that we see anything unusual insights relative to a positive/negative. It just is what it is, and we are happy to generate positive numbers. So and I think as we have said, previously, right, we performed particularly well in April, as we said in the back half of the quarter. And that was driven by the Easter shift, and while we are not disclosing weekly sales any more, you can take from my comment that Easter was very powerful, in terms of sales results in the month of April.

So those factors, and when that happened, as we always talk about Mitch, the peaks get to be a little steeper, and we do well when we have a peak like that. And I think that both is reflected, is the customer likes what we are doing and they have the money, they come out and they spend disproportionately that money with us. So I can tell you that everything got lifted in April, and so, proportionally. So from that perspective, I can't really call out for you any particular trends. I would say, I think, it was just generally, that as we got better, everything got better. I think, again it speaks to traffic and people's willingness to spend money.

Yes, and I would just add to that Mitch, on the regional perspective, the way we typically look at that is, what is a reasonable standard deviation from the mean of 1.8[%] comp that we landed on in the quarter. And as you look across all regions and even internationally, really everything was roughly in line. Obviously, our European operations as we said, were a positive impact on the comp, and you would expect that from a growth business. And as tough as it has been in Europe, they continue to comp positively, as they have since we have owned them. And so, that was a good piece of our business in Q1. But all other regions were within a reasonable deviation from the Company average.

Okay. And then, as a follow-up Chris, on your SG&A outlook, I think you said a couple of things. I mean, I think you said you expect slower SG&A growth this year than last year. But then it sounds like you are accruing more for bonuses. Did I catch that right, and is the slower SG&A growth inclusive of more on the bonus side?

Yes, great. Thanks, Mitch. No, I -- let me kind of just backup on SG&A overall, because this was an area as we talked about 2013 being an investment year, that we did see a spike in the growth of our SG&A line item. So as you look at SG&A for 2014, I think it is important to note that we will see a benefit in Q -- from a GAAP basis in Q1, Q2 and Q3 as we were accruing the contingent earn-out in the prior year. Now that will be a detriment to Q4 and the year in general, as we wrap it up. If excluding charges, as we think about SG&A -- our overall SG&A in Q1 had a lower growth.

And as we look into Q2, we would expect to see a lower growth. But on the year, we do expect to see the higher growth level than what we have seen over the front half of the year, albeit lower than what our growth was in 2013. So I think when we think about our cost structure, it's important to note that while we are not planning 2014 to be a heavy investment year, our growth initiatives do live on in a continuum, and we don't have any specific major projects to call out at this time, but we may continue to make incremental investments. And what I meant on the incentive piece of the business was that in 2013, we did not accrue nor pay to the high level of our incentive levels. And so, to the extent that we are able to exceed what we believe is a reasonable level of performance, we will have to accrue those incentives and pay those incentive levels again, which will increase our investment in SG&A.

Okay. I got it. Thanks.

And your next question come from the line of Edward Yruma with KeyBanc. Please proceed.

Hello, good afternoon. Thanks for taking my question. I guess, a bigger picture question, you have been incredibly successful at being the authentic [action sports] retailer in the mall. But clearly, there is a move towards more diverse fashions. I guess, how do you feel about the balance between kind of the core action sports apparel versus potentially streetwear? And then, also as it relates to the percentage of hard goods within the business? Thanks.

All right. Thanks, Ed. So I am happy to address that question, and again, we have been doing this a long time, right? So we are definitely perceived in the market as a core action sports retailer, and but we have to, and are doing something even more fundamental in the marketplace, instead of just serving that market -- that core action sports consumer, and we always have been. So in the mid 1990s, we had a whole urban run with FUBU and South Pole and all sorts of brands. And we will see this play out -- I can give you numerous examples over the 20 years I have been here, how we see that play out.

What I will tell you that means for our brand, is that we have permission from our customer to do much more than just action sports. And we are really serving this consumer who wants to be different, who wants to be unique, wants to make a statement about who they are, and what lifestyles they are embracing through what they wear -- and not just what they wear, but what they do on a holistic basis. So I just -- historically, we kind of get pigeonholed as this action sports retailer, but we have always been able to move much more broadly. So what you see us doing with streetwear is exactly that, responding to what our customer telling us they want us to do for them. And we have always been really good at that, Ed, and that is what you are seeing us do with that.

So now can I tell you what the exact breakdown is between streetwear versus what is skate-related or some other lifestyle-driven business? Well, no. I really can't. Because so many of the brands today have a multiple lifestyle approach. So you might look at a young brand that might have some heritage in skate, but they are really more streetwear today. So how do you classify those two things, and separate them out becomes very difficult to do. And again, from our perspective, our customers doesn't care. They just really want really cool stuff, that is really unique and special, that fits with who they are. So that is kind of how we perceive it, Ed, and we will go anywhere our customer gives us permission to go. And I think that is much broader than just action sports. I think that's what you see reflected in our streetwear business today.

I will tell you, and I am glad you asked the hard goods component of that question. Because again, hard goods works the same way. And while we have been doing very well with skate hard goods for a couple of years (Multiple Speakers). Yes, and it's been a really great part of our business, and we are really good at it -- I will add to that again, I mean, it is something that I think we really excel at, and with great people who know what they are doing in our stores, there are other parts of hard goods that have been terrible, and that used to be much bigger parts of our business. This again, shows you how we are moving with the changes in the marketplace.

And so, snow has been declining our business for over a decade, and it used to be much bigger part of the business, its relative to what it is today. But you look over that decade, we were growing sales across that entire time frame on a comp store and overall basis. So again, hard goods is an illustration for that for me, Ed, is we will go where our customer tells us to go. And we will move between all of the categories and all the brands to drive the sales number. So it's all inter-related, but again I think we have permission to go in a lot of different ways, where our customer would like us to go, and that is what we are doing.

Great. Thanks so much.

And your next question comes from the lines of Liz Pierce with ACM. Please proceed.

Thanks for taking my question as well. I am kind of dovetailing on just what you are speaking about, are there things that are happening perhaps in Europe that would, if you contest into the US, that might help revitalize the men's and the footwear category?

So again, Liz, so are things happening in Europe that might come this direction, is that summarizes it?

That's basically it, yes.

Okay, very good. I would tell you again that, with the lifestyles we are representing are global lifestyles positions. So and a lot of it still born here from the US, particularly around streetwear and the action sports lifestyle. So while there are local brands in Europe that we are certainly carrying and representing and are important to us there, we are not seeing many of those make the transition in Europe. And none significant, really in footwear outside of the big brands that already have a presence here like Adidas. So the answer to your question is really not, most of it still comes from the US, and moves outside of the US globally.

Have you actually tested some of this, I mean, are -- or you just know it won't work?

Again, we have our -- we have lots of ways to follow what our consumers are asking us for, and these are -- the little European brands are not on the radar of the US consumer.

Got it. Okay. And then, just kind of a follow up question, in terms of you said, you are going to go where customers tell you to go. Would that, and this may be backing on to Steph's question, are you still comfortable with the size of the stores?

Again, I think we have said in some previous calls, and I will echo it again, is we are constantly looking at trying to manage our store portfolio, and trying to manage it in a number of ways. So first, from a product perspective, we have always been and continue to try to improve our ability to micro assort stores. I think we have some of the best, maybe the best micro assortment tools in all of specialty retail and our buyers are very good at doing this. So we are not talking about categories of stores with, we are talking about individual stores, in terms of how we are trying merchandise and present the product.

So and everything, that little local brand is important to our market, to the different mix among the bigger brands, and the different types of products that sell better in that environment. So I think we are way beyond where most people, most of our competitors are at, in their ability to micro assort stores. So when you look at, and you have capabilities to do that, and then you combine that with the omni channel world where consumers are going to tell us even more about themselves, they are going to share more data with us. They are going to use the digital world to connect to the physical world. I would tell you that I think over the long term, that potentially stores there -- we are biased to saying, that average store size is over the long-term, are more likely to come down than to grow.

And as we have said, even in the comments today, we are actively managing our store portfolio. Because our goal is, that if you look at business in a trade area, we don't want to have one more store necessary than it takes to capture the entire market share that we want to own in that marketplace across all channels. So that is one of the ways, going back to Stephanie's question, that we hope over time to understand this better, and be able to execute better in this new world. And have the exact number of locations we need to capture all of the share across all of the channels, so we can maximize the efficiency, productivity and profitability of the business in a trade area.

Great. That was actually really helpful. Thanks, Rick.

And your next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Good afternoon. I wonder if you can give us more color on how you are thinking about and planning inventory for second half? And then I have a follow up.

Well, I will give you headlines. I will let Chris follow on, Jeff. We are not doing anything different than what I just kind of -- I will follow right along with the question from Liz, which was is again we are planning inventory at an incredibly detailed level. And then, that assortment planning process works its way up, the top down inventory planning comes down from our planners. Those plans are reconciled along with our sales objective. So our goal is not to be in position to be clear where we were at the end of fourth quarter, with an overhang of inventory. We want inventory clean, as part of being a full margin retailer.

And I think what, as Chris said in his comments, we are in a much better position today, relative if you look at where sales are, relative to inventory position, I think we are feeling pretty good about it. So we are not going to do it, Jeff, anything differently than try to do what we have done historically, which is plan the business in with -- at a very detailed level, and to really try to maximize sales. So we can minimize the markdowns and sell -- the product that we sell to our customers for our brands at full margin.

And I would just add to that, as we think of the back half of the year, there is a lot of different ways that we look at this. But we would expect inventory to grow at a pretty similar level to our store count, and would expect per square footage to be relatively flat with the prior year.

Right. Okay. That is helpful. The other thing I just wanted to touch on is your digitally based elements of your business, is there anything that you are learning there that you would care to share, anything new? And then, if there is anything that you are learning that is shaping your plans for the future?

There is lots we are learning, Jeff, about the digital world, how we are interacting with our consumers in that world, how Stash, our loyalty program is going to fit into all that. And none of that, at this point am I willing to share. (Laughter). So I think you have to -- we will have to think of this, the modern world as just one continuous feedback loop. And ultimately, right? We are going to find ways to include that feedback loop, and predictability and assortment planning in a few years out. But we need to gain scale in all of those digital channels. We need to get scale in our loyalty programs, and that still continues to be our primary focus in loyalty at this point, is gaining scale, so we have greater consumer insights, and we are learning more all the time in that feedback loop. So we think that we have lots of great ideas, we have lots of ideas of things would like to do and try and experiment with. Some of them will be about brand. Some of them will be about driving sales, and each channel will have a different focus based upon where that channels out, how that channel interacts with our consumer base.

Okay. Fair enough. Thanks, and good luck.

And your next question comes from the line of [Alex Sampson] with Mizuho Securities. Please proceed.

It's Alex on for Betty Chen. We have heard a number of retailers express difficulty in their Canadian business. Just wondering if you can touch on how Canada is performing? Anything to call out, in regards to the competitive environment for action sports there, and maybe how the team is thinking about the growth opportunity there longer-term? Thanks.

Okay, great. I will try to take a shot at that for you, Alex. Like I would tell you every market today that we are working in is an incredibly competitive marketplace so, and Canada was no different upon our entry there. I think we understood the competitive landscape well, in going into marketplace, there were a couple of good competitors in the marketplace. One of them tends to I think to be -- have been weakened over the last few years. We anticipated in, as we went into Canada, that we knew that the cost structure of doing business in Canada was different, relative to the cost of real estate. We also knew that generally, sales performance on a per location would be higher. Because of the fact that the mall space in Canada is not as built out as it is in the US. So I will tell you that, as we look at our performance of stores -- and we look at a class of the new stores with our Board annually, and review how we are doing I will tell you that in aggregate, in Canada, we are meeting at the objectives as we planned, for financial -- overall financial metrics. So from that perspective, we were really pleased with how we are doing. It is playing out on the maturation scale we expected it to, and we are delivering the results we expected to, based upon again, those primary considerations of a different cost structure, but a higher revenue base for new stores. And again, we will need to see this -- these are still early reads. We will need to see this continue to play out, Alex, over the next couple of years as we mature the base up there. We continue, we expect to have how many stores, Chris, this year for the --?

We will open another 7 stores, which would give it 35 total.

35. And we think it is somewhere possible -- you were estimating Chris?

It is probably about 10% of US business, so we planned out 600 or 700 stores. So we would look at that in the 60 or 70 store range.

So we have a ways to go, Alex, with that. And I guess, I would tell you that maybe we are bucking the trend, relative to what a lot of other retailers have done, because we are pretty happy at this point, and we are hitting the high level metrics in aggregate for the classes we thought-- for where we thought we would be at this point in time.

Great. Very helpful. Thanks.

And your last question comes from the line of Lee Giordano with CRT Capital. Please proceed.

Thank you. Good afternoon. I was hoping you could talk a little more about Blue Tomato, and the performance you are seeing there in those stores and online? And then what your ultimate goal might be for Blue Tomato over time as far as store count? Thanks.

All right. I am just making a couple notes here, Lee. Okay. As you obviously saw from the numbers Chris shared in the prepared comments, I mean, we had a good quarter, first quarter for Blue Tomato. I think as we have said, as we have said every quarter that Blue Tomato has been part of the Zumiez family, is that we have comped up every quarter, that Blue Tomato has -- in the almost two years that it has been a part of the Zumiez business. So we are taking -- our look at Europe is a very long-term perspective, like we try to take with everything. We want to do our expansion in Europe with good quality, focused on building over the long-term. We are thinking about what we are doing over a 5 and 10 year window. We don't think it's probably going to really substantially move the needle for our business, Lee, until we get out in another four years, five years we build the base of the scale of our business in Europe.

So I can tell you again, the team at Blue Tomato is just fantastic, and incredibly culturally aligned with what we do, how we do things. It has been a great partnership. And as you know, we work in this empowered world, and as part of Zumiez values set, and they are running the business. Yes, we are monitoring, we are tracking, we are agreeing on goals. But the guys there are doing it, like they have done it since the beginning of that business. So at this point, I would tell you -- obviously it did hit the astronomical kind of trends it was running at the point in time we bought it, and that is why the earn-out has been reversed. But we are pretty happy with where we are at, and we are learning a lot. As we have said in previous calls, we are experimenting with store formats, finding out what is going to be right for each kind of market in the countries we are currently working in. And we are learning a lot from those experiments. And but at this point, it is a small, very small part of the business, and we are in general, happy with the performance.

As it relates to the longer term view of, for Blue Tomato and what the store count is, we just aren't prepared to go there yet. And the fundamental reason is, while we believe Europe, the market in Europe is very big for what we do, in fact, the second biggest in the world after the US, we are just not prepared to do it. Because we need to do this work. We need to do the quality work we are doing now, in the next couple of years to prepare for more growth, when we are four and five years from now. So that we are going to do it the right way.

So I need to learn more, is what I am going to tell you, Lee. We are happy with where we are at again, kind of like I just said, with Canada, for what point in time we are at, where we thought we would be. We are still feeling pretty darn good, with the quality -- the Blue Tomato team is excellent. I think they are the best partner, we could have partnered up with in Europe. But we need to do the work, and we need to do it here over the next few years, before we are going to look at really fully sizing the market. And so, we are not going to set any long-term targets at this point, other than to say, it's a big market place, and we need to prove that we can be successful, and build it country, by country, by country. And we have a ways to go to prove that yet.

Thank you.

This concludes the question and answer session. I will now the call over to [Brooks] for closing remarks.

All right. Well, thank you everybody. We really appreciate your time, and your spending with us here in the first quarter. And we will look forward to talking with you, as we get to the end of our second quarter. And thanks to you all.

Ladies and gentlemen, this concludes the presentation for today's conference. You may now all disconnect and have a wonderful day.