Zumiez Inc (ZUMZ) 2014 Q2 法說會逐字稿

Welcome to the Zumiez Inc.'s second-quarter FY14 earnings call.

(Operator Instructions)

Before we begin, I would like to remind everyone of the Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez Inc.'s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties and actual results may differ materially. Additional information concerning a number of factors could cause actual results to differ materially from the information that will be discussed is available in Zumiez' filings with the SEC. I would now like to turn the call over to Mr. Rick Brooks, Zumiez' Chief Executive Officer. Please proceed.

Thank you, and welcome everyone. I'm joined today by our Chief Financial Officer, Chris Work. I'll start the call today with some prepared remarks about the second quarter, then Chris will take you through our key financial and operating metrics. Then we'll open the call up to your questions. The second quarter ended up stronger than we initially anticipated. Compared to the prior year, net sales rose 12% to $177 million and diluted earnings per share increased 63% to $0.26. Both figures compare favorably to our original guidance of net sales between $167 million to $171 million and diluted EPS of $0.12 to $0.16. For the quarter, comparable sales were up 3.4%, driving better than expected leverage of our operating expense structure.

While the start of third quarter moderated from our recent trend line, we are pleased that the weeks got stronger as we moved through August, culminating in a very strong Labor Day Weekend. August comparable sales increased 2% on top of a 3% gain last year. We believe our recent performance is a direct result of the investments we've made in our people and developing a robust and seamless omni-channel presence to showcase the brands we sell. Our ability to better connect with consumers in a meaningful way is driving top-line momentum. As a result, we are more efficient with our inventory management in the second quarter, and moved into one of our busiest selling seasons, with clean inventory levels. As we continue to expand our omni-channel capabilities and bring our highly differentiated and life-style-relevant product and perspective to the marketplace, we believe that we can maintain strong merchandise margins through full-price selling.

I would like to spend just a moment updating you on our physical store growth, both domestically and abroad. Our approach to our physical expansion is straightforward. We do not want to open one more store than necessary to meet consumer demand. We strive towards optimizing our store base by entering markets where it is clear we are underpenetrated, and either repositioning or closing underperforming stores as local markets change. As such, it is a constant reevaluation process aimed at maximizing long-term productivity. During the second quarter, we opened 26 new stores in North America, including 22 in the US and 4 in Canada. For the year, we are targeting 43 additional stores in the US, 7 in Canada, and 6 in Europe. As we've said before, building out our physical presence with productive new stores is an important part of the investments we are making to develop our omni-channel platform, both domestically and abroad.

In addition, we have made, and will continue to make, incremental investments in our technology infrastructure, including our strong e-commerce platform. All together, these investments are key to executing our growth plans, but our ability to drive meaningful growth across all of our markets is highly dependent on the passion for the brand that we entrust with our great teams worldwide. Today, our commitment to invest in our people is stronger than ever. We are confident that our investments will continue to drive solid growth in the years ahead, as we further extend our global reach. We also strongly believe that the enhanced connection with our consumers that is enabled by heightened omni-channel presence will be a key point of differentiation in the rapidly evolving retail landscape.

Our focus as a management team continues to be toward growing and fortifying our brand for the long term; carefully and strategically investing in those things that will bring value to our consumers, our people, and our shareholders for years to come. I'll now hand the call over to Chris for a review of the numbers. Chris?

Thanks, Rick. Good afternoon, everyone. I'll begin with a brief review of our second quarter results and our August sales. Then I'll share our thoughts about next quarter. Second quarter net sales increased 11.9% over the second quarter of 2013 to $176.7 million. Breaking that down by region, North American sales were up 10.1% and our European sales were $9.5 million, an increase of 57.6%. Our European business again contributed positively to the comp in the quarter, and have comped positively in each quarter since the acquisition. Consolidated comparable sales, inclusive of our e-commerce business, increased 3.4% this quarter, driven by an increase in comparable transaction and an increase in dollars per transaction. The increase in dollars per transaction for the quarter was due to an increase in units per transaction and an increase in average unit retail. In terms of category performance, accessories, hard goods, men's and juniors posted positive comps, while full-ware and boys posted negative comps. We finished the quarter with a total store count of 582 up from 529 a year ago, consisting of 535 stores in the US, 33 in Canada, and 14 in Europe.

Gross profit was $60.9 million in the second quarter of 2014, an increase of $5.8 million over the second quarter of 2013. Gross margin was 34.5% in the quarter, down from 34.9% in the second quarter of 2013, primarily due to lower product margin. Second quarter 2014 SG&A expenses were $49.3 million, or 27.9% of net sales compared to $47.3 million, or 29.9% of net sales in the year-ago second quarter. SG&A for the 2014 quarter included $0.6 million, or $0.01 per diluted share of intangible asset amortization expense resulting from the Blue Tomato acquisition, while the year-ago period included $1.7 million, or $0.04 per diluted share in acquisition-related costs, which included the contingent earn-out and amortization of intangibles. Operating profit was $11.6 million in the second quarter, or 6.6% of net sales, up from $7.8 million, or 5% of net sales, during the second quarter of last year. Net income for the second quarter was $7.5 million, or $0.26 per diluted share. This compares with net income of $4.7 million, or $0.16 per diluted share, in the second quarter of 2013.

Turning to key balance sheet highlights. We ended the quarter with cash and current marketable securities of $113.4 million, up from $95.0 million on August 3, 2013. The year-over-year increase was driven primarily by cash generated by operations, partially offset by capital expenditures related to new store growth and remodels, and $32.8 million paid to repurchase our common shares. Inventory was $119.8 million at August 2, 2014, up 5.9% from $113.2 million as of August 3, 2013, largely as a result of our increased store footprint compared to this time last year. Inventory per square foot was down slightly at quarter end compared to a year ago. Year to date we have 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 August 2, 2014, we had $27.2 million remaining in our stock repurchase authorization.

Now to our August results. Our comparable sales increased 2% for the four-week period ended August 30, 2014 compared to 3.0% increase for the four-week period ended August 31, 2013. Total net sales for the four-week period ended August 30, 2014 increased 9.4% to $94.0 million compared to $85.9 million for the four-week period ended August 31, 2014. The increase in comparable sales in the period was driven by an increase in dollars per transaction, slightly offset by a decrease in comparable transactions. Dollars per transaction were up for the four-week period due to an increase in units per transaction and an increase in average unit retail. During the four-week period, juniors, men's, hard goods, and accessories posted positive comps while footwear and boys boasted negative comps. Year to date 2014 comparable sales increased 2.5%.

Turning to guidance. As always, I'll remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margins, and earning growth, given the variety of internal and external factors that affect our performance. With that in mind, we are planning third-quarter comparable sales results in the low single-digit range and total sales to be in the range of $207 million to $211 million. We expect gross margin will be down approximately 50 to 100 basis points compared to the prior-year third quarter, primarily due to lower product margin and slight deleveraging of fixed costs. We project consolidated operating margins to be in the range of 10.5% to 11%, with diluted earnings per share between $0.47 and $0.50. Our third-quarter guidance includes an estimated $0.6 million, or $0.02 per diluted share, in intangible amortization costs associated with the acquisition of Blue Tomato.

In addition to our quarterly guidance, I will once again share our general thoughts for the full year. With our sales results through August 30, 2014, we now project we will achieve low single-digit comparable sales results for the year, and continue to 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. As a reminder, we achieved record product margins in North America in 2013. And while we are a full-priced retailer, our product margins can be impacted by a variety of factors, most notably shifts in product mix and overall trends. [Due to] this, we continue to project that product margins will be down moderately for the remainder of 2014. We are planning SG&A growth in 2014 to grow at a slower rate than 2013, excluding the impact of Blue Tomato earn-out accrual reversal and the legal settlement in the prior year. However, we do expect SG&A expenses will grow at a faster rate on the back half of the year than we saw in the front half.

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 56 new stores in 2014, including 6 in Europe, with a similar cadence to our historical openings of two-thirds prior to back-to-school. We expect capital expenditures for the year to be between $38 million and $40 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 29.2 million shares, which includes the impact of share repurchases through August 2, 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're now ready to take questions.

(Operator Instructions)

Your first question comes from the line of Mitch Kummetz from Robert Baird. Please proceed.

Couple questions on the margins. Rick, I thought I heard you say in your prepared remarks that you expect strong merchandise margins through full-priced selling, and yet the guidance is for product margins to be down in the third quarter and for the back half as a whole. I was hoping you guys kind of reconcile those two comments. Maybe I didn't hear your comments correctly, Rick.

I think you just missed the nuanced point, Mitch, that all my comments are addressed about the long-term direction of what we're doing. So short term there will be different challenges as we move through different cycles. But in the long term, the longer view, we've been saying for a long time that we believe the last five years has been about winning share in the marketplace, and we think the next five years are going to be about the same thing. As we do that, Mitch, we believe part of winning share is the -- that demonstrate our ability to do that will be that consistency, our ability to be a full-price seller. So my comments are more longer-term looking, Mitch, than the short-term guidance.

So is the pressure -- yes, go ahead.

Well, I was just going to say, I want to make sure we're clear why we're saying that. Our guidance still implies a relatively healthy level of earnings growth. I think that's an important thing to keep in mind as overall structure of what we're doing here. Even in what would be a tougher cycle for us, and particularly in a particular category product, we're still delivering pretty healthy earnings growth through the cycle.

And Mitch, I would add, as I pointed out in my comments, 2013 were record margins for us. And our margins are not only impacted by the greater landscape, but also just by shifts in product across our categories and within categories. Trends change, and our -- and the movement across our categories can have an impact on margin as well.

Got it. And then Chris, on the SG&A, I know your comment was you expect SG&A to grow to faster rate in the back half than in the first half. Could you just remind me what's going on to drive that?

I think when we think about SG&A I -- we have to consider the spending we did in 2013, which was really an investment year and we brought up two new websites. We had some investments in both our web and IT talent, as well as a full year of our international operations, which we continue to invest in for the long term. And as we turn into 2014, we really remain focused on balancing, leveraging those investments to grow the business, adding the right additional investments, but also maintaining profitability. And while 2014 is not considered, from our perspective in comparison to 2013 a heavy investment year, we have managed SG&A pretty well on the front half of the year.

And there's no significant item that's driving it on the back half of the year, but there's other smaller things there, just timing of expenses that are moving from the front half to the back half. We do have continued investments around new people still planned on the back half of the year, and there's even things like our incentive compensation structure, which in 2013 was accrued more heavily in the front half of the year, and then as the results tailed off, we had to reduce that over the back half of the year, and we don't have that planned in the model in 2014, assuming we can achieve the targets we've set out.

Okay. Great. Thanks. Good luck.

Thanks, Mitch.

Your next question comes from the line of Dave King from Roth Capital Partners. Please proceed.

Good afternoon, gentlemen. This is Joe Bess on for Dave. I apologize if any of my questions have already been answered, but could you give us an update on back-to-school, and maybe how things are trending as kids have gone back to school across your various markets? Or maybe asked differently, just how things have trended in August, week by week?

Joe, what I would tell you is very similar to what we said in our prepared remarks. August overall was a 2% comp. We were -- it started slower than what our trend line had been coming into the quarter but accelerated each week as we moved through August, highlighted by a strong Labor Day Weekend. Again, we've seen this over peak periods in the past, of really the peak being more violent from a volume perspective than the whole period. And our performance over the peak period I think bodes well for our brand and our product offering that we have out there to offer the consumer.

Okay, great. And then, I guess looking at your business and the recent gains, and particularly in August -- sorry, Rick, how do you think -- or how much do you think is really due to continued market share gains versus maybe an improvement in the overall backdrop?

That's a hard question to ask -- to answer, Joe. I'm not exactly sure how we would parse that. And likewise, I guess I would, as Chris is suggesting, giving you colors for how the week flowed, we're not sure that -- we think back-to-school runs through this upcoming weekend. So we're clearly not done with the back-to-school cycle to this point. So I'm not sure I can fully tell the story, and I'm not sure that the August fully tells the story at this point. It's just the data point we have now. So it's a hard question for me to answer. I guess I would put it this way, which is first, we're up against a 3% a year ago in August, so we're comping on top of a year-ago comp. And on a relative basis in the marketplace, I think it's pretty clear that we're a winner. So I can only look at it from that perspective, Joe. And then again, I would caution you to say that we'll have to see how the full back-to-school cycle looks as it plays out through the remaining portion of this week and this weekend.

Okay, not a problem. That's helpful. And then I guess thinking about as we head into winter and think about the Blue Tomato business, and I know in the past you've talked about maybe having a little bit less of a winter offering, given the weaker snow seasons over the past few years. I guess how does that apply to Europe, given that that business is a little, arguably a little bit more winter-oriented than the US?

We don't approach planning inventories, Joe, any differently in Europe than we would in the US. I mean, we look at what the business requires, what it needs. We try to look at how efficiently we can manage through inventory levels. I think we feel that we came out of what was a weak year in Europe last year in terms of snow conditions with a pretty healthy, clean inventory position in our snow hard goods business there. So I don't think we're -- so we're not entering in a bad position, I guess, in an overall perspective. We'll just have to see. We're always cautious about any seasonal category in today's world. So -- but we're thinking about what's possible and we plan it, and we look at what maximum sell-through rates we can get on what levels of inventory we're taking. So again, I don't think we approach the planning any differently than we do as Europe or here in the US. And then we have some tools and techniques that we will use differently each year, different strategies and tactics that we hope will give us the opportunity to continue to get better sell-through rates with less inventory risk.

Okay, great. Thanks for the color, guys.

Your next question comes from Ed Yruma from KeyBanc Capital. Please proceed.

Hi. This is Jessica Schmidt on for Ed. Thanks for taking my question. We've heard that trends in Europe have become difficult for some of the retailers, and particular in the teen space, just given some of the macro challenges that they are seeing over there. Can you talk about what you're seeing? And I guess how you're looking to manage the business there?

Sure. I'll talk in some generalities and let Chris again follow up with, probably reiterate some of the comments he made in our prepared remarks. Let me start by saying we continue to be optimistic about our business in Europe, and why it's admittedly focused in what we think are two of the strongest economies in Europe at this point, Austria and Germany, Austria being the home country for Blue Tomato. We are pleased with the results we've gotten, and I'll let Chris again remind you of what we've said about the numbers here over the last -- well, since the acquisition here in a moment. But I just want to call out again what a great partnership we have with our team at Blue Tomato. These are people from a cultural perspective that are tightly aligned with the Zumiez team. And we're asking them to do a lot. We're asking them to grow what's already a very strong e-commerce business, I think one of the most successful e-commerce businesses in our niche in Europe, to grow that piece of their business while we're also growing stores. I'll remind you that the point of the acquisition, we really had three stores in Europe, in Austria, and we're now going to finish this year with I think it's --

18.

18 stores this year in Europe. So in just about 2.5 years, the team there has just done some remarkable work, and so we're really pleased with where we're at. We have a lot of work to do. We continue to think that the opportunity in Europe is still very, very big. And we think, just like here in the US and in Canada, that we have partnered with the best operator in Europe, just like we are here, we believe we are in the US and Canadian markets. So we feel very good about where we're at. Chris, if you want to just give a little, again, highlights on the numbers.

Yes, Jessica. From a numbers perspective, reiterate what we said on the call. Europe sales in the quarter were $9.5 million, which is an increase of 57.6% from the second, their second quarter results last year. And while Europe is still just over, you can tell by those results, just over 5% of our overall business, so it's still relatively small to the overall picture. This is a business that's comped positively in every quarter that we've owned them. So still driving very hard and, as Rick mentioned, building out what we believe will be the backbone of a strong omni-channel platform.

Great, thank you.

Your next question comes from the line of Dorothy Lakner from Topeka Capital Markets. Please proceed.

Thanks, and good afternoon everyone. Just a question about the categories, category results. You've had some really strong results across the apparel businesses, both on the juniors side and men's, and in accessories as well. I mean, these have been categories that have pretty steadily been positive. Footwear, you've had challenges both on the men's side and the junior's side. But looking into the back half of the year, and correct me if I'm wrong, it seems like those tough comparisons you have should ease. Is there anything that you feel you're beginning -- if you're beginning to see some light at the end of the tunnel? If you could just talk a little bit about what you're doing in footwear and how you see it in the back half of the year?

Great. Thank you, Dorothy. Let me just even back up just a moment, talk a little bit higher up than your comment, because it's an important thing, I think, for all of us to remember that the strength of our business model is the diversity of brands and the diversity of categories. Selling everything that our consumer wants to see us sell within the construct of the lifestyles we're representing. So as difficult as footwear has been, and I'll let Chris remind you here in a moment about the timeframe that we've been experiencing difficulty in our footwear business, and you're correct, men's and women's. As difficult as it's been, we have found ways and we have found trends in our men's and women's business to continue to drive comp store sales gains. So I just want to make sure I get an opportunity before I talk about footwear specifically to call out, because that's the strength of our business model, something we continue to say across these calls for many years now. That's a real strength of our business, as we cycle brands, as we cycle trends, we can go where the consumer wants us to go and find ways that we can drive gains. I have to tell you, for as difficult as our footwear business is, Dorothy, I feel pretty good about where we're at year to date.

I should say so.

So now, what can we do about footwear? At this point, I have to tell you, I think footwear's going to be a struggle yet. Yes, we're going to hit some easier comparisons. We'll see whether or not that changes. When you're in a footwear cycle like we are where athletic footwear, performance athletic footwear, basketball footwear is really the driving trend cycle, that's just not what our consumers come to us to buy. So we'll have to see. I think it'll be a combination of how those trends are playing out, how we can watch and monitor that side of the business relative to where we're at. Now, we have been very aggressive about our cleaning up inventory positions in footwear. And as we said regarding our overall quality of inventory, we feel very good about where we're at, and that comment would go to also be reflected in our position in footwear.

Yes.

So we'll see how we do. I can tell you that we're looking at everything we can possibly do in terms of all the levers we can pull, from micro assortments, brand positioning, to how we can specialize in unique product in collaborations with vendors. We're trying everything we can do. We're layering those things out there, but this is fundamentally a trend cycle in footwear that is just not one that plays to our strengths. That being said, again I'm pretty impressed by our product team and our sales teams that we can still find a way to drive positive comps. Chris, do you want to give a little historical context?

Yes, just from a historical context the footwear category has been down for the last four quarters that we have reported. But really probably is even longer than that, it was really Q4 of 2012 was the first time we started to see the real shift to the athletics trend. We did have some offset in that as we finished out in 2012 and the first part of 2013 as the juniors business was still strong. But that really changed by the midpoint of 2013 and into the last four quarters being tough. And then you saw it again in August, for our August sales we're reporting today as well.

Just in terms of the inventory, I mean, your inventories, you're always very clean, but it seems like there was a wider gap in this quarter between how much inventory was up and sales. So just wondered what your thoughts are and where we should expect inventory at the end of the next quarter, kind of what your plans are in the back half of the year? Seems pretty clean.

Yes, Dorothy. I think part of what you're seeing, you follow us closely so you're aware, but obviously as we ended 2013, we were a little heavier in inventory than we wanted to be. And we had to be more promotional in getting through some inventory on the front half of this year, specifically the front half of the first quarter. So overall, sales up 12%, inventory up around 6% is kind of in line with what our store growth is. As we think about the back half of the year, we would expect inventory to be up in line with our store growth. So it's important to us to maintain real clean inventories.

Great. Thanks and good luck.

Thanks, Dorothy.

Your next question comes from the line of Jeff Van Sinderen from B. Riley and Company. Please go ahead.

Hi. This is Austin Drake on for Jeff. Can you guys give us your latest thoughts on how you see your store fleet evolving as digital and omni-channel continues to grow? Just wondering if you had reached any new conclusions on how many brick-and-mortar units is the right number?

Sure, Austin. I'll be glad to add a little bit of color to our prepared comments. Again, the first thing as we said in the prepared comments is we don't want to have one more store than we need to serve the market. Now, that seems pretty straightforward, but that's actually pretty hard to figure out. So we are doing a number of things to try to make sure that we learn as we progress each year through executing our omni-channel plants. Now, first thing I would need to call out for everyone is that we have large parts of the country where we're not well represented in the physical world. So, and again as I think I said in one of my first comments during the Q&A phase here, was that we believe it's a shared consolidation game we're playing, have been for the last five years, will be for the next five years. We want to own the share. We want to dominate our niche for the lifestyles that we represent. So we have significant portions of the country where we're really not represented in the physical space.

So if we're playing the share consolidation game, we need to go get the share. And that is a significant number of the stores that we are opening in the US, is to go and fill in or open new markets where we're not represented very well today, where we tend to be underpenetrated. As we then look at the rest of the portfolio, more mature markets, we're constantly evaluating performance of our fleet. We are looking at four-wall contributions in about every manner you can think to slice and dice the data. And we're looking at contribution rates. We're looking at by type of mall. You name it, we're looking at it. And because we want to make sure, as we said in the comments, that we're taking the opportunities to reposition the fleet as best we can to capture share in each marketplace. So this is where we're going to talk over the years about, as we build out that omni-channel presence.

Again, we need to build more stores yet because we are simply not in certain parts of the country at all. After that, it's about maximizing. We're going to try all sorts of things. We're going to measure what happens when we close stores in markets, what happens to the integrated omni-channel business. We know -- already know it's a huge lift when we open stores in markets. So we're going to continue, Austin, to really experiment with these ideas and measure where we're going to be. Today we still think that says the fleet's going to be between -- somewhere between 600 and 700 stores in the US, and that would still be 60 to 70 stores in Canada and Europe, the opportunity yet is huge. We're still predominantly an e-commerce business in Europe, as Chris said earlier, with only 18 stores planned by the end of this year, and the opportunity in Europe there is really to -- is to have a very large fleet of stores. And in each case we're approaching looking at what makes sense for the marketplace as we understand it today, and then building the flexibility into our models and into our business to adjust to the marketplace.

Okay. Thank you very much.

Your next question comes from the line of Lee Giordano from CRT Capital. Please proceed.

Thank you. Good afternoon, everyone. Rick, I may have missed it, but in your last comment there, what markets specifically do you still have holes for new store growth? And then within that, are there different types of locations you're looking at in terms of either A, B, or C malls or strip locations or outlets? Can you give us some color on that? Thank you.

Surely. Glad to do that. Geographically our biggest holes tend to be the southeast at this point, really excluding Florida, but generally the southeast from the Mid-Atlantic down through the southeast across Texas. We have opened some stores there here over the last year. We're doing well in those new stores. We're happy with the performance. So that southeast marketplace, and then also connecting between Illinois, Indiana, across to the East Coast. Those would be the primary opportunities that we have in terms of markets where we're just significantly underpenetrated today. As we think about, and again I'll remind everyone that we have been very disciplined about our approach to how we manage the risk of new stores. We've always tried to be about 50% of our new store mix in new markets, 50% in existing markets. We always try to have roughly the same mix between A, B, and C malls each year to try to manage the risk aspect and the consistency of the growth in our business, and then of course we're trying to balance geography as best we can as we grow the business, too.

So we're trying to manage risk and mitigate some of the risk of the store growth by looking at, again, geographical mall mix types of exposures as we build the business. That is nothing new. We've been doing that for a very long period of time. So that's how we're still thinking about it. Now, we have been experimenting in a very small level with some strip locations, mostly in mature marketplaces, Lee. I think of that as filling in holes, gaps in the marketplace as we look at a market. And we've been experimenting with some street stores over the last few years. Very small numbers again. I think we have what we classify as three street stores. And for the same reason, that those are not -- and by the way, those are not included in our mall numbers as we talk about where we think we can be in terms of presence in the US. These are, again, about filling in holes in the marketplace where we're not currently serving our customers. So those are additional opportunities for us as we think about it, but we're going slow. We're testing the -- testing carefully how we do in those off-mall kinds of locations, and we'll be evaluating how those perform.

Thank you.

Your next question comes from the line of Richard Jaffe from Stifel. Please proceed.

Thanks very much, guys. Two follow-on questions. The junior business has been so strong for you. I'm wondering if that's pushing up to the limit you guys have been maintained for yourselves as keeping juniors as sort of a 10%, 12% of revenues. Wondering where it is and how much further upside there is to that? And then we have seen in the markets some success in the brown shoe business, Timberland being a recent call-out. Wondering, does that play into your strength? That obviously the basketball-type sneaker doesn't work for you, but could you play the brown shoe business more effectively? Thanks.

All right. Thanks, Richard. I'm not going to concentrate -- not comment really on where we're at with juniors so far this year in terms of penetration because we need to see the full year. Each cycle is so important and so different, and of course we're just getting through, not quite through yet the back-to-school cycle at this point. I do just want to call out about the success of our juniors business, because it's been great. It was strong in August again. And so I really appreciate the hard work of our buyers and our store and sales teams across the Company. We've made a lot of progress in what we're doing in juniors, and we're really pleased with the effort and success, and obviously the math, as you are indicating, would tell you that the percentage penetration must be going up. That would be true. But again before we talk about specifics, I would like to see how the whole year plays out because I think that's a much more valid comparison relatively speaking.

Now, how high can that comparison get? I think historically we've been as high as 15% or 16%, Chris? And mid-teens, in that range. We're not there yet, I don't think. So now, and we certainly wouldn't cap it anywhere at that range either, Richard. Customers, we want to go where customers tell us. If customers want to buy a lot, we want to sell a lot. And particularly in juniors, we want to turn inventory quickly. And I think these are areas our team has just done an exceptional job of here this year. So I'm not sure how high it can get, but we're going to try to push it as high as we can get it as long as our customer is willing to invest in the product with us. So great job by our team this year. Thanks for calling that out. And we're going to push it and drive it as far as we can in our business.

The brown shoe businesses, we have played with the brown shoe business over the years. It's actually never -- we haven't really had any significant cycles that have played well for us. My early days here, we carried Doc Martins. We've carried, you name it, we've carried it off and on. I'm not saying we won't be doing that again. Those are things we'll try and we'll push. Women's will have a bit different approach than men's because, again, I think the junior's consumer, it's just a different consumer. So we'll see where we can go. Again, we're not ruling anything out. If there's an opportunity for us to sell product to our customer, we're going to find a way to do it.

Great. Thanks very much.

Your next question comes from the line of Randy Konik from Jefferies. Please proceed.

Great. Can you hear me?

Yes.

All right, great. Thanks, guys. Can you just -- I guess Chris, can you just clarify the back-half margin, gross margin guidance? Is that a reflection of a mix, a product mix assumption, or a different promotional assumption in the back half of the year? And then as you gave some varied SG&A guidance for the back half versus the front half, any [initial] color on how we should be thinking about calendar 2015? Would it be a different run rate in the back half versus the front half, anything like that? Just give us any color you could give on the next year would be helpful. Thank you.

Great. So just starting with the gross margin comments. As we talked about earlier, our margins last year were our peak margins in North America, and specifically product margins, were peak margins in North America. So as we look to the back half of the year, and more Q3, which we provided guidance around today, we do think that there will be some moderate pressure on margins that we've called out in our guidance range. Obviously, our goal continues to be to be a full-price seller in the marketplace and we think we're doing a good job of that in delivering strong bottom-line results. From a mix perspective, there -- we'll have challenges there too, as we have mix not only across categories, but within categories that impact the margin. So we still believe we're going to operate a very high margin price, a margin point I should say, as we move into the back half of the year, albeit slightly lower than where we were a year ago.

From an SG&A perspective, I'm not going to talk too much about 2015. We would kind -- we laid out where we feel 2014 will play out, and I think what's important that you should know about us is we're going to continue to make the right investments for the business for the long term. And that's where -- that's the way we're looking at it. And then we want to make investments that we can leverage as the business continues to grow. And we'll be very mindful of producing a bottom-line result, and that's kind of how we think about SG&A over the long term.

Got it. Thank you.

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

Thanks. Good afternoon everyone. Rick, I just want to follow up. I think Mitch had a good question on the pricing. Can you talk a little bit about your strategy to balance buying goods to sell at lower prices so that you have some value proposition on the mall relative to a discount strategy where you're actually discounting full-priced goods? Talk about the balance and how you partner with some of your vendors to really broaden your pricing continuum. And then if I could, just a question on the omni-channel because it's come up a few times on the call today. But could you give us an update on where you are in your kind of milestones and your progress milestones around the integration of the two channels, what initiatives you have planned for the back half and then what we should look forward to in 2015? Thank you.

Great. Thank you, Steph. Happy to do so. And so let's start with your first question relative to pricing and value, and I'll add a bit to it. It's not just working with our branded partners where it's appropriate for that brand, but it's also our private label mix. And we have a very good private label team here who knows how to deliver value in the categories where private label is very important to our business. So yes, we do plan for that. And that can, as we can move mix there, that can be -- obviously have a positive effect on margins overall. As Chris said, a lot of what you're seeing in margin is there's mix shift involved in that, and then we have a tough category that tends to be a margin drag for us right now.

So we are very, I think, very good about finding ways to deliver value to our consumer, and both through how we partner with brands, and I think everyone knows that as you look at our sale racks, a good portion of what we do on those sales racks is purchase for those racks. And then using our private label as a lever to add value to the consumer's overall basket purchases. [It feels like] we can really focus on the areas where brands are really important in the consumer's life. So it's a very important strategy, what we do. It's one of the ways we've been able to leverage margin over the years.

I think it's still an opportunity for us over the longer term for us to build the strength of our value business for this consumer while still selling, most importantly the real -- our key brands at full price. The last thing we want to do is selling any brands at a discount. We certainly don't want to do that if we don't have to. And we certainly don't feel that for those brands that the real equity, it would be a disservice to them to be having to discount their product. So we feel good about where we're at. We still think as we move forward we have some opportunity, particularly around our private label, I think building that over the future stuff.

Now, the second part of your -- the second question you ask relative to integration of our omni-channel strategy. Yes, we have called out a number of times, because we have been doing things for the last really four years, as we've talked about our five-year planning process, we really identified the need for omni-channel in late 2008. Spent 2009 developing the plans and 2010 really beginning the launch of our omni-channel initiatives. So we have been launching over this cycle a series of initiatives to integrate channels, to integrate our businesses. And that, as Chris said, has required us to make a number of investments, both in people and technology. The launch of our web platform here in North America last year was a very important aspect, a very important step, not just for where we've been, but for where we need to go. And we have a number of initiatives scheduled for the next two years and three years of things that we think are going to be important drivers of our omni-channel business. So we have come a long ways where we're at today, but we have a long ways to go.

I would characterize our omni-channel integration this way, Steph. It's kind of like (inaudible) planning. We're never, ever done with micro-sorting stores and doing it better and better and better. And we're -- we view really what we're doing in the integration of our building a channel list, retail experience for our customers as a never-ending job because if customers are in charge, they are the ones that have the power in today's world because of smart technology. We need to go where they want to go. However they want to do it, we're going to be there to serve them, and we don't know exactly what that's going to look like, again. I tend to think we're a at early stages of this transition, not the latter stages. So we've got a great start, I think.

We, again with the folks [done in] the last five years. I'm not going to talk specifically about what we're doing, what we've done, or what we're going to do here over the next few years, or specifically identified initiatives. I'm not going to get into that for competitive reasons, but we've got a clear road map at this point for the next two to three years of activities. We'll adjust it as we need to based upon what we see and how we're going to interact with the consumer. But it's a never-ending process would be, I guess, my final comment for you there. We're going to keep growing, changing, and evolving as our consumer does.

Okay. Thanks, guys. Best of luck.

Thanks.

Your next question comes from the line of Betty Chen from Mizuho Securities. Please proceed.

Thank you. Good afternoon. I was wondering if Rick or Chris, you can discuss sort of the margin profile differences between Europe, Canada, and the US on an operating margin level, and any distinct differences between gross margin or SG&A? And then as a follow-up to an earlier question, Rick, regarding how you can lever some of your private label merchandise as a value attraction, are you seeing -- what are you seeing in terms of product costing on that front, and how we may be able to see some of that impact or benefit from a timing perspective? Thanks.

Great. I'll try to take these and I'll let Rick chime in if he's got anything to add. From a margin profile, the way we think about the US compared to both Canada and Europe is Canada and Europe are not as over-malled, or as over-retailed, as our US business. So when we look at both our Canadian models, as well as our European models, what we would expect is we would expect that they will do more on the top line. They will probably have a little higher operating structure, specifically around rent, and possibly wages as well, and that they will produce a lower operating margin than our US stores, albeit from a dollars perspective should be very comparable, if not greater. So we expect that our European and Canadian stores will provide the same level of volume, albeit at a slightly lower margin.

In thinking about the private label value perspective and the costs associated with that, this is not an area where we have seen a lot of cost increase in our private label business. And one of the things that's buffered us in the past with large cost increases in cotton and things like that is how diverse our model is. That it's not just a cotton-based business, we have the accessories and the hard goods and the footwear that go along with the model. We have not seen a huge uptick here, nor in our private label business in -- through our results to date.

Great. Thank you so much.

Your next question comes from the line of Jennifer Black from Jennifer Black and Associates. Please proceed.

Hi, Rick and Chris. It's Carla White in for Jennifer Black. I just wanted to say congratulations on a good quarter, and thank you for taking my call. I just wanted to find out if you could give us an update on your Stash Reward Program and what you're learning? And can you tell us about how many active members you currently have in the Stash Reward Program? And also wanted to comment, your back-to-school catalog looks great. Can you maybe give us an update on what you're seeing so far as trends as a result of the mailings that you've done, and is it up from last year? Thank you.

Okay, great, Carla. I'll try to do my best to address those questions for you. Stash, we continue to be primarily focused on acquisition of members. We're well over 2 million members now within the Zumiez Stash, so making good progress on that front. Again, I want to give our sales teams, as you know that's where still most of our volume is, so much credit for signing people up. We have great sales people, and they can not only sell product, they can sell the Stash program too. So well over 2 million members at this stage. We are actively working now on how we are going to increase engagement levels with those consumers, and we're going to be building out our CRM tools over the next year to try to be more highly relevant in our messaging to the consumer base, which of course you know that was the whole strategy behind Stash to start with, was the need to understand our consumer at a more detailed level than ever before, and the trade-off, right, is we get to reward them and they are willing to share some more information with us. So now our job is now that they are sharing some information with us to find ways to be more relevant in their lives, and that will be the focus here over the next couple of years as we continue to build out all these omni-channel initiatives. We feel good about where we're at. We're going to continue to try to drive engagement, and then look at how we can build -- use what we're learning about our consumers to be more relevant in their lives. We've got a ways to go there.

The catalog is, I would just tell you this point, we are still experimenting with the catalog. It's -- we're -- we have had good results, I would characterize it as, on our first -- this is our third book that we did here at back-to-school, and my thanks, I think it looks pretty good, too. I think the team's done a great job, but we're still in learning mode here for what we're going to do. And we view catalog as another omni-channel initiative. So I guess I would ask everyone again to think about all the consumer touch-points you can be -- you can use to communicate to your customers. Catalog is one of those. It tends to be a long-lived item in people's homes and our consumers' homes. So for us it's just another tool that we want to consider in the omni-channel world. And so I would still characterize this as learning in this phase of our business. We're certainly not disappointed with our results in catalog. We -- to be clear, we have not evaluated yet our back-to-school catalog book at this point. That will be happening here over the next few weeks as we get the data back on relative lists for those consumers that receive the book. And -- but it's really, again, Carla, part of that broader omni-channel strategy. How can we communicate, be relevant for our consumers? Show them what's going on in the life-style in a highly relevant way? Consider it just another one of those omni-channel strategies.

Great. Thank you very much.

Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back to Mr. Rick Brooks for closing remarks.

Again, our thanks for your time today. We're always appreciative of the opportunity to talk with the analysts and the investment community. Pleased with our second quarter results, and we'll be looking forward to discussing our third-quarter results here in a few months. Thanks, everybody.

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