Zumiez Inc (ZUMZ) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Zumiez, Inc.'s third 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 historic facts are subject to risk 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 and is available in Zumiez's files with the SEC.

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

Thank you and welcome, everyone. I'm joined today by our Chief Financial Officer, Chris Work. I'll start the call today with some prepared remarks about the third quarter, then Chris will take you through our key financial and operating metrics. Then we will open the call up to your questions.

Our third-quarter results came in ahead of expectations, bolstered by stronger than anticipated net sales Net sales in the quarter increased 12%, to $213 million, ahead of our guidance range of $207 million to $211 million, which combined with lower than planned expenses across the business resulted in favorable flow-through to the bottom line.

Earnings per share were $0.54, ahead of our guidance of $0.47 to $0.50. The better-than-expected sales in the third quarter were primarily a result of a comparable sales increase of 3.7%, driven by a solid back-to-school season in the US and a good start to the fall and winter season. These trends strengthened into November, helped by cooler weather in the month, culminating in a strong Black Friday weekend, which comped over 7% for the four days, Thanksgiving through Sunday.

We believe the investment we made in our omni-channel capabilities, domestic new stores and international growth are enabling us to connect consumers with our unique product assortments on a greater scale, and this is evident in our overall performance.

Before I hand the call over to Chris for a financial review of the quarter, I'll give you a brief strategic update. We continue to expand our brick-and-mortar locations throughout North America and Europe. During the third quarter, we opened 16 stores in the US, two in Canada and one store in Europe. And as of today, we've opened 56 total planned stores for the year.

As we plan for 2015, we remain focused on store optimization and productivity, recognizing that our new store planning must go hand-in-hand with the expansion of the rest of our omni-channel presence to ensure we are able to connect with all of our customers in all markets on their terms, enhancing their ability to experience our brand through both the physical and digital world.

We also continue to make other investments that we believe are critical to excluding our growth strategies. On the technology front, we are enhancing and fortifying our commerce platform through continued upgrades to our digital infrastructure. These improvements are playing a key role in driving our growth by expanding our unique perspective in a way that complements and enhances our physical presence in the markets in which we operate. We believe the investments we are making to expand our footprint, coupled with the capabilities we are building through our technology platform, are imperative to being relevant with our customer and strengthening our position as a leading lifestyle retailer.

As discussed before, our ability to execute is highly dependent on the very passionate team of people here at Zumiez, to whom we entrust our brand every day. Our commitment to investing in and further developing our great group of dedicated employees is as strong as ever.

With the important holiday shopping season immediately in front of us, we're excited about the near-term and optimistic about our team's ability to execute relative to the current retail landscape. But our sights are clearly set on the long-term. So as a management team, we remain focused on those things that we believe will fortify and expand our brand and our culture for years to come.

The investments we have made and will continue to make have enabled us to enhance and personalize our consumer connections. We are confident our evolving technology platforms, combined with our compelling and unique product assortments and world-class customer experience, will provide a key point of differentiation that will enable us to stand apart from the competition and deliver enhanced shareholder value. With that, I'll now hand the call to Chris for a review of the financials. Chris?

Thanks, Rick. Good afternoon, everyone. I'll begin today with a brief review of our third quarter results, then a review of our November sales results, and finally, I'll share our thoughts about the balance of this year.

Third quarter net sales increased 11.6%, to $213.3 million, compared to the third quarter of 2013. By region, North America sales were up 9.7%, and our European sales were $14.7 million, an increase of 45.7%. Our European business again contributed positively to the overall comps for the quarter and have comped positive in each quarter since the acquisition.

Consolidated comparable sales inclusive of our e-commerce business increased 3.7% this quarter, driven both by increased transaction volume and dollars per transaction. Dollars per transaction in the quarter was driven by an increase in average unit retail, as well as units per transaction. In terms of category performance, hard goods, juniors, men's and accessories posted positive comps, while footwear and boys posted negative comps.

We finished the quarter with a total store count of 602, up from 548 a year ago. Breaking that down by region, we had 551 stores in the US, 35 in Canada, and 16 in Europe.

Gross profit was $77.9 million in the third quarter of 2014, an increase of $7.1 million, or 10%, over the third quarter of last year. Gross margin was 36.5% in the quarter, down from 37.0% in the third quarter of 2013, primarily driven by lower product margins.

SG&A expenses for the third quarter of 2014 were $52.9 million, or 24.8% of net sales, compared to $50.1 million, or 26.2% of net sales, in the year-ago period. SG&A for the 2014 quarter includes $0.6 million, or $0.02 per diluted share, of the intangible asset amortization expense resulting from the Blue Tomato acquisition, while the year-ago period includes costs of $1.7 million for charges associated with the acquisition of Blue Tomato and $1.3 million for the conditional settlement of a previously disclosed California class action wage-an-hour lawsuit, or $0.07 per diluted share in total.

Third quarter 2014 operating profit increased to $25.0 million from $20.7 million in the third quarter of 2013. Operating margin in the 2014 quarter was 11.7% compared to 10.8% in the 2013 third quarter. Net income for the 2014 third quarter came in at $15.7 million, or $0.54 per diluted share, up from $11.9 million, or $0.39 per diluted share, in the third quarter of 2013.

As for key balance sheet highlights, we ended the quarter with cash and current marketable securities of $108.7 million, up from $94.2 million on November 2, 2013, driven by cash generated from operations, offset by capital expenditures primarily related to new store growth and remodels and $32.8 million paid during the last 12 months to repurchase our common shares.

Inventory was $133.4 million at November 1, 2014, up 5.3% from $126.7 million as of November 2, 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 total of $17.4 million. As of November 1, 2014, we had $27.2 million remaining in our stock repurchase authorization.

Turning to our November results, our comparable sales increased 6.3% for the four-week period ended November 29, 2014, compared to a 1.7% increase for the four-week period ended November 30, 2013. This brings our year-to-date 2014 comparable sales to 3.4 %. Total net sales for the four-week period ended November 29, 2014, increased 12.6%, to $70.3 million, compared to $62.4 million for the four-week period ended November 30, 2013.

The year-over-year comparable sales increase was driven by an increase in transactions, as well as an increase in dollars per transaction. Dollars per transaction in the period were driven by an increase in units per transaction, slightly offset by a decline in average unit retail. During the four weeks ended November 29, 2014, men's, juniors, accessories and hard goods posted positive comps, while footwear and boys posted negative comps. Our comp over the Black Friday weekend, defined as Thursday through Sunday, was 7.3%.

Now turning to guidance. As always, I 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. Keeping that in mind, we are planning fourth quarter comparable sales results in the 3% to 4% range and total sales to be in the range of $249 million to $251 million.

We expect product margins to be in line with the prior-year fourth quarter; however, gross margin is expected to be down 200 to 250 basis points, primarily due to a prior-year benefit for the correction of an error related to the accounting for rent expenses. We project consolidated operating margins to be in the range of 12.5% to 13%, with diluted earnings per share between $0.69 and $0.72. Included in our fourth 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 a reminder, in addition to the prior-year rent benefit of $3.3 million, or $0.07 per diluted share I just mentioned, fourth quarter FY13 results also include a $5.8 million benefit for the reversal of contingent earnout accruals associated with the acquisition of Blue Tomato, or $0.16 per diluted share, $0.6 million, or $0.02 per diluted share in intangible amortization costs associated with the acquisition of Blue Tomato, and a released valuation allowance on our deferred tax assets primarily related to net operating losses in foreign subsidiaries, benefiting our tax position by approximately $0.8 million, or $0.03 per diluted share.

A few other thoughts about the balance of the year. Through November 29, we have opened 55 new stores in the year, including seven in Canada and five in Europe. We opened one more store in Europe this week, completing our total of 56 store openings for the year, and anticipate our net store growth, after closures, for the full year to be 52 stores. We anticipate capital expenditures for the full year will be between $37 million and $39 million, consisting primarily of new store openings and store remodels. We expect 2014 depreciation and amortization to be approximately $29 million. We are currently planning our annual effective tax rate to be approximately 37.5%.

Lastly, our weighted average shares, using the calculation of diluted earnings per share for the full-year 2014, is projected to be approximately 29.2 million shares, which includes the impact of share repurchases through November 1, 2014. Any additional share repurchases will further reduce our share count. Operator, we are now ready to take questions.

(Operator Instructions)

Jeff Van Sinderen, B. Riley.

Good afternoon. Rick, maybe you can touch on your thoughts on marketing plans, any changes you're thinking about making there? Just wondering if you've been planning to increase marketing spend as a percentage of sales or keeping it flat, and also maybe touch on your latest assessment of the environment. Do you think it's improving? Do you think it's about the same? Do you think it's getting worse? Thanks.

All right, thanks, Jeff. I'll take my shot here for you on both of these. And in the current year, I can tell you, we're effectively going to be very close, I think, for the full year to being about flat relative to a function of sales and our marketing spend. And for us, again, we do a lot of marketing partnership with our brands, so our own dollars have a relatively extended reach through combining our efforts with our brand partners. And I'll tell you that we do a variety of types of marketing spend, both tactical marketing spends tied to seasons, as well as longer term brand significant horsepower spending that's also around longer term brand impressions, Jeff. So I think going forward, you can probably expect us to be on a relatively the pace we're on relative for marketing spend, as we look into the future, too.

Relative to the assessment of the current environment, obviously, we're pleased with the November results, but these are all short-term. I still think we're sensitive to the volatility in the marketplace. There are a number of factors moving quickly, in terms of commodity pricing, that are probably -- hopefully going to be beneficial, and hopefully that extends for a period of time.

On a longer-term view, though, I think our view is one of caution. I'm saying that the recovery has been slow and painful. And I think from a planning perspective, we continue to think that's -- we're going to continue face kind of a slow, bumpy, volatile recovery for a period of years yet, Jeff. So that's kind of the longer term planning perspective that we put in place.

And I guess the only other dynamic I'd say relative to the assessment of the environment is the impact of smart devices and technology on the consumer world that I think is still in the process of a radical reshaping of what's going on in the retail consumer world. And I think those are the kind of things that create great opportunity for people that can plan ahead and play in that game. And I think that's one of the areas we've done a good job of trying to be a strong player in that arena. So that's broadly, generally our assessment now, and I think as we look into the future.

That's helpful. Thanks very much and best of luck for holiday.

Thank you.

Paul Alexander, BB&T Capital Markets.

Hello, guys. Thanks for the question. Chris or Rick, could you guys delve a little bit more into the comp guidance and sales guidance for fourth quarter? It implies a bit of a slowdown from November. Is it that you're concerned that all the promotions around Thanksgiving pulled forward demand, or particularly good weather or gas prices or whatnot pulling forward demand, or what other considerations are in there? Thank you.

Thanks, Paul. So in regards to guidance, as Rick mentioned, we're really happy with how November turned out. As we indicated in our prepared remarks, the important Black Friday holiday weekend was strong. But we saw strength throughout the month. And obviously, we benefited from the cold weather, but I think we also saw good business week to week. As we've seen over the last few fourth quarters, we've definitely seen a drop-off in sales between the important Black Friday week-end, Cyber Monday and what we've seen the week leading up to Christmas. And we typically have seen that drop-off in our stores and seen the web be stronger in that period, but that definitely led to those weeks being less significant on a year-over-year comparable basis.

So in planning our guidance, we're expecting to see something similar in the fourth quarter this year. And then we would expect to perform in the peak, as we have the last few years, and therefore our guidance that we've laid out today. So we do remain cautious, but we're encouraged by what's happened here in our November period.

Thanks. Just to clarify. Were you saying that the drop-off post Black Friday is something that you've seen historically, or are you saying -- or I don't know if you would comment on what you've seen so far, like in this week. But is that what you were trying to say? Is that now or is that historic?

It's historic. Because we've looked at the last few years. That period between Cyber Monday and the week before Christmas has become less significant, and we have seen declines in those periods. So as I made that comment, I'm speaking historically.

Great. Thank you very much.

Mitch Kummetz, Robert Baird.

Thank you for taking my question. Rick, could you talk a little bit about the footwear business? It's been a couple challenging years there. I know you've talked about the basketball silhouette in the past and maybe some challenges cycling through a downturn in the Tom's business. But where are we there? Is both guys and girls trending negatively? Is there any optimism on the category?

Be glad to try to help you out there, Mitch. And by the way, you just did my job for me. Thanks a lot. You just analyzed the last couple years in trends in footwear.

Before I start, though, with talking about footwear, I just want to harken back to a common refrain for Zumiez, which is the strength of our business model around diversity of brands, around diversity of categories and departments in our business. We've always said that we believe that we are going to go through cycles. We're going to have strong runs in brands or categories of business. And we'll take advantage of those cycles and then when things reverse, they'll be other things that will come up, as cycles change and shift. And I think that's what you're seeing us do this year is we're finding other ways to run gains, despite what is continues to be a difficult footwear business for us.

Relative to a lot of the other players in the market, I would tell you footwear for us, we have a much more developed business, I think, as you're aware, Mitch. And it's been an interesting part of our business and still is a significant part of our business. But it continues to be tough. And I don't think we've seen any change, at this point, in terms of performance athletic cycle, basketball being the key driver to that, those basket silhouettes still being really what's working. And I think you can clearly see that in our competitors, some of our competitors performance on the mall, in terms of the athletic retailers.

So at this point, Mitch, we're still riding the cycle. And I guess I'm really pleased to see we're riding the cycles with, as Chris pointed out, a relatively strong comp sales performance, again, relatively strong comp sales performance for the year. So at this point, I don't have any great insight for you, Mitch, on the cycle, I think, other than to say I do think that our buyers have done a terrific job of getting inventory in a much better position than we were a year ago at this point in time. So I feel much better about that positioning. But it continues to be a cycle that doesn't favor what we do.

As a quick follow-up to that, is it fair to say that both men's and women's are negative in footwear? And can you remind us when the comp turned negative on women's? Because I knew it was originally the guys business that became challenged and then it took a little while for the women's to then fall off, as well.

I think you generally got about the timing right in your opening comments or question. I'll let Chris confirm that, though, for us here. But yes, it is both men's and women's that's negative. Chris, you want to --

Mitch, we first started talking about footwear in Q4 of 2012, which is when we really saw the men's business drop off. At that point in time, we still had a trend on our women's business that was positive. And that trend was helpful for us through the second quarter and into the very beginning of the third quarter of 2013. So we've been riding 5 quarters here in a row now that both parts of the business have been down, but that trend, the women's trend, slowed for us in the summer of 2013.

Okay. Thanks for the color. Good luck, guys.

Thanks.

Dave King, Roth Capital.

Thanks. Good afternoon, guys. Thanks for taking the questions. I guess first off, or mainly my question's on product margins. Can you remind us again or talk a little bit about what drove the product margin pressure in the quarter? And then similarly, it sounds like that should not necessarily rebound, but your guidance is kind of flat on a year-over-year basis. Can you talk about then why that should then improve? And then with that in mind, Rick, maybe you can talk about overall levels of promotion, both for you, understanding, obviously, that you guys don't really promote, but just for you? And then thoughts on the environment in terms of what you think your peers are doing or your sense coming out of the Black Friday week-end, in terms of how it feels out there in terms of levels of promotion? Thanks.

Great. I'll start with product margin and I'll let Rick talk about the promotional environment. From a product margin perspective, what we said in our prepared remarks is operating profit for the -- I'm sorry -- gross margin for the third quarter was down 50 basis points, which primarily tied to product margin. And as you think about where we've been this year, we saw a pretty significant decline to product margin in the first quarter, as we were clearing out inventory from 2013. That got sequentially better in the second quarter, and now is better in the third quarter, as well. And as you indicated in your question, we're looking at the fourth quarter being flat to prior year.

I'll remind you, our product margin was at its peak in FY13, the highest product margins we've had. So within the third quarter, we did see some mix across our business, both within categories and across categories, as well as mix internationally, from our international margins to our US margin, as our international business continues to grow as a percent of the Company.

So there's quite a few things in there. And being down 50 basis points, we feel pretty comfortable with where we are from an inventory position; and as indicated in the guidance, we're looking at the fourth quarter being on track with where we were last year.

Then I'll take a shot, Dave, at the overall promotional stance. And you're right, we are not very promotional and we weren't across -- we were no more promotional this Black Friday week-end then we were a year ago. We did not run any special promotions than we typically run and offer our customers. Nor, I will add, did we run promotions that were different across channels, either. We're very big believers in that price neutrality across our channels is a very important aspect of being an omni-channel retailer. And so we're very disciplined around making sure that our promotional structures work for all channels, for all customers, however they interact with us, in each channel of our business.

So I don't anticipate, as we look forward into the quarter, that you're going to see any significant changes that are requiring significant changes, as Chris just indicated from the guidance relative we're giving you for product margin. I think we feel good about our positioning in that we can offer value to our consumer, but we can do it at strong margins. We have good strategies in place to do that. So again, I think that's reflected in the guidance that Chris has put forward here for Q4.

Now from a competitive point of view, I expect it's going to be brutal, still, I guess, Dave, would be my sense is I expect that it's going to be a really challenging quarter for most of specialty retail. I think to be in our position -- and I will credit our position to two things, in terms of our not having to be very discount oriented in the marketplace. The first is I think we have just an incredibly strong brand positioning developed over many years and effort of interacting and building our relationship with our consumer. And of course, we have just an amazing group of salespeople throughout the organization that know how to really work with customers well. And again, as Chris shared with the sales stats, those are pretty positive sales stats you heard from, in terms of how we're driving the gains, both in transactions as well as in the -- for example, in November, as well as in all the per transaction data, too.

So we like our position. And we particularly like our position relative to others in the marketplace, because I think it's going to be another pretty brutal holiday season.

Okay. That's helpful. And I guess as a quick follow-up to that then, Rick, is it your sense out there that -- so it sounds like your sense is that it's still going to pretty brutal out there. But it looks like you've had transactions be up a fair bit now, for I think several months, give or take a few here and there. Do you think -- can you talk about how you think that shakes out between higher traffic versus conversion, and do you think there are more people coming back to the mall, in terms of your customer at this point, or is it still too early to tell?

I don't think we're immune to traffic trends. And we do not -- to be clear, Dave -- we don't have counters in our stores. So we don't have specific traffic information relative to our operation. But I think it is -- I do think it's clear that traffic, as you see from various sources that traffic in malls is down. I think what you see from us is that we are able, through the efforts we put into place, and again, through the quality of our sales team, is we are able to convert at higher rates.

And so when we talk about transaction gains for us, I think that what you're seeing is the effectiveness of what we're doing in terms of our omni-channel efforts, in terms of the quality of our sales team in our stores. It's a reflection, again, of I think those things that make the Zumiez experience and the Zumiez brand experience a special kind of experience and that positions us very uniquely in the marketplace.

Fantastic. Appreciate the color. Good luck with the rest of the year.

Thanks, Dave.

Dorothy Lakner, Topeka Capital Markets.

Thanks and good afternoon, everyone. Wondered if you could talk a little bit about the snow business. And a corollary to that, if you could just give us a little bit more color on Blue Tomato and talk about what you're seeing in store performance maybe versus online performance there? Thanks.

All right, Dorothy. And I'll sure take a shot at that. As Chris said in the comments -- and let's talk specifically about November, but the comments will be true, I think, as we -- let's talk about snow biz. It's November. So overall, our hard goods business is good in November. As Chris commented, we were able to comp positive in our hard goods business. But I'll tell you, it was not driven by our snow hard good business. It was driven by the quality of the effort on the skate side of what we're doing.

So we've been challenged on the snow hard goods business. The outerwear business on the apparel side for both men's and women's in November was very successful. And again, as we commented, that was really related to the cold weather, I think, that we experienced, particularly in the first part of the month.

Now I will tell you the same thing in Europe is it's been a relatively warm winter so far in Europe. And our snow hard goods business has been tougher there. But as Chris said, we continue to comp positive at Blue Tomato. So again, I think the advantages we have here in terms of the breadth of our business, again in terms of brands and in terms of the diversity of categories, it what gives us the strength to find the things that consumers want. Whether the weather is one way or another, it's snowing or not snowing, we are pretty comfortable that we can capture the consumer dollars in our range of offerings.

So yes, it's been a bit tougher at this point, I'd say, on the hard goods side. But again, we're finding other ways, through other hard good categories or through our apparel business and other departments that we feel like we're still doing our job of going out there and serving our customers with the dollars they have available.

On Blue Tomato, we're not going to really, I don't think, break down between stores and the web, other than to say that both are comping positively. And again, we're just very pleased at the pace of change that we've asked the Blue Tomato team to undertake. They've just done a really terrific job of going from where we were 2.5 years ago to where we are today. It's been a remarkable effort, and I greatly appreciate all the hard work of our colleagues there at Blue Tomato. They've just done a really great job.

Liz Pierce, Brean Capital.

Thanks. Good afternoon. Rick, I have a question on, circling back on footwear, related to Mitch's question. As you look back in the history that you've had with Zumiez, when you've been in a cycle like this before, what happened on silhouette changes that finally got the footwear to swing back -- or if it's silhouette changes, I suppose I should ask it open-ended -- that swings it back into your sweet spot? Thanks.

Great, Liz. So let me even back up -- and I should have on Mitch's question even earlier. I like to remind everyone that before we hit this downturn in footwear, we had a long run. And we often talk about the hot brand, the hot fashion trend. And as we've talked about, before the downturn, we talked about the long run we had in a category driven cycle which was around footwear. So we had a number of very -- I think as long as 4 or 5 years of really good results in footwear, Liz. So it actually had crept up in the mix of our business before this cycle now.

Now again, I think you're pointing out, it's been around a long time, which I have. So tapping back in that experience, what do we see changes then in the cycle? And again, from our perspective, I don't look at this as just a footwear issue. We're going to look wherever the cycle is, that whether it be a trend cycle, a brand cycle, another category different cycle that will push a product category forward. From our perspective, we don't care. So it's not just a footwear perspective is how we look at it. It's going to be whatever the consumer is going to tell us where they want to go and what's important to them is what we're going to do. And I think we're pretty good at being there early on trends and cycles, whether that be brands or fashion cycles.

So it's not just a footwear issue, Liz. And that's why it's a bit tough to answer your question specifically around footwear. So we will continue to push forward. So I'm clear, we're just not sitting on the sidelines and saying, oh, there's nothing we can do about footwear. We continue to test all sorts of new things and try new things. And we're experimenting on many fronts on footwear. But again, I think you have to back up and look at the question more broadly and say our job is to serve customers, and we'll go with whatever it is that they find interesting, we're going to try to be there to serve them.

If I can ask a follow-up on that, do you mean not exclusively within footwear, so anything that might be related to the rest of the store and what you think they want in their lifestyle?

That's exactly right.

Okay. Perfect. Great answer. Thank you. That's helpful. Best of luck.

Christian Buss, Credit Suisse.

Hello. This is [Phan] on for Christian. Thanks for taking my question. Your men's and hard goods and accessories categories have been really strong, consistent out performers. And I wanted to know, how do you keep up the momentum within those categories? Can you talk about any new products or new brand introductions on the horizon and within those categories, where you see the greatest growth opportunities? And if you can quickly, also touch upon the Stash Rewards Program, would be curious to know any learnings you're gleaning from that program? Thanks.

Sure. Again, our strength of our business, as I've said a number of times now, is always about diversity. Again, diversity of brands, diversity of categories in our business. Because we serve the entire lifestyle for this consumer. So I don't want to get down to talking about individual cycles or trends. That's just not what we like to do. But to say that we always find ways, and because of the diversity of our business, just like you would in a diversity of your stock portfolio, to find the winners and then to go after the winners. And we are very good, and we have a very strong set of buyers, at pursuing those things that are working and investing in the inventory and taking advantage of the opportunities that are in front of us.

So I don't want to get into the details. And again, I think that the cycles we have going and as we know, skate hard goods has been good for quite a while now, women's has been good for quite a while now, mens' has been improving over this year. So we feel good about where we're at. I think we're in a good position. And over time, we'll see what happens with footwear. There will be opportunities. I just can't tell you when that's going to be. So I'm not going to get into specifics about what we believe is going to drive it. That's partly our own magic internally as to how we run the business.

In regards to Stash, we are continuing the effort of collecting and driving forward our membership base there. I believe, Chris, we're now at --

Just over 2.6 million members.

Just over 2.6 million members in our Stash program. And as I've said before, the primary mission has been to sell members into the program. Again, our sales teams are very good at doing that, and we have a great sales teams. And now we're taking the next steps about really talking about how we work with our Stash consumers and become more relevant to them in terms of the messaging that we're going to introduce for them as a result of knowing more about these consumers.

So that's going to be our next step, in that we're going to make our first initial stabs at that this holiday season, and we'll continue to progress and continue to learn to find out how best we can serve these really important customers. These Stash consumers are our best customers.

Neely Tamminga, Piper Jaffray.

Great. Good afternoon. Rick, we agree with you on this major shift in consumer behavior around mobile. Certainly, it's impacting time consumption, and you alluded to some technology spend in projects for FY15. I'm just wondering if you can be just a little bit more specific, for our sake, around what key functionalities or things are you going to be able to do in 2015 that you currently can't do or do well in 2014? Thank you.

Thank you, Neely. Again, as I've said, and for a long time now, I think we were early on to the idea of omni-channel, going back probably 5 years now, in terms of our thinking. We developed clear road maps that we began executing about 3 years ago in our omni-channel horizons.

That road -- we are continuing, Neely, to follow that exact road map. We are updating, as you'd expect, based upon what we learn as we roll out initiatives. We have more initiatives. We have more progress to make on that omni-channel road map into next year. I think we are well-positioned. We're on track and on plan with the things that we said we're going to do. I'm not going to share with you specifics of the road map. Again, I think that's a competitive advantage for us at this point of the game.

And I also tell you that omni-channel still greatly revolves around this idea of great people in stores -- majority, the vast majority of our sales still take place in our stores. So a lot of what we've been doing is unleashing the power, through technology, of our customer and our sales teams. And we're going to continue to do that. And I think we have very clear road map on how we need to do that, continue over the next few years. There's a lot of work to do in this area. I still think we're at the early stages of the process, not the latter stages of the process.

So in specific to mobile, again, I'm not going to share a lot of details about our thinking around mobile. I'll just say this, that I have to tell you, I think there's -- mobile is just as nuanced as any other aspect of our business. When we talk about what we need to do in mobile, we have to talk about very specifically as to what it means for our consumer in the mobile world. And our mobile consumer is not the same as other people's mobile consumers. So there's no doubt that we have seen, like every other retailer, a much -- a large portion of our traffic, our online digital traffic, move into the mobile environment, whether that be phones or tablets. A significant volume of business is now taking place on those platforms.

With that being said, we're really looking at mobile and saying that we know we have a very specific consumer with very specific needs and we are very good at understanding how they want to interact with us in the mobile world. So we're going to be very, very focused in our efforts in mobile on the things that we believe are going to make the most difference for that consumer.

This is just -- but again, this is just one piece of many aspects of the road map that we must execute to really be where our consumer wants to be, to serve them in every channel they want us to serve them in, to meet their needs no matter where they're at. So we have a long ways to go in our omni-channel road map. Mobile is an active part of that, Neely. But again, I'd tell you that our mobile road map is going to look a lot different than a lot of other people's mobile road map, based upon who our consumer is, our understanding of our consumer, and us going out and meeting their specific mobile needs. And again, I think from our results, you can get an overall aspect that we're having some good success in, again, unleashing our brand, unleashing our people in an omni-channel world.

We look forward to seeing those initiatives unfold, and Happy Holidays to you all.

Thanks very much, Neely.

John Morris, BMO Capital Markets.

Hello. It's Janine Stichter on for John Morris. We were just wondering, on the topic of omni-channel and e-commerce, as you continue to make investments there and see really strong trends, is there any new thinking in terms of your target for North American stores -- I think it's 600 to 700 -- and what metrics do you use to assess that opportunity? And then along those lines, can you remind us where you might be underpenetrated in terms of bricks and mortar stores, be it in terms of region or mall type?

Certainly. I'll take the overall perspective and let Chris talk about maybe more targeted areas where we have yet to penetrate. You can obviously see it yourself by, if you can look at all our locations, you would see the holes we have yet to cover within the US.

So no, the quick answer to your question, Janine, is no, there's no change to the target at this point. We're still in that 600 to 700 range. Although like we said in our prepared comments, we continue to really think about this not just as adding stores, but this integrated view of the world that this all one channel reinforces every other channel from no matter what angle you look at it.

So we still have opportunity in the US to add stores. We still think that is the general range. But it is also about optimizing the portfolio. So as you heard us say, we've closed a few stores this last year. And some of them aren't necessarily closures. I might recharacterize them as repositioning locations within to serve a market, a particular market, where we've closed one location and opened in what we perceive as a better location for that marketplace. You're going to continue to see us do that. We're going to open, continue to open stores in markets we aren't in. And we're going to continue to optimize the portfolio of stores we have, while at the same time, we're going to manage risk at the low end of our portfolio, to make sure that we aren't over exposed in our lower performing stores and that we can exit those stores, if we need to, in a reasonable amount of time.

It's a very dynamic world. As I said earlier, this idea of where we're at, the empowered consumer, the use of technology in the consumer world has changed consumer behavior in a major way. I said I think we're at the early phases of that. I continue to believe that. And that's why flexibility around the right number of stores and the right locations is very important.

And lastly, before I let Chris comment on regionally, I just want again make the point that I've made over the years, the last few years, is that the number of stores is relevant in the sense that we need to capture share. But we don't want one more store than is necessary to capture the market share that we believe is our share out there to be had. So in other words, the top line goals, our top line goals don't change based upon whatever number of stores we have. It's how we optimize capturing those shares to optimize margins and optimize how we serve our consumers.

The top line number in our projection stays the same. It's just an opportunity of how we're going to go get those. And we realize that the market get those sales and we realize that the market is still very dynamic, and that's going to play out here over the next few years. Chris, you want to comment on regional coverage?

Sure. From a regional perspective, if we were looking at a map together, what you'd see is holes are basically from the Chicago to New York area. We've got some good markets to fill in there. And then as you move south, between Texas and Florida, that's where the bulk of our growth is. But I will say we continue to fill in other markets that we've been filling in over the last few years. So there's other opportunities across the country, but those two areas are where I'd highlight the majority of our growth.

From a metric perspective, as we do look at new stores, we have pretty high metrics. And remember, our new stores, specifically our new stores in new markets, are opening up at 70%, 80% of what we believe they'll be doing at a mature level. And we would expect those to pay back in 18 to 24 months. And we have pretty big return rates, as well, on the invested capital. So we do put our stores through some high hoops to open them, but we've been pretty good at opening productive new stores.

Thanks a lot.

Ed Yruma, KeyBanc Capital Markets.

Hello. Good afternoon and thanks for taking my question. Rick, how would you assess the overall profitability of Blue Tomato versus maybe your targets that you laid out when you acquired the business? I know you've had some pretty decent sales numbers, but on the other hand, you reversed some of the contingent consideration last year. So how would you assess the performance there and what's your interest in investing more capital against the European opportunity, given the macro conditions there? Thanks.

Thanks, Ed, for the question. I will let Chris talk more specifically about the historical time line. I know he'll recap this where we thought we were, at the level of performance at the time of acquisition. I'll let Chris talk about that.

But let me talk more about the opportunity in Europe. And we look at the opportunity in Europe and we think we have a very, very big opportunity in front of us. And then we combine that with the fact that we believe we partnered with the best operator in Europe. And that's based on their historical performance pre-acquisition. Now post-acquisition, again, as I said earlier, we've asked them to do a tremendous amount. We're asking them to grow at a very rapid rate relative to what their base is. And we have made heavy investments there, Ed, because of that, both in physical stores, from where we were -- and Chris can recap this in a moment -- but also in terms of talent, we've made big investments. That being said, Blue Tomato has grown both its web business and its store business, in terms of new stores and comp store strength. So we're very, very encouraged by what we see there.

I think we are in that very usual position is that we have, I think, a great partner, people who really understand the market, in a way I think was impossible for us to do, being here in this continent. And I think that the difficult environment in Europe, Ed, is actually probably an opportunity for us. Because many, many other people are struggling in this market, while we have the opportunity to go out there and consolidate share in the marketplace. And as I said, I think we have, much like we have in the US -- I think we have the dominant platform in the US -- our opportunity in Europe over the next 5 and 10 years is to build the dominant platform in Europe for this lifestyle.

I think we're well on our way. I think team there really is up for the challenge and is ready to tackle it. And I think we've made huge progress in establishing a base in our Blue Tomato business, at this point. And I'm pretty excited about where it can go. I think the opportunity is very, very big in Europe. And as we get further along in this, we'll be, I think, able to quantify that here over the next couple of years, we'll be willing to come out and actually put a number to what that is. But the opportunity is very, very big in terms of the European opportunity. And as we've done at this point, we're just looking at the developed side of Western Europe, so a lot of opportunity there. Chris, you want to give any more historical context of that?

Yes, I'd just summarize where we've been from the acquisition, because I think it is important. It looked like it was not a huge part of our overall business at this point; but for them, they've had massive growth. In 2012, when we acquired it, it was basically a website, an Austrian-based website with 3 stores. We added additional 3 stores, 2 out of the 12 post acquisition, and then doubled their size again in 2013, finishing with 12 stores, and then as we mentioned on our prepared remarks, finished with 18 stores today.

So as you can imagine, the infrastructure needed to not only for that type of growth, as well as to take them from a private Austrian company to a public national or international retailer, was significant. So as we think about Blue Tomato today and the opportunity that Rick laid out, the investment was needed.

So at the time of acquisition, it was on par, from a profitability perspective, with our US business. And today, it's probably more of a breakeven business, excluding charges. But like most investments that we make, we believe this investment we'll be able to leverage in years to come. And so again, we feel good, just as Rick mentioned, with the leadership team there and their ability to operate the business. And we will continue to make investments in Europe, but we expect it to contribute to the bottom line as we continue to grow the business.

Great. Thanks so much, guys. Best of luck this holiday.

Thanks, Ed.

Lee Giordano, CRT Capital.

Thanks. Good evening, everybody. Can you talk a little more about the accessories business and what's driving that? And any new initiatives this year in that part of the store versus a year ago to maybe drive traffic? Thanks.

We always have initiatives to drive traffic. And we try to do that in every category in every department that's comping up. So yes, we always do. I'm not going to share with you what they are. I think our accessory business has been solid for quite a long time.

Just over a year.

Just over a year. So we've had a good, good run with accessories. I can tell you there are a number of things that are working particularly here over the last month, in November. We have a number of categories that are working for us in the accessory department, both men's and women's accessories.

So I don't really have any, a lot more to add to that. I don't know if you do, Chris. But generally, again, we're not going to disclose the individual things that are driving the business. But our job is to have things in each of the businesses either driving it or minimizing our exposure in a down trending category, or experiment to find things for the upside. I think we feel pretty good about where we're at. Many, again, it's multiple categories within accessories are contributing to where we're going. So we feel pretty good about the business.

Great. Thank you.

Carla White, Jennifer Black and Associates.

Hello, Rick and Chris. And let me just add my congratulations on a great quarter, and thank you for taking my call. Last quarter you guys talked about filling in markets where you're underpenetrated and doing some testing in off-mall locations. I wonder if you could provide some additional color as to what you're seeing from those stores versus your mall locations? Thank you.

Thanks, Carla. And again, we continue to execute against that plan. We have opened a couple street stores, and we continue to have a small portfolio of off-mall locations around different parts of the country. Our street stores, we are only a year or two into it, at this point, Carla, so I don't think we're ready -- we're prepared to have any great insight to that at this point, other than to say that the stores, the first few we opened that are in their first year of comp, are doing well. And so we're encouraged by that. But it's too early in the process to get -- to make any large conclusions about it. And I'd certainly like to have a bigger sample before I would talk to you more broadly about what that opportunity is and how big that opportunity is.

But like everything else we do, just like we do in the product side, we're pushing around the edges of what can we do in real estate, what does it make sense to do. We're testing in some of our most mature markets how we fill in what we view as holes in the marketplace, relative to where we're not -- we believe we're not in a position to serve the customers that are in that market. Those are where we've seen small, a few locations in perhaps strip centers and locations like that, where we're coming back and testing saying, can we make this work.

Again, in an omni-channel world, I don't want to neglect that point of view. It's all about serving customers in multiple contact points. So appreciate you asking the question. It's still early for what we're going to do, and it's hard for me, at this point, to quantify what it might mean in the long run. But yes, we are out there testing. And I can tell you I don't have any negative things to say, at this point, about what we're doing there, Carla. But the sample size is too small to drive any major conclusion, at this point.

Thank you so much.

There are no further questions in queue at this time.

All right. Let me conclude by just thanking everyone for their time today and, of course, wishing everyone a happy holiday season here, as we get a chance. We retailers don't celebrate holidays that much, because we're too busy. But certainly wishing everyone a happy holiday season. And we'll look forward to talking to all of you when we talk about the fourth quarter results in March. Thanks, everybody.

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