Zumiez Inc (ZUMZ) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Zumiez Inc's fourth-quarter and full-year 2014 earnings conference 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 including 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 are not based on historical facts are subject to risks and uncertainties and our actual results may differ materially. Additional information concerning a number of factors could cause actual results to differ materially from the information that will be discussed is available in Zumiez's filings with the SEC.

At this time I will turn the call over to Mr. Rick Brooks, 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 fourth quarter and our plans for 2015. Chris will then take you through our key financial and operating metrics, then we will open the call to your questions.

Our FY14 ended on a high note. Net sales in the fourth quarter increased 14% to $259 million, ahead of our most recent guidance range of $255 million to $256 million. Earnings per share, excluding all charges related to the acquisition of Blue Tomato, were above the high end of our guidance range.

Comparable sales of 8.3% also came in better than expected, driven by solid results in North America and Europe, but also achieving expansion in product margin. Our outperformance was aided by our omni-channel infrastructure that fully integrates our stores and digital platforms with our highly differentiated product assortment. But the real credit goes to the strong execution by our people who are the foundation of Zumiez.

Looking ahead, we plan to build upon our recent success through continued investments in the business. In 2015, we plan to invest further. We plan to invest in physical store base, both in North America and in Europe.

Our goal here has not changed. We still aim to open only as many stores as we need to meet demand. That said, we see a great deal of untapped potential, both in new markets as well as in further penetrating markets where we already have a presence.

During the fourth quarter, we opened 3 stores including 2 in Europe, bringing our total store count at the end of FY14 to 603. Our 2015 plan includes the addition of 57 new stores worldwide, including 51 in North America and 6 in Europe.

As we've talked about before, we view the store expansion as critical to enhance our digital capabilities and our omni-channel platform. In regards to omni-channel, we aim to continually improve our digital infrastructure by enhancing the end-user experience in line with the world-class shopping experience our consumers have come to expect from Zumiez.

While still small in comparison to our North American business, trends in Europe have been very encouraging in recent quarters. In fact, the gains we've seen in recent months have caused us to reevaluate our estimates related to the acquisition contingent earnout, which Chris will discuss in more detail momentarily.

Suffice it to say we are pleased with what we're seeing with this business, which was comp positive every quarter since the acquisition. In 2015 and beyond we intend to capitalize on the current momentum by focusing on the same quality growth we have achieved since the acquisition.

As we begin 2015 we are optimistic about our future growth potential. Through the last several years we have executed consistently, even in the face of macroeconomic headwinds. Along the way, we haven't lost sight of the bigger picture and we've invested behind the high-growth opportunities that we believe will have the greatest impact on our success for the long term.

As a result, we've built a highly differentiated brand with unique product assortments, backed by an infrastructure that allows our teams to best meet the needs of our customers. We continue to see the consumer appetite for our lifestyle-oriented approach, and we look forward to capitalizing upon our success in delivering shareholder value for years to come.

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 fourth-quarter and full-year results. Then I'll outline our first-quarter guidance and share some thoughts about 2015.

Beginning with the fourth-quarter results, fourth-quarter net sales increased 14% to $258.6 million compared to the fourth quarter of 2013. Breaking it down by region, North America sales were $230.7 million, up 13.4%, and our European sales were $27.9 million, an increase of 19.2%. In the quarter, foreign currency translation variances negatively impacted sales by approximately $4.5 million.

Consolidated comparable sales, inclusive of our e-commerce business, increased 8.3% 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, men's, juniors, hard goods and accessories posted positive comps, while boys and footwear posted negative comps.

We finished the quarter with a total store count of 603, made up of 550 stores in the US, 35 in Canada, and 18 in Europe. Gross profit was $97.8 million in the fourth quarter of 2014, an increase of 11.3% over $87.9 million in the fourth quarter of 2013. Gross margin was 37.8% compared to 38.7% a year ago.

Last year's gross profit included a $3.3 million benefit from the correction of an error related to the accounting for rent expenses. Excluding this prior year benefit, gross margins increased 50 basis points year over year due primarily to improved product margin.

SG&A expenses for the fourth quarter were $66.5 million or 25.7% of net sales, compared to $47.6 million or 20.9% of net sales in the 2013 quarter. SG&A included a $6.4 million charge related to the accrual for the Blue Tomato contingent earnout. While SG&A in the year-ago quarter benefited from a $5.8 million reversal of the contingent earnout accruals.

Excluding the impact of the contingent earnout to both years, SG&A expenses would have decreased 30 basis points as a percent of sales, primarily as a result of leveraging our cost structure on the strong comp gain. Also included in SG&A in the quarter is approximately $0.5 million for the amortization of intangible assets related to the Blue Tomato acquisition, which is comparable to the prior-year quarter although translated at different exchange rates.

Fourth-quarter 2014 operating profit declined to $31.3 million or 12.1% of sales from $40.3 million or 17.8% of sales in the comparable quarter of 2013. This change includes the impact of the current year Blue Tomato acquisition charges and prior-year net benefits. Net income for the 2014 fourth quarter came in at $17.5 million or $0.60 per diluted share, down from $26.9 million or $0.89 per diluted share in the fourth quarter of 2013.

Let me again lay out the impact of some of the charges and benefits we recognized in the current and prior-year fourth quarter. In the fourth quarter of 2014, the contingent earnout associated with the Blue Tomato acquisition negatively impacted results by $6.4 million or approximately $0.19 per diluted share. Based on Blue Tomato's recent performance, we now consider the likelihood of payment on a portion of the contingent earnout to be probable.

We had also recorded an expense of $0.5 million or approximately $0.01 per diluted share associated with the amortization of intangible assets related to the acquisition. In the fourth quarter of 2013, we reversed an accrual related to the contingent earnout based on the then current estimates, thereby benefiting the 2013 fourth quarter by $5.8 million or approximately $0.16 per diluted share. We recorded a benefit of $3.3 million or approximately $0.07 per diluted share for the correction of an error related to the accounting for rent expenses.

The amortization of intangible assets was an expense of $0.6 million or $0.02 per diluted share. And lastly, our 2013 fourth-quarter results include the effects of the release of a valuation allowance related to net operating losses and foreign subsidiaries, benefiting our tax position by approximately $0.8 million or $0.03 per diluted share.

Before we turn to the full-year results, let me quickly elaborate on our reasoning for adjusting the contingent earnout. As we have discussed before, when we completed the acquisition in 2012, it was important for us to assign long-term metrics to the performance of the business. We did this in the form of enterprise goals primarily tied to aggressive tiered multi-year EBITDA targets, as well as store-related metrics tied to the number of new stores opened and their combined contribution margins.

These metrics collectively provided for a payout of EUR22.1 million at the completion of the performance period ending April 30, 2015. Last year, on this call, we talked about the aggressive nature of these targets and challenges given the macroeconomic landscape in Europe that led to our belief that Blue Tomato would not be able to attain the metrics for the contingent earnout.

Over the last year, we have continued to monitor the metrics of the contingent earnout. And during the fourth quarter, which, based on seasonality, is their largest quarter in regards to sales and profitability, we experienced a level of performance driven by the sale of winter goods and the continued maturation of their brand in the new and existing markets in which they operate. Given this, we now believe it is probable that the team in Europe will hit the store-related metrics tied to the number of new stores opened in their combined contribution margins, which is worth EUR6 million or $6.8 million using the exchange rate as of the end of 2014.

Turning to full-year results, net sales for the full year of 2014 were $811.6 million, up 12% over FY13. By region, North American sales were $747.1 million, up 10.6%, and European sales were $64.4 million, an increase of 32.4% year over year. For the year, foreign currency translation variances negatively impacted sales by approximately $5.9 million.

Bolstering our year-over-year increase was the addition of 52 net new stores throughout the year and a comparable sales increase of 4.6%. Gross margin for the full year of 2014 was 35.4% compared to 36.1% in 2013.

Gross margin declined in the year primarily due to the prior-year benefit of $2.7 million for the correction of an error related to the accounting for rent expenses. In addition, products margins for the year were down slightly in 2014 compared to the prior year.

Operating margin was 8.8% in 2014, compared to 10.1% in 2013. This change, similar to the quarterly comparison, was impacted by certain benefits and charges which I'll review in a moment. 2014 net income was $43.2 million or $1.47 per diluted share, compared to $45.9 million or $1.52 per diluted share in 2013.

I will now lay out the impact of certain benefits and charges taken in both years that should be taken into consideration when looking at our results. In FY14, we recognized a charge related to the Blue Tomato contingent earnout that decreased net income by $6.4 million or approximately $0.19 per diluted share. Full-year amortization of the intangibles related to the Blue Tomato acquisition was an expense of $2.3 million or approximately $0.06 per diluted share.

In FY13, we recognized the reversal of the Blue Tomato contingent earnout accrual, which was a benefit to 2013 of $2.6 million or approximately $0.08 per diluted share. The correction of an error related to the accounting for expenses would have a benefit of $2.7 million to 2013 or approximately $0.06 per diluted share. The amortization of intangible assets associated with the Blue Tomato acquisition was an expense of $2.3 million in 2013 or approximately $0.06 per diluted share.

We also recognized an expense of $1.3 million or approximately $0.03 per diluted share in 2013 for the settlement of a previously disclosed class-action lawsuit. Lastly, the impact to 2013 for the release of the valuation allowance of net operating losses in foreign subsidiaries was a benefit to our tax provision of approximately $0.4 million or $0.01 per diluted share.

Turning to key balance sheet highlights, we ended the year with cash and current marketable securities of $154.6 million, up from $117.2 million at the end of 2013. The year-over-year increase was driven by cash generated from operations, partially offset by net capital expenditures primarily related to new store growth and remodels, and $19.6 million paid in the year to repurchase our common shares.

Inventory was $93.9 million at the end of FY14, up 7.6% from $87.2 million at the end of FY13, largely as a result of our increased store footprint compared to this time last year. During FY14, we 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 January 31, 2015, we had $30 million remaining in our stock repurchase authorization.

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.

With that in mind, we are planning first-quarter comparable sales results in the 3% to 4% range and total sales to be in the range of $176 million to $178 million. We expect product margins to increase approximately 100 basis points compared to the prior year first quarter. We are currently projecting consolidated operating margins to be between 2% and 2.5%, with diluted earnings per share between $0.08 and $0.10.

This guidance contemplates an estimated $1.1 million of charges or $0.03 per diluted share for charges associated with the acquisition of Blue Tomato, including $0.6 million in contingent earnout accruals and $0.5 million in intangible amortization. Also, when looking at the monthly sales results for the quarter, keep in mind the Easter shift is expected to be a benefit to March and a detriment to April.

Before I wrap up, I'd like to give a few thoughts on how we're thinking about 2015. While recent comparable sales trends have been more favorable, we have not seen sustained strong results over the last several years, and remain cautious in our outlook for 2015. With this in mind we are planning comparable sales to increase in 2015. However, we are planning this increase to be lower than comparable sales growth in 2014.

While retail in general remains uncertain, we continue to believe that the investments we've made in our omni-channel infrastructure, along with our unique approach to our product and our people, will continue to keep us ahead of the competition in the team sector in general. As reminder, our product margins were pressured in the front half of 2014 as we cleared excess inventory, but these improved as the year progressed.

As a result, we expect product margins for the year to improve. However, we anticipate these increases will be meaningful in the front half of the year, particularly in the first quarter, and on the back half of the year expect product margins to be roughly in line with prior year.

From a cost perspective, we are planning SG&A growth in line with 2014 growth levels. We expect foreign currency translation to impact total sales unfavorably for the year. However, the impact on earnings will be muted because the contribution margin from our international operations are lower than our mature US business.

We are planning to open approximately 57 new stores, including 6 in Europe, with a similar cadence to what we've done historically, with two-thirds of these openings occurring ahead of the back-to-school season. We expect capital expenditures for the full FY15 to be between $39 million and $41 million, compared to $36 million in 2014, with the majority of the capital spend dedicated to new store openings and plan remodels.

We anticipate depreciation and amortization will be approximately $31 million compared to $29 million in 2014. We are planning our business assuming an annual effective tax rate of approximately 38%.

We are currently projecting our diluted outstanding share count for the full year to be approximately 29.5 million shares. Any share repurchases during the year will reduce our share count.

And with that, operator we would like to open it up to questions.

(Operator Instructions)

Mitch Kummetz, Robert W. Baird.

I'll ask you two questions, if I may. Let me start with the product margins. They're up in the quarter, you expect them to be up in Q1. Obviously you talked about an easy comparison but what else can you say about the profit margins? How much of this is mix or what are you doing or what's happening in the environment that's leading you to these increases?

Thanks, Mitch. There's really probably two things that are the main driver to product margin in the fourth quarter. As we get into Q1, it's a little bit different story just based on where we were last year.

But in regards to the fourth quarter, what we saw were really two things -- mix, which you'll see when we publish our 10-K, we'll talk about our total-year results. But what you're going to see is the categories that have really been our strongest contributors over the last year are women's apparel, accessories and hard goods, specifically on the skate side of the business. And all of those categories have earned share at the expense of footwear. So, we've definitely seen some mix issues in the business that have helped with product margins.

The other piece that you'll see is our private label penetration did increase this year. After a few years of hovering between the 17% to 18% range, we are going to finish the year around 19.6% private label penetration. I really look at that -- and, again, we've got great branded partners, and this is just how we can mix in the private label within our offerings.

I think those two things are what you're seeing that's helping drive that product margin. We do expect some of that will continue to feed the margin into 2015 in the first quarter. But I think a lot of what you're seeing in the first quarter is actually a benefit from where we were a year ago and where our inventory positions are.

Okay. Then on Blue Tomato, the business has obviously gotten better given what you're doing with the contingent earnout accruals. Can you just speak a little bit to that? You reversed some of the accruals last year because you talked about the tough macro landscape. Is it just that the macro has gotten better or are you guys doing something there that has led to improvement in that business?

Yes, I think it's some of both. I'll walk through the earnout and I think I'd really start by congratulating the Blue Tomato team. As Rick said in his prepared remarks, it's about people. One thing we know from the acquisition is that this is just a great cultural fit for who Zumiez is. And this team has been working hard at growing that business. So I would start by congratulating them.

As you know, we set some pretty aggressive targets here. A year ago when we looked at the EBITDA targets we put around this business, these were multi-year growth initiatives for the business. A second set of targets was around stores and the contribution margin for the stores.

So, while the landscape in Europe has been really tough, and specifically up in 2012 and 2013, when we ended 2013, we just did not feel like we were in a position based on our forward-looking models that the team was going to be able to reach these incentives. As we moved forward now in 2014, and we've been tracking this, I would say there's a couple things that have really changed our thought here.

Clearly there's a little bit of rebound in the economy, but I'd say Europe's really still tough. I link this more to the continued maturation of the business there. The team in Europe has really been working to grow the Blue Tomato brand, and in doing that we've seen good results. And you've heard us talk about that even in this last quarter more than we have historically.

The second thing is just better operating on a per-location basis. With comp store sales gains and the maturation of the business, what we are seeing on a class-by-class basis -- and when I say that I'm talking the 2013 class of stores, 204 class of stores -- they're just performing better than they did a year before. We saw that as a really strong mark on the business.

And the last piece is probably more macro. We did have a much better fourth quarter. And we mentioned on the call that the fourth quarter is a significant portion of their business. And we got some cold weather there as we moved through the end of December and into January and that really marked improvement in that business.

So, I would put those three things together that really changed our thinking as we moved through the year on the probability of them being able to hit the third portion of the incentive, which again is tied to stores, number of stores open and the contribution of those stores. And those stores hitting a certain sales threshold, too, I should say. So, that led us to believe that we should accrue the EUR6 million that was part of the purchase agreement and will run through 4/30 of 2015.

So, as we wrap up through the end of the first quarter in 2015, you're going to see that most of these charges are now behind us. We will have a couple months left of intangible amortization that run through the third anniversary of the acquisition in early July, but these charges were mostly behind us after the first quarter

Mitch, I would just add my congratulations to the Blue Tomato team, too, and a bit of color around the winter business. It hasn't been a great winter business in Europe, but I think it speaks to the consolidation of the marketplace in Europe like we've seen in the US over the last few years. And as you guys have heard me say on these calls over the years, I think we have the best team, I think we have the best business. And I think we're winning share in Europe just like we have in the US.

I also feel good about that, that we have had such a strong result in what hasn't been the best of winters in Europe, but we're seeing really good results from our team and being able to sell the winter products. And as Chris said, we are very encouraged by the performance of those stores and seeing the maturation, the year-over-year comp. Because these are new for all of us, as we build out the store, particularly in Germany is a new market. So, it's been really important for us to see what it's been, and it's been really encouraging. I think as we look at the long-term future for what we see in Europe, this just makes us feel even more positive about where we're at.

Great, thanks, guys

Paul Alexander, BB&T Capital Markets.

Hi, guys, thank you. A lot's being said about the success at Blue Tomato, but can you talk about the domestic business, the US business, and help us to understand what's been going on here? Because with the impact of Blue Tomato being so strong and distorting the comps, I think we've lost a little bit of clarity on the domestic picture in recent months, and might have trouble anticipating what things are going to look like when that distortion goes away as the Blue Tomato seasonality reverses.

Let me start, Paul, and then I'll ask Chris to follow up here. It's been a really good year in North America. I think, particularly in the fourth quarter, one of our strongest comps we've had in a number of years in the fourth quarter.

We continue, I think, to see the strength of our model play out. And as we've talked about over the years, the strength of our model, when I say that what I'm referring to is the diversity of brands, which I might ask Chris to comment on for us, too, here, the diversity in categories, presenting the full lifestyle approach to what we're doing.

Here in the US, in particular where footwear has been a definite drag on our business, you still have seen us deliver pretty strong results in the fourth quarter, particularly in the fourth quarter. I think it reflects, again, the strength of our overall business model, Paul, in that we feel good about where we are at. If you look at, again, earnings gain in the US, we look pretty strong, and that's still the bulk of the business.

Blue Tomato is still a small part of our business. So, what you're really seeing is, I think, some pretty healthy growth and some pretty good comps and we feel pretty good about where we're at. Chris, do you want to add?

Yes, absolutely. I'd just frame up the scale here because when you do look at Blue Tomato on an annual basis, just to frame it up, this is really still less than 10% of our business. And so, while recently in the last two monthly sales calls we've talked about Blue Tomato being a more meaningful portion of our comp, I also would just add that it overpenetrates in January and early February from the less than 10% level that it is on an annual basis. As I think about that, then, on the year, with the [4 or 6] comp on the year, clearly at less than 10% there has to be something working in the North America business, as well.

We feel good about that, we feel good about the category performance, as Rick mentioned. We've talked all year and even last year about the drag of footwear, but we are still running decent comps here despite the portion of our business that's roughly 20% being a drag.

The other thing is we feel really good about the product mix within North America and across the whole business. And what we've talked about that from a product mix before is the importance of the diversity of what we're doing and what we've seen over the last 12 months is really a decentralization of our top 10 brands being less of a percentage of the overall business, while the top 20 brands has really gained in its contribution to the entire business. We see that as a good thing because that shows that there's a brand diversification and brands moving in and out, and that helps bring that newness and the exciting thing that we think our customer is looking for.

That's great. Just as a follow up then on that, then the expectation of a decelerating comp trend here in first quarter versus the last few months, if that's not just about Blue Tomato's seasonality reversing and not overpenetrating anymore, why are you making that assumption of such a deceleration?

I think the first thing I'd look to is where we have been. Q4, we would all agree, was a very strong quarter. But our trend line pre-Q4 was about what we are predicting for Q1.

I don't think that's inconsistent with what we've seen over the last few years, which is really we've done pretty well in the peaks at winning share, but when we've been outside of peaks, we have not seen what we just saw over the last three months. So, we're looking at it that way and that's our best estimate how we can see the first quarter playing out. Obviously, as we pointed out, we think March will be a lot better based on the Easter shift, but we expect to see that negative impact on April.

All right, thank you very much.

Dave King, Roth Capital.

Good afternoon, guys. In terms of following up on the Blue Tomato and the strength there, I think I may have actually just gotten an answer to part of my question, I'm wondering about your currency exposure at this point. It sounds like, Chris, you just touched on the fact that international or Blue Tomato specifically is still less than 10% of revenue. As we think about the rest of the currency exposure, how should we be thinking about expenses, if at all, and then more importantly cost of goods sold?

And then how does that tie into the guidance you laid out for product margins in the first quarter and the impact to overall gross margins, particularly with, I would assume, a fair amount of your brands that you sell over there are still actually US domiciled, et cetera? Thanks.

Great. I'll tell you, our first-quarter guidance includes the impact that we're predicting today for the foreign currency change. And as you look at where we were a year ago, we're seeing foreign currency hurt us both on our European business as well as our Canadian business as the dollar has surged against both of those currencies.

We have predicted right now what we think that means to our overall sales. The thing that I would point out to most of you, as we look at our business over the last 6 to 12 months, is we've really started to see this change. There's nothing today that we're seeing in our new stores that are contributing to the spread that is alarming to us. This, really, as you look at what's happened to our spread over the last 6 to 12 months, it is really more currency based.

We do think it will have a significant impact in the first quarter from foreign exchange, and we think that will carry forward in the second, third and ultimately the fourth quarter based on how we're seeing exchange rates today. But as you guys know, those move and we will just have to continue to monitor those.

From an expense perspective, it's actually an area that we don't have significant exposure to because most of the purchasing of our product is in local currencies. So, we do have a little bit of cross-border activity, but nothing that's meaningful enough to bring up on an external call. I don't have as much concern there.

As we talked about in our prepared remarks, from an overall EPS perspective, we're still investing in our international businesses. And while Canada is a little bit ahead of our European business, the bulk of our earnings today is still in our US business. From an FX perspective, this has more of an impact when looking at increases on the sales line than it does on the EPS line. So, it's not that there's no impact, it's just it's more meaningful on the top line. From an expense perspective, you're obviously translating all your expenses at the same exchange rate, so less meaningful there.

Okay, great color. Thank you

Dorothy Lakner from Topeka.

Thanks. Good afternoon, everyone. I wonder if we could just talk a little bit about the penetration you're seeing on the e-commerce side of the business. Obviously the stores are doing great, but I'm sure e-commerce is growing. So I just wondered where you are on that. And also just maybe a little color on your loyalty program Stash.

Thank you, Dorothy. I'll let Chris talk maybe what data we share on the e-commerce side. We're obviously happy to share it. I would just caution you that it's not as meaningful as it once was in terms of thinking about the business, Dorothy.

The omni-channel world, this integrated world of channelist selling, its real, it's worth a lot of (inaudible) dollars as we are, I think, one of the leaders in that area. And we are blurring the lines for our customers. And actually a better way to say it is our customers are blurring the line between what's e-commerce, what's store.

They're in charge. They're choosing, they're driving it. We're just enabling their ability and enabling our teams to meet their needs, our customers' needs, wherever they may be, however they may want to interact with us.

I'll let Chris share the number for what we report, but I'd caution you that I don't know how meaningful it really is in today's integrated channelist world that the consumer sees. So, Chris?

From a web penetration perspective for the year, we did see probably 100 to 130 basis points increase from the prior year. So we are in the around 13.5% web penetration. But as Rick said, it's really hard for me, actually, to report that number, so you won't see us report that externally because it's just so blurred between the channels when we think about how we are interacting across these channels, both on our US platform, as well as our European platform. We really do view these as one business that's tied together with one set of inventory.

I think your second question was around Stash, and we are approaching 3 million members in the stash program. We are still really excited about it. We still would say we're in the early phases of it, which I know we've said for the last couple years. But this is really about gathering information and really learning from it and we feel like we're on plan to get to where we want to be.

I would just add to that, which is really 2015, Dorothy, would be the first time, I'd say, we're really starting to use the Stash data with some very targeted CRM approaches to our customer base. Experimental phases, in those stages of what we're doing with Stash at this stage of the game. So, it's not only about rewarding our customers, but it's how can we better communicate and better localize the messages for our customer base. And we're beginning that process here in 2015.

Great, thank you.

Jeff Van Sinderen, B. Riley.

Good afternoon. Let me add my congratulations on your comp trend. I wonder how you're thinking about footwear at this point. I know it's been a negative business for you, but what do you think needs to happen for that business to turn around for you? And do you think there's a chance of that happening this year?

I only wish I knew the answer to that question, Jeff. Let me share with you a little bit about what we're doing on our side. It's the reason I think we had the better December in footwear. Chris was cautious with all of you in talking about what that might mean. And the caution was well warranted, I would add.

I don't want to leave people with the impression that we're not trying everything we can try to improve the footwear business. We are. We're pushing hard. We're testing and evaluating all the time here. We're trying to fine-tune local assortments on a market-by-market basis. We're working really closely with our brand partners about what we can do together with them to bring freshness and newness to the assortment on the walls.

Now all that being said, we're still up against what I think is fundamentally a trend cycle in footwear that doesn't favor what we do here in the US, and that is really about athletic performance footwear, with basketball and running leading the way. That's why we've seen particularly our footwear business lose share to our total business here in this last year.

This trend continues, Jeff, so it really is a function of the consumer cycle. I'll go back to what I said earlier in this call, this is a strength of our business model, though. This is a strength of why we can have such a good fourth quarter, is because our team is really good at looking at the tough department and saying, That's tough, we've got to minimize those losses.

But we have other opportunities in other areas: hard goods, accessories, men's and women's apparel here, both running gains in Q4. These are real strengths, then, that we can leverage, improve product margin that we're able to deliver in Q4.

So, for me, it's a testament to the strength of what we're doing as a business with the diversity of brands and diversity of categories, presenting the whole lifestyle, that even in spite of how much of a drag footwear has been on our business, we found ways to run gains. I definitely don't want to leave people with the impression we're not trying everything we can.

Our footwear team is working incredibly hard. But we're fighting an uphill battle. We need, probably, to see some trend change in terms of consumer behavior around footwear. And right now I'd say we're still in that trend cycle around athletic performance footwear.

Okay. And then maybe you can just touch on some of the initiatives, talk a little more about some of the initiatives you're working on for omni-channel to move that forward this year.

Sure. I will do what I always do, Jeff, which is probably not tell you anything about it. But let me just say this. I think we're one of the early players in this. We first started talking about our focus and exploring these ideas in 2009. By the time late 2010, 2011 rolled around, we were really launching our first initiatives in the omni-channel world.

We had a series of initiatives, and it's part of our five-year planning process, that we have just been knocking out one by one, and rolling out more initiatives for our consumer to work, for finding ways to allow our consumer to communicate, work with us, and get what they want. So I'm really proud of what the team has done. And it's been really, really encouraging; it's been very significant for the business.

I would tell you as we look forward in 2015 and beyond, we have another clear set of road maps for what we need to do in the omni-channel world. For competitive reasons, I'm not gong to share what all those are. But we know what the mission is, and we have a clear road map for more opportunities to interact with our consumers in this channelist retail world that we're all living in now. The consumer's got the power and our job is to be there for them any way that they want to work with us, and to unleash, then, the power of our sales teams in serving this omni-channel consumer.

The other thing that's really important about this world is the importance of great salespeople. And this is why I think ourselves and a couple other retailers, I think, are really leading the way here. Because omni-channel is really about amplifying your business, about amplifying your voice, both at the stores and in the digital world. And the way you do that is through great teams of people. With strong culture, great brand positioning, it allows us, through these tools, to unleash the power for not only the consumer but the power of our sales team.

That's the other secret, Jeff, I'd say, about what we're doing that has been so impactful for us. And it's also really motivating for our sales teams at the same time. We have a lot on our plate for that. We're going to continue to drive it forward.

And I think, again, it's about the consumer, where the consumer is going. And I feel really good about where we're at and I feel really good about where we're going. I think we're one of the leaders in really embracing this omni-channel world.

Jeff, I would just add to that, to what Rick said, is we also look at this on a geographic region by geographic region. And part of the importance of us opening stores, both in the US and in Europe, is really filling in so we can have a better omni-channel presence. And so while we feel we're really ahead of the game here in the US on our strategies, we're also implementing some of these same strategies in Europe. And it takes stores, you have to have enough stores to do it, but we think these are also long-term growth vehicles that will help us as we think internationally, too.

Both in Canada and in Europe.

Both in Canada and in Europe.

Okay, good to hear. Thanks and best of luck

Adrienne Yih from Janney Capital Markets.

Good afternoon and congrats on the solid end to the year. And just having positive comps all year long in 2014 is an accomplishment. Rick, I wanted to ask you about women's or juniors. In the trends that we're starting to see, hearing a lot about a knit top cycle and it tends to be a little bit more private label. Can you talk about opportunities, what you're doing in that piece of the business, and how you expect to grow it over the next year or two? Thanks.

Thank you, Adrienne. And again, women's is a great example, I think, of when our teams really focus, work hard together. We've been on a great run in our women's business for a number of years now. So it's been really exciting for us to see this.

I think we have a really successful partnership, not only with our brands, but between our branded women's buying team and our private label team. And I think the integration of what we've done there has been a big part of our success here, particularly, as you noted, in this last year where private label penetration in women's has grown significantly stronger in our businesses last year. And I think it's because of the close integration of our two teams and it's because of what the consumer is demanding.

And you're absolutely right, Adrienne, this has been the trend relative to women's. I think we've done a much better job of being on top of the current cycles. We've done a much better job at telling color stories for women in our presentation in our stores and online. And I just have to give credit to our teams and our people for doing that.

Now, that being said, we are always, at the same time, working closely with brands and young brands about how we can introduce them on the women's side of our business. Probably two years ago we were really driving a lot of the women's growth through the branded side of business. Trend-wise that's moved more towards driving it through private label.

I think there's an opportunity for us over the next 12 to 24 months to see some brands come back to the women's side, particularly unique brands to Zumiez that we can then help them grow their business by guiding them into the women's side of our store. So, these are the cycles and trends I would expect to see continuing on the women's side. And, again, kudos to our team for multi-years of good work here on our women's business.

Rick, just longer term, is there enough space physically in the stores if you wanted to more significantly penetrate and compete in that women's space, or could you do it online or do it through an e-com channel that was dedicated toward women's? Just wondering how you might take advantage of a piece of the business that could be pretty meaningful, but doesn't seem to have enough space in the stores. I could be wrong.

No, I think we are definitely more constrained than most women's retailers in the space. I think your observations are probably correct. That's a good prediction.

You were probably safer over the past 12 to 18 month by doing so.

That's probably true. I also would say that we are a lifestyle retailer. So we also have, when we look at the women's business, we have to look at it through our lifestyle lens. We're not just going to chase anything in women's. We have a definite point of view about who our customer is, what they're looking for from the women's side. It's not always exactly the same as we view our men's consumer.

But we still have to apply the same lifestyle lens. It's got to be a consistent brand experience that's consistent on both sides of stores. I would also tell you that's one of the things I think we have a much better understanding of, the work we've done over the last two to three years on understanding really a deep dive in the organization around our brand positioning, understanding what we're really doing for consumers.

And I think that lens is super important for us and, therefore, we don't need necessarily all the space that someone would need that's going to do a gigantic bottoms presentation for women's. We tend to be much more focused on what's unique that we can do that other people can't do in the women's business.

I would say that the need for space is somewhat limited, Adrienne, by this lifestyle lens that we're applying, which is a really good thing because it means that we get to see the women's world a bit differently than our competitors do. I think it's a really important aspect to what we're doing.

Then the second thing I'd say to you is we still feel that why we are -- and I'd tell you we're limited on space throughout all our stores, by the way. The goal for us is to turn product. The faster we can turn product, the more cycles we can get on in the business, the more successful we'll be, both from the freshness of the inventory as well as our profitability in the business. We're also very focused on the speed with which we must change and rotate product. In women's, as you know, that's even more critical than it is probably on the men's side.

Great job and keep it up. Good luck for spring

John Morris, BMO Capital Markets.

This is Janine Stichter on for John Morris. Congratulations on a great quarter. We just wanted to ask about the long-term store-based opportunity, particularly with regard to some of the tests you've done off mall and street locations. If you could just provide any of the early learnings there, and then how this might ultimately impact your thinking about how many stores you could have over the long term. Thanks.

Great, Janine, I'm glad to help you out a bit there, and I'll ask Chris to add, as appropriate here. We still think, as we said in the prepared comments, that we have a good opportunity to continue to grow stores because we have parts of the country we actually aren't in yet. So we have that opportunity for ourselves. And we know when we enter those markets that our web business grows significantly in those new markets, as well as our omni-channel business. Our ability to leverage both stores and web together is another significant growth opportunity for us.

We have whole parts of the country, Janine, that we still got to penetrate. That's where a lot of the growth is yet. Now, we are experimenting, as we have talked about on past calls, with stores in different formats: strip centers, street stores. And I would tell you that the population to conclude today is too small for us to say this has been a home run, we're just going to go all into it. We have sized opportunities for street, so we have that, but I'm not ready to talk about it yet because we would need more comfort, I think, to say, yes, it's going to be all in, we're going to go do this.

Now, that being said, I will tell you that the handful of street stores we have, we feel good about where we're going, we feel good about our success there, but we just need more time to fully evaluate it. So, more to come on that front.

You are going see us in the strip side. We will be continuing to target particular locations where we think we might have an opportunity around the country. We literally look at marketplaces and we say -- map it out, we look at population densities, and we say, Do we have a hole in the marketplace that we're not covering through the mall perspective?

And, in many cases, those aren't going to be street stores. They're not downtown-centric. These are more suburban communities. Those are where we're looking and saying we're going to try some opportunities. And likewise, the count is too small, Janine, to let you know, I think, to confirm our observation at this point. But nothing to stop us from continuing to test. And I think we'd again have positive inclination at this point, we just need more data points themselves.

That's helpful, thank you

Randy Konik from Jefferies.

Thanks a lot. I'm just curious, you mentioned a lot about private label top 20 brand penetration increasing. Obviously, there's going to be increased penetration in the web and, obviously, Blue Tomato growing. Of those four items, how do you think that impacts the margin structure of the Company overall on the long-term basis?

And then, as it relates to product margin opportunities, obviously it sounds like the first quarter is more of an opportunity because of an easier type of comparison. But how do you think about long-term potential product margin opportunities ex a mix shift, just normalized margins for products? Do you see those starting to be able to rise again, or not? I'm just curious on how you are thinking about long-term product margins. Thanks.

Our goal is to always grow product margins long term. And I think if you take mix out of it, we certainly look at the business and we see opportunities to do that. I think it's going to be about finding great brands and continuing to do what we do with brands that we can sell at full price and full margin. And turning inventory, as Rick talked about earlier, to really be able to sell more at a high price and have less markdowns. It's about looking at our off-price value customer and saying, how do we work with brands to service that customer while still getting the margin that we want to get?

I think there's a lot of things like that that we weave together to believe that we can continue to grow product margins, both here domestically and internationally. I think we certainly have scale opportunities as we go international, which is, again, I think we can really help brands and tell a great story where we can start with small brands and just a handful of doors here in the US. And we can move them into more doors and ultimately give them a route to go international with one partner that we can tell a great story together. So, I think there's a lot of those different strategies and opportunities that we can execute on a micro level that long term will continue to bring value to product margin.

That was a great list, Chris. And I think I only have one more to add to the list, Randy, and that's our ability to localize assortments. It's always been one of our strengths, it's going to continue to be one of our strengths.

I think, again, integrating really localized assortments with the omni-channel capabilities we've developed, I think is also going to be very powerful for us. It will be fast to the consumer at all touch points. Same day, next day, would be the goal in all cases with the consumer. We're not there yet, to be clear, but that is where we're going for our customer because they're going to want us to do it for them.

And that gets back to the power of localized assortment. It's always been something that our teams have been super good at. I think we're better than anyone in the branded specialty retail world that's doing this, where we're micro sorting down to, in many cases, particularly in seasonal buys, down to an individual store level.

I think we have, again, as we look at our future for where we're going, these are things where we have really clear road maps what we can do. And it puts all these things that Chris listed out and I'm talking about here with what we can do with localized assortments and speed to the consumer, puts it all together that I think again reduces markdown structures and enhances our ability to serve our customers.

We're really good planners about this, Randy. Our five-year plan is very details we laid out, particularly in the first three years of the five-year plan. We have good road maps. I think we have clear ideas about what we need to do to achieve these things. And all of these things that Chris mentioned and I'm talking about here, should yield better product margins over time.

That's helpful. So, it sounds like, from your commentary, there is meaningful product margin opportunity ahead. As it relates to just the private label and that comment around the top 20 brand penetration increasing, do you envision a meaningful increase in the penetration rates of those two items or not? And then, lastly, what's the ultimate vision in your mind around Blue Tomato? And how do you think that differs from what your vision has been and realized with the Zumiez business? Thanks.

Okay, great. I just want to make a couple comments about the top 20 in private label, Randy. And, first, I think when Chris was laying out those statistics for us, it's two things here. It's a reduction of concentration in our top 10 brands from a year ago, and an increase in the top 20 -- slight increase in penetration in the top 20.

We view that as a positive because what it means is the volume is spreading out over a larger group of brands and there's some emerging brands in that pool that we're very excited about. So, for us, what we want to see, and typically we've now been, I think, decentralizing here in this top 20 over the last couple years, now we're starting to see a little higher concentration, but the top 10 is losing it to the second 10 in this process. This is a good thing in our business because these are typically the areas that we have close relationships with these young brands, more exclusivity around the presentation of the product.

And some of these young emerging brands are going to become all-store buys here, I think would be everyone's goal, over the next few years. And as Chris said, then, we want to help lead them in with the best quality retail in Canada, and lead them in when they're ready for Europe with the best quality retail platform in Europe. Those things are what's really important about, I think, the comments about concentration. What's more important for me is that we're deconcentrating the top 10 and that's been an ongoing trend the last couple of years because of the emergence of smaller brands. So, that's really the key thing for me there.

Private label, as Chris said, it's one of the ways we convey value to our consumer base. And some of it's trend driven, as we've talked about in the call on Adrienne's question earlier in the call. Private label will move up and down. We've been pretty static, about 18% prior to this year. You're seeing us react to the consumer and what the consumer is telling us. And our teams, like I say, I think we are also executing at a higher level than we ever have between our buying team, our product team and our private label team. So I think that's where we are seeing some synergy gains there.

And then thank you for the question about the longer-term vision on Blue Tomato. I think that our vision -- and we work closely with Gerfried and his team -- so let me be clear, this is also Gerfried and his team's vision for what we want to achieve in Europe. I think we have a large significant opportunity in Europe. Europe is going to consolidate -- is consolidating -- like we have been in the US. Winners are winning; losers are losing. It's about the best quality retail gaining share in all these marketplaces.

And I think that's clearly what we're doing in Europe. And we used the example earlier of the strength of our winter business in a not a great winter year, but how we seem to be doing so well. And I really think that represents share consolidation and what it does in the marketplace.

As we look out into the future with Blue Tomato, our vision remains the same, which is that we want to build in Europe, and I think we have the opportunity to build it, a pan-European business. I think Gerfried's already built maybe the only real pan-European action sports lifestyle business in Europe. And we think that there is a chance to dominate the marketplace there with our lifestyle retail, like we've done here in the US. And we're on our way to doing in Canada, too, I'll add.

So, I think the opportunity is really big for us. There's a lot of work to do, I don't want to minimize that. We're at 18 stores at the end of the year. As Chris said, to do omni-channel, which is going to be a great opportunity in Europe, we have to have the store base, and that's why we've been investing heavily.

We can also turn on omni-channel on a country-by-country basis. This is the things that Gerfried and his team are working on. But the vision is to build a dominant position in Europe that we built in the US. We're well on our way to doing that. We have a great partner. There will be many challenges, but we certainly are seeing good trends, we're seeing good maturation in these new stores, good maturation cycles, and we're very encouraged at this point and we think we can do it.

Great, very helpful, guys. Thank you very much.

Edward Yruma, KeyBanc Capital Markets.

Guys, thanks for sneaking in my question. Just twofold. First, in your de-emphasis or your shift in mix away from some of those top 10 brands, do you think over time there will be a longer-term margin benefit? And the reason I ask that is it seems like some of these big brands have become commoditized and become more promotional elsewhere in the mall.

And then, second, more housekeeping, on the Blue Tomato incentive comp, I know you guys went through in great length, but the stub period left in April, should we assume that that's, then,$400,000, the difference between the $6.8 million and the $6.4 million? Or how should we model that last bit of the incentive comp accrual?

All right, Ed, thanks for the questions. I'll take the first part, let Chris handle the second part of that question. No, I don't think you're going to see significant margin impact. Again, we're so diversified across the brand groups that I don't think concentrating or deconcentrating will necessarily have a big movement in the margin impact relative to those top 10 and top 20 brands, Ed.

I don't have a lot of color for you there. It's more about the large accounts we have that Chris and I talked about earlier, about all the ways you have to think about driving product margin over the next few years. So, I don't see any impact, any significant impact, from deconcentration out of the top 10 brands, positive or negative in that regard. And then I'll let Chris take the next part.

Yes, Ed, as we talked about, in Q1 it's $1.1 million of charges made up of $0.6 million for the contingent earnout and $0.5 million for the amortization. As you think about how that rolls into the second quarter, you essentially would say two-thirds of the quarterly amortization charge is what would roll into the second quarter. We'll anniversary that at the beginning of July.

Great, thanks so much

Liz Pierce, Brean Capital.

Hi, thanks. I'll add my congratulations. In the stores that you're opening in Europe next year, the six, is that in same countries or they're new countries?

We'll continue to concentrate in Germany and Austria, which we're about split 50-50 today. As we continue to look at stores, it's mostly concentrated in the marketplaces that we're in today.

Okay. So no new countries basically.

No. We're clearly laying that plan out, Liz, for what we'll do. And I think those are exactly what our Blue Tomato team is looking at, when we will add a new country to the mix, what the timing is going to be for that. We still have a good opportunity, though, in Austria and Germany here for the next year, two years -- well beyond that, actually, before we'll need to add a new country. But you should expect that over the next couple years we will be adding another country to the mix, and the discussion is which one, why, and what order will we go? And that's what the team is really working on at this point.

Okay. And then second question, have you guys had any -- just your commentary on the port situation, the impact or none at all?

I think from a port perspective as it relates to 2014, we spent a lot of time working on this topic over the year. Obviously, as all retailers, it was a big distraction to our business. I'd tell you, we certainly looked at it and said there were disruptions within the supply chain as far as getting product to our distribution center and getting it out, and most importantly getting it out to our stores and in front of our consumers.

We did see some slowdowns, although I applaud the team in really working with our vendors to try to get around this without having huge additional costs put on the business. I think from a 2014 perspective, we feel good about how we were able to manage through that inconvenience. Obviously February was more challenging, based on where it ultimately had to go to get things resolved, and we're working through the backlog today. I will tell you there has been some delay but we, like all retailers, have just been trying to work through that.

So, do you have basically a contingency plan in for this year, or you're just going, presuming that the settlement is going to stick, stick with what you're doing?

I think our contingency plan is to continue to work with our vendors and stay with what we're doing. I don't want to give the impression we have empty shelves. We've got a very diverse product mix and a diverse set of vendors we work with, so we have been able to work through it.

There's just been certain product we would have loved to have in stores that was not in the location we wanted it to be because of the slowdown. I think our contingency plan is to continue to work through it. And obviously you can see by our results we've been able to work through it okay. But we would like to continue to work to make it better.

Perfect. Great, thanks. And best of luck for this year. Thanks.

Richard Jaffe, Stifel.

Thanks very much, guys. A lot's been answered but a quick follow-on. You talked about the e-commerce business and how it's integral to your stores, but it's sort of chicken and the egg, they're both essential. I'm wondering as you've gotten to a critical mass, has the need to continue investing or the rate of investing slowed down at all for your e-commerce enterprise or plateaued? Do you see any slowing in that investment?

A couple years back we invested heavily in both of our commerce sites, both here in the US as well as in Europe, as we really did a large revamp on those platforms. I'll tell you, as we've moved through 2013 and 2014, there's still investment there and we will see annual investment.

I liken more of that to the omni-channel piece that we're talking about. There's certainly pieces of it that are helping the web, but I think they're helping everything, as our stores are connected through the web, to be able to sell to consumers, and our consumers are connected to our stores' inventory.

Those considerations are important to providing the Zumiez brand experience. You are going to see us still have investments, although I would not say what we planned is largely what we did when we redid the site, by any means. But I think we're in a cycle where you'll just continue to see investments on the omni-channel side of the house to continue to enhance that customer experience.

And I would I just add, Richard, these are investments that we expect a payback from, obviously, in doing this. This is one of the reasons I think that we're such a good cash generator in our businesses, because I think the investments we've made we've been able to earn the returns on those investments. Again, that's about the disciplined approach, about making sure that we're making the right investments at the right time.

When I talk about our road map for us that our five-year plan lays out, these are the kinds of things we're talking about, what needs to go in what order and why, and what the return is going to be from making those investments. This is one of the reasons that, as you've heard me say over the last five years it's been about share consolidation in the marketplace, I think in the next five years about share consolidation.

One of the reasons, in my mind, winners keep winning is because we have the resources to invest and earn the returns on those investments. And that's tougher for people that aren't gaining share in the marketplace. You're going to continue to see us invest. And, again, I want to emphasize we have a strong road map for the investments we need to make, which we think we can earn healthy returns on. And those investments are going to drive more share consolidation.

Great, thank you.

Lee Giordano, CRT Capital

Thanks, good evening, guys. I was hoping you could just update us on how you feel about current inventory levels, and then also how you're planning inventory for spring and then even maybe later on in the year? Thanks.

I think we feel good about our current inventory levels. Specifically in light of where we were a year ago, we feel much better. I think our buying teams have done a great job in moving through inventory, keeping it fresh and unique. You'll see us continue to do that in the spring.

We've continued to grow sales quicker than we've grown inventory, which is an important metric as we manage the business. So, as you see us move through the year, I think that's really how we monitor the business is we try to grow sales ahead of our inventory growth. And you'll see that even as we move to the end of this 2015. We expect to be in that position and we will continue to grow inventory, there's no doubt, especially with the store growth that we talked about and as we plan our inventory around what the customers' needs are, I would expect to see sales grow ahead of inventory.

Great, thank you.

Now I would like to turn the call back over to Rick Brooks for closing remarks.

All right, thank you very much. And, again, I want to say thank you to everyone for joining us today. As I always like to do at our year end, I just want to offer my thanks on behalf of our executive team to all our Zumiez employees, our Blue Tomato employees, for the great contributions this last year. I also want to make sure I say thanks to our great partners that we have in our vendor base, our brands, those brands that we resell. We have some tremendously supportive and empowering partners there, too. Make sure I offer my thanks to all of our brand partners.

And, again, of course, to all of our investors for their patience and understanding in our investments as we grow this business. And I hope you're enjoying the kind of results we've been able to generate in this last year. So, many thanks to everyone and we look forward to a great 2015.

Thank you for today's participation in today's conference. This concludes the presentation. You may now disconnect. Thank you very much. Have a very good day.