Zumiez Inc (ZUMZ) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Zumiez Incorporated First-Quarter 2015 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 concerning Zumiez Incorporated business outlook and contains forward-looking statements.

These particular forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties, and our actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez' filings with the SEC.

At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome, everyone. I'm joined on the call today by our Chief Financial Officer, Chris Work.

After a few brief remarks on the first quarter and start to the second quarter, I'll provide an update on the competitive advantages that we believe will deliver increased profitability and greater shareholder value over the long-term. After that, Chris will take you through our key financial and operating metrics, and then we will open the call to your questions.

First quarter net sales came in at $178 million, up 9% from the first quarter of 2014. Comps increased 3% and diluted EPS was $0.09, inclusive of Blue Tomato acquisition costs. These results were within the range of our overall expectations.

However, we experienced a greater than anticipated slow down in our domestic business as we moved through the quarter. While our consolidated comp was lifted by continued strength in our European business. These trends weakened in May, as we recorded a consolidated comp decline in the month, that was made up of transaction declines in the US business offset by strength in international business, particularly in Europe.

While we are encouraged by the growth of our international business, indications are that recent trends in the US business are being affected by headwinds, which we believe are primarily tied to a lack of clear fashion trends driving the teenage consumer to shop, resulting in lackluster traffic; foreign exchange trends, namely impacting our border business and high tourist locations; weaknesses in our seasonal spring business; and delayed receipts due to the West Coast port issues in the first quarter.

We are mindful of our execution through these periods of inconsistency, and continue to believe, consistent with historical trends, that when a consumer comes out to shop, we're confident we'll perform at or above the high expectations we set for ourselves. We remain very optimistic about our long-term positioning.

Our primary focus remains on executing the global initiatives we have consistently discussed with you over the past few years that we believe will deliver sustainable long-term returns. I'd like to give a brief update on those initiatives.

North America, we opened nine new stores in the quarter and an additional 11 stores in May. We are on track to reach our full year projection of 51 new stores in North America. We continue to see untapped potential in our North American markets, and our goal is to maximize the long-term productivity of the entire portfolio by optimizing our physical store presence in each market as part of our omni-channel platform.

In Europe, we opened four of the six stores we expect to open during 2015. As I mentioned, this business, while still small compared to our North American business, has been a strong performer over the winter months and now into spring. We believe this trend reflects the investments we made in the European market to broaden the reach of our world-class shopping experience, and highly differentiated approach to product assortment.

Our growth in Europe is very encouraging. And while we continue to view this as a long-term investment, we plan to continue capitalizing on our momentum in this market. Both the remainder of the year and beyond.

Our omni-channel strategy continues to drive expansion and enhancement of our digital infrastructure and shopping experience. With these investments, we are able to better offer customers a consistent and genuine interaction with our brand. Regardless of the channel by which they are engaging with us.

We believe expansion in e-commerce works in tandem with expansion of our brick-and-mortar stores, both domestically and abroad. We're proud of the integrated brand experience our teams have created through both Zumiez and Blue Tomato that represent our unique approach to our lifestyle market.

Now before I hand the call to Chris, I'd like to recognize the team of individuals to whom we entrust much of our culture and brand experience. Our sales teams. We recognize their contributions, and we made it part of our unique culture here at Zumiez to invest in them, providing them with the tools, training and support they need to deliver a genuine high-quality customer experience each and every time.

We again held our annual store management retreat recently. It's a great event. Always sends our retail managers back to their stores providing their employees with renewed energy and enthusiasm for the Zumiez brand and cultural experience.

Those intense few days are designed to help these individuals positively impact their teams and their locations on a daily basis. Our managers understand that they are stewards of our brand and culture. And this retreat helps feed the passion they have for Zumiez, as well as the lifestyle we symbolize in a way that has long lasting and meaningful effects on our overall business.

During these national events, I'm reminded of how important it is for us to focus on our people. They are the key to our success as a lifestyle retailer, and every year I'm more convinced that investing in them is one of the most important things we can do to ensure long-term success.

I'll wrap up by reiterating that we recognize the short-term performance of business is not immune to factors that are impacting retail. And as such, we are being cautious with our near-term projections.

That said, we believe we'll continue to gain market share, which can be attributed to our strong culture, our strong brand and our omni-channel strategy. All of which support our authentic lifestyle positioning, and our commitment to exceptional customer service.

These factors, along with a highly differentiated product assortment, are competitive advantages that will continue to drive shareholder value for many years. With that, I'll hand the call to Chris for review of the financials. Chris?

Thank you, Rick, and good afternoon, everyone. Let me take a moment to briefly review our first-quarter results and our May sales results. Then I'll outline our second-quarter guidance, and provide a few thoughts for the year.

First-quarter net sales increased to $177.6 million from $162.9 million in the first quarter of 2014, an increase of $14.7 million or 9.0%. Breaking revenue down by region, North America sales increased $10.6 million or 7% to $161.2 million and our European sales were up $4.1 million or 33.6% to $16.4 million. This includes the negative impact of foreign currency translation in the quarter of approximately $5.0 million.

Consolidated comparable sales, inclusive of our e-commerce business, increased 3.0% this quarter, driven primarily by an increase in dollars per transaction, partially offset by a decrease in comparable transactions. Dollars per transaction in the quarter were positively impacted by an increase in average unit retail, as well as units per transaction.

In terms of category performance, hard goods, men's, juniors and accessories posted positive comps, while footwear posted negative comps. We finished the quarter with a total store count of 616, made up of 557 stores in the US, 37 in Canada and 22 in Europe.

First-quarter gross profit was $56.5 million, an increase of $6.0 million or 11.9% over the first quarter of 2014. Gross margin was 31.8% compared to 31% a year ago, up primarily as a result of 100 basis points improvement in product margins.

SG&A expenses were $52.4 million, or 29.5% of net sales for the first-quarter of 2015. This compares to $46.8 million, or 28.7% of net sales in the year-ago quarter. Included in SG&A for the quarter is approximately $1.1 million in Blue Tomato acquisition charges, compared to $0.6 million in the prior-year quarter.

First-quarter 2015 operating profit was $4.1 million, compared to $3.7 million in the first quarter of last year. Operating margins remained flat year-over-year at 2.3% of net sales.

Net income for the first quarter of 2015 was $2.8 million, or $0.09 per diluted share. This compares with net income of $2.5 million, or $0.09 per diluted share in the first quarter of 2014.

The results for the first quarter of 2015 include $1.1 million or approximately $0.03 per diluted share for Blue Tomato acquisition related charges. While 2014 first-quarter results include $0.6 million or approximately $0.01 per diluted share for acquisition related charges.

Turning to the balance sheet. Cash and current marketable securities were $150.9 million as of May 2, 2015, up from $107.8 million as of May 3, 2014. This increase was driven by cash generated from operations, partially offset by net capital expenditures primarily related to new store growth and remodels.

We ended the quarter with $104.1 million in inventory, up $6.5 million or 6.6% from the end of the first quarter of 2014, primarily as a result of our increased store footprint compared to this time last year.

Turning to our May results. Our comparable sales decreased 2.2% for the four-week period ended May 30, 2015, compared to a 3.6% increase for the four-week period ended May 31, 2014. This brings our year-to-date 2015 comparable sales to an increase of 1.8%.

Total net sales for the four-week period ended May 30, 2015 increased 4.1% to $51.5 million, compared to $49.5 million or the four-week period ended May 31, 2014. The year-over-year comparable sales decrease was driven by a decrease in comparable transactions, partially offset by an increase in dollars per transaction. Dollars per transaction in the period were driven by an increase in average unit retail, and an increase in units per transaction.

During the four weeks ended May 30, 2015, accessories, men's and footwear posted negative comps, while hard goods and juniors posted positive comps.

Looking at guidance for the second-quarter of 2015, I'd like to remind everyone that formerly in our guidance involved some inherent uncertainty and complexity in estimated 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 second-quarter comparable sales results in the range of negative 5% to negative 3% consistent with our late May trend. We are planning total sales to be in the range of $179 million to $183 million.

This sales guidance contemplates the movement of Labor Day in 2015 back one week in September which we believe will have a slightly negative impact in July, and a more significant impact in August as volumes move into September.

We expect gross margins to decline 150 to 200 basis points due primarily to the deleverage of fixed costs, including store occupancy on a negative comp and to a lesser extent, a decrease in product margins. Consolidated operating margins are planned to be between 3.0% and 4.0%, with diluted earnings-per-share of between $0.12 and $0.15. This guidance contemplates an estimated $0.4 million or $0.01 per diluted share for the intangible amortization charges associated with the acquisition of Blue Tomato.

Before I wrap up, I'd like to briefly cover how we are currently thinking about the remainder of 2015. As you know from our historical results, our business is seasonal. With the majority of our sales and earnings occurring in the back half of the year, while the first and second quarter are significantly smaller.

As mentioned earlier, our second-quarter guidance contemplates negative comparable sales. However, we continue to believe we will perform stronger in the peaks of back to school and holiday when our customer has a reason to come out and shop. That said, with these inconsistencies, we're not prepared to give full-year sales guidance, but expect our comparable sales growth to be lower than our 2014 comp performance.

The majority of our year-over-year product margin opportunity was in the first half of the year, particularly in the first quarter. While first-quarter margins came in as expected, we now believe near-term margins will be more pressured as indicated in our second-quarter guidance. In the second half of the year, to the extent sales stabilize, it will be our goal to maintain product margins at prior-year levels.

We continue to plan SG&A growth in line with 2014 growth rates, excluding the charges associated with the Blue Tomato acquisition previously discussed. We expect foreign currency translation to impact sales unfavorably throughout the year. However, the impact on earnings should not be significant as contribution margins for our international operations are lower than our mature US business.

We're planning to open approximately 57 new stores with a similar cadence to what we have done historically with two-thirds of the openings happening ahead of back to school season. We are currently projecting capital expenditures for the full FY15 to be between $39 million and $41 million, driven by new store openings and planned remodels.

We anticipate depreciation and amortization of $31 million for the year. We're assuming an annual effective tax rate of approximately 38%. We expect our diluted outstanding share count for the full year to be approximately 29.3 million shares. Any share repurchases we make during the year would reduce our share count.

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

(Operator Instructions)

Sharon Zackfia, William Blair.

Rick, a question on what you saw in the late spring? May obviously not typically a traditionally pivotal retail month. Just curious what you saw in April? It sounds like it got worse as May went on?

How do you -- have you seen an instance like this previously that you can think of really quickly up offhand that maybe you can share with us? Prospects were bouncing back, how your buy-in team is dealing with this at this point? And how quickly they can shift -- it sounds like it might be more spring assortment, so I'm not sure if that matters. But any kind of context you could give us would be great?

Well thank you, Sharon. Of course, I can, because I've been doing this, as you know, an awful long time. So we have hit cycles like this over the years where you'll see a shift, and it's usually driven around, again, lack of -- or you see it more in lack of trend direction. And I would tell you that I think it's more pronounced in this kind of environment when we are still in this bumpy recovery mode from the great recession. And in these low volume periods, the lack of trend is more pronounced. And that's really what drives weaker traffic.

So I can't give you specific examples, Sharon. But there are these points in time where we'll do this. And I will also say, in following up on your comment, that our miss relative to our plans is all in the seasonal spring categories. To be clear, those categories include things like men's and women's shorts, board shorts, women's swim, tank tops, hats, sunglasses, sandals, those are all categories that significantly under performed our plan in May.

And I guess you look at each thing and you break it down by women's and men's. And in women's, we overcame the weakness in the seasonal business in other categories of clothing, because we still comped up in May. And in men's, which is our largest sales department, we just didn't have enough going on in the other categories of men's clothing to offset the declines in the seasonal categories, even though we ran gains in many of the other categories in our May business. In particular Long Bottoms, Sharon, was -- we've been seeing a good trend for a while there, driven by some trend direction in Long Bottom. And we still ran a gain in our Long Bottoms, causal pants and denim pants combined in the month of May in our men's business.

So, I say all that to highlight the fact that it is really our biggest misses relative to plan were all these seasonal categories. So I can't tell you exactly why. I think it's a broader issue again in teen, in the teen marketplace. The weather hasn't been bad everywhere, just like it's not bad everywhere every year. It's always nice somewhere.

So what are we doing, I guess, Sharon, then to take the last part of your question there. We are going back, and as you would guess, we have been now really looking hard at looking our local assortment plans. And saying what did we get right, what's working, what's not working? We're rebalancing inventory where necessary in that process, and moving the product around if appropriate. And of course, we're going to look at the slowest selling items that take the appropriate level markdowns on those products. So that's where we are at.

And I guess the last thing I'd say on this topic I think Chris laid out in the metrics, is that, and this is true overall and true in the US, is that we are running gains in average unit retail. We're running gains in units per transaction, which is driving a pretty significant increase in dollars per transaction. Which is I think very important to me because it speaks to again the quality of what our sales teams are doing in the marketplace. So we are maximizing each interaction with each customer. And I think that's a very important part of what we're doing here.

So in my mind, Sharon, what we're looking at here -- and again, there other challenges like our footwear business continues to be challenged. But relative to May, the seasonal stuff, I think the stuff that really decelerated for us relative to other things happening in the marketplace, and particularly as you can see, men's, women's we were able to overcome it and men's we couldn't.

And so that's where we are at, and that's what were doing to analyze it to take it forward. And as Chris said, I still remain optimistic about our positioning for back-to-school when I think our customer will be out and shopping.

Okay. Just maybe one quick follow-up. Can you comment if California was worse than the overall average? And then, Chris, when you said the comps for this year are worse than 2014, did you just mean less than the 5% you had in 2014, or did you mean negative?

At this point in time, we are not ready to comment on the full year. But we're looking at it as less than the 5% we had last year.

Perfect

And California, for us, Sharon, was actually generally, it tends to be one of our stronger marketplaces.

Okay. Great. Thank you.

Dave King, ROTH Capital Markets.

Thanks, good afternoon, everyone. I guess following up on some of the trends you saw during the period it sounds like California did okay for you. Rick, can you just talk about geographically what might be going on beyond that? Was there anything beyond that in terms of weather?

And then you seem to touch on a lot of the things in Sharon's question that I was looking for, but I guess maybe looking at the outlook for the year. It sounds like now you think that's going to be negative, actually I lost my question completely. So I'm going to step back. Thanks, guys.

Thanks, Dave, regroup and you can follow up here in a moment. So I would say that, again, I'm not one to want to talk about weather. Because weather is -- there's somewhere where the weather is bad always every year. So that was clearly the case with tornadoes in Oklahoma, and the flooding in Texas which were of course terrible, terrible events.

So yes, we have weather issues. But there is something again a year ago that would impact the business too. So I don't really want to fall back on that, Dave, as an excuse for why our seasonal categories are so poor. I just think there's some broad trend issues. And without the momentum to bring out kids to shop, without a real incentive or real trend driver to bring them out, it makes it harder for us to sell product to people. And again, when they do come, as I said from our sales stats, we do a really good job of maximizing the interaction with our customers.

So yes, California is generally better for us. I would say there were pockets across the market across the US that were like that, and other pockets that were not as strong. And that would be intermixed with, as I think Chris mentioned in his comments, some of the border stores relative to the foreign currency. Those were tougher for us. Some of our high tourist-driven locations. Those were tougher for us.

So it's really hard to just call out one thing. It's more of a blended element of a number of factors coming into play. Both around trend on the seasonal product driving I think weakness in customer traffic. And then in particular, emphasis to foreign currency and border transactions and some weather issues around the country.

I would just clarify on your thoughts for the outlook for the year. Our outlook in the short-term is the negative 3% to negative 5% comp that we laid out for our guidance for Q2. Again, we continue to believe we could perform stronger in the peaks of back-to-school and holiday when our customer is out shopping. So we're certainly -- it's not our goal to draw that trend line out through the remainder of the year, and we're optimistic about our strategies in the back half.

Dorothy Lakner, Topeka.

Thanks, and good afternoon, everyone. Just wanted to circle back on SG&A, wasn't sure if I caught what you were saying, Chris, about how we should look at the SG&A line.

And then on the footwear side of the business, trends have been negative for a while. Are we seeing any light at the end of the tunnel there?

And then just maybe a little bit more color about what you're doing to rebalance the assortment? Obviously, if Long Bottoms are working now, they should work as we move into the cooler seasons of the year. But just a little bit more color how you are thinking about what happened this quarter, and why things would be better in the back half of the year beyond just the pure traffic issue.

Okay, great, Dorothy. Let me tackle a couple of those, and then I will let Chris also join me on those comments. So let's start with footwear, and give you maybe a bit of update on our thinking of footwear. You're right. This is been a more difficult department for us for quite a while now, going back a few years actually. And I think we did have a positive comp in footwear in December, and I think everyone got really excited about that. And I think Chris probably tempered everyone's excitement.

Yes he did.

But footwear, first I'd say, you have to break it down into looking at men's footwear and women's footwear. And in the men's side, I think the issues on the men's side are pretty clear. They have been the same predominant trend issue going on now, again, for a few years and that's really related to performance athletic footwear, in particular basketball. And that's just not something we do. It's not where our -- our customer doesn't expect us to do it, and it's just not our niche. And the retailers that are doing it, are doing quite well.

Now here's what I do know. I do know that those trends always rotate, and they are going to adjust and change over time. So what are we doing in the men's side? Well, we're continuing to test styles, we're continuing to test brands in men's. And we continue to work towards unique product ideas with our brand partners. And I would tell you I'm a little bit more encouraged about men than I am women's.

So as we talk about the second aspect of our business, our women's footwear business has been the tougher between men's and women's. Women's is the tougher portion of the business. We continue to struggle with a brand, a particular brand, and we are working closely with that brand partner to reposition styles and literally assortments down to the store level. And then with other brands in women's, we're doing so many things we're doing in men's. Which we're testing other styles, we're testing new brands in women's, and all again trying to build unique product assortments in a way that aren't offered broadly in the marketplace.

So generally, that's where we are at with footwear. Men's is a bit more encouraging than women's. Women's we're still really struggling with. And to be clear, men's was still negative in that. But I'm feeling a bit more positive about where we are at in men's, although we've got more work to do. And fundamentally our challenge there is one around trend and athletic performance footwear, in particular basketball. So that's the footwear topic.

We're talking about spring again, and thinking about what we're doing. As I said, there's always someplace that's nice and someplace we had bad weather. So what our buyers do is we are really taking a hard look again at, as I mentioned with Sharon, Dorothy, we're looking at what was our individual assortment plans by location.

Going in and looking at how we're doing against those plans. Who sold well, and that is a factor of weather, where you see someone that really had good weather and we had a higher sellthroughs. That's where we are rebalancing product away from those areas that had lesser sellthroughs of product across all those spring categories. And that's just smart. We're just going to take advantage of the business across the country in ways I think that a good retailer does. So that's really what we're talking about on that front.

And as you said, I'm encouraged by Long Bottoms. Because we've had a good strong trend cycle in there, with in particular joggers. I have to tell I think that trend has peaked. But with that being said, as we commented about in May, we still ran a gain in men's Long Bottoms between denim and casual pants. So I think that does bode well for us as we move into the back-to-school season. Because obviously Long Bottoms become much, much more important in that window.

And I might add that even in as we drove the big cycle with joggers, we still ran comp store gains in denim in almost every period of that cycle. So denim hasn't been weak for us, it's just been lesser in a trend cycle is all. So I'm very encouraged that as the casual bottom trend wanes a bit, we're seeing denim step up. And again, in the men's category, just not enough to offset the problems we had in the spring seasonal categories.

Right.

And then related to peak and non-peak. It's just a different ballgame, Dorothy, in peak and non-peak. And as you know, we are good at playing the game and particularly in the peak windows. And I think we have a good history at that. And I just don't think because the lackluster trend situation, customers, particularly on the men's side, women shop more frequently. And you can see our women's business was a bit better, but men, if there's no driver to come out no must-have item, they're going to hold.

But they do and will come out for back to school, because again, that's a have to buy scenario. So there I'm encouraged, and I'm encouraged by the fundamentals, I'm encouraged by the Long Bottoms business, I'm encouraged by the quality of our sales teams. I feel very good about that aspect of our business, and I know based on historical patterns that when they come out we do well.

And particularly maybe not always in the absolute term in today's world, but definitely on a relative terms. And that's why we talk about gaining share in this marketplace. So that kind of covers my side, Chris, do you have anything to add in on the SG&A question?

Yes, the only thing I would add to those topics is on the footwear side of the business. Obviously, we've talked a lot about this over the last few years, and Rick did a great job summarizing where that category has been. I will tell you, we're feeling a bit more optimistic about the results there just based on its trend line. As you even saw with the May results, when we list out the categories, footwear was not our most negative category.

And additionally, while -- our buying teams and distribution teams did a great job working through the port strikes during 2014. We, like many retailers, were not immune to the slowdowns in Q1. And this is one category that was probably impacted more than others. So we are trying a lot of things here. And our trend line there is getting a little bit better. So more to come as we work through Q2 and into the important back half of the year.

From an SG&A perspective, without giving annual guidance, we're trying to give some direction. We're looking at SG&A growing similar to last year, excluding the charges related to the Blue Tomato acquisition. Obviously, this is an area that we are monitoring really closely. Specifically in light of where we're pretty good long-term planners in the way we think about the business. And making sure we're making the right long-term investments for growth and shareholder value creation. And then coupling that with really the short-term economic -- our short-term results, I should say.

So we're balancing the long-term investment with profitability and managing SG&A, and looking at that really closely. But today, we're looking at SG&A to grow pretty much in line with 2014 rates.

Great, thank you.

Thank you, Dorothy.

Ed Yruma, KeyBanc Capital Markets.

Hello, good afternoon. I guess just a couple quick follow-ups.

First on the SG&A, I know that there is a variable component to the SG&A for your store expenses. So I guess just trying to understand a little bit more why SG&A growth would be comparable to last year given the weaker sales.

I guess two, you've talked about the strength in the Long Bottoms. Are you willing to call that there is a denim trend that you are observing? And if you think of denim as a part of your business, where was it today versus maybe when denim was at secularly a strong point?

And then finally, more of a thought to an earlier question. Are you -- given the weakness, are you signaling to your buyers to reign in forward buys? How many adjustments can you make, or is it still too early to tell whether this was a seasonal blip versus a period of maybe sustained weakness? Thanks.

Thanks, Ed. I'll take the last couple aspects, and then Chris will follow up with the SG&A question.

Long Bottoms are really interesting. Again, as you know us well, Ed, we don't care what we're selling. We just want to sell what customers want, and our job is positioning the inventory appropriately to do that. So we, over the last 18 months, we have seen a big, big shift between casual -- what we call casual pants and Long Bottoms grouping in denim to the point where denim has become a much smaller component of our overall pant Long Bottoms business. So in other words, if it's a denim cycle, we have lots of room to move up relative to where denim is at currently in the mix of our business. So that's the opportunity side of the business.

And again, I'm encouraged by what we're seeing in our denim side of our business. And we have, at this point, as I said, we ran gains in May, we've run gains -- actually denim mostly throughout this cycle. I think that speaks to being on trend with what we're doing there relative to what customers wanted. Likewise I'd say we're on trend relative to what customers want on the casual pants side of the business. So we have a relatively, speaking in that case, Ed, a lot of room to move up in denim on a relative historical patterns in Long Bottoms.

Then second relative to inventory. Inventory coming out of Q1, we feel great about the position we are in. You heard the numbers from Chris. Quality of inventories, we're in a good spot. Our challenge, again, is around these seasonal buys. So that's where if we're going to have markdown pressure, that's where it's going to be. And we've considered some of that within the guidance that Chris provided there.

So we are very good, as you know, about managing to where we believe our inventory needs to be. We do have room to move on things in terms of what our buyers can do and the levers they can pull. And we'll be doing all the things we can to make sure, that is, we're going to do our best to keep inventory in line. And I think our track record is pretty good. We have a good track record of doing that, and maintaining a current quality level of our inventory, maintaining that at a high level.

Great. Then on the SG&A variable component, clearly there is a variable component within SG&A. And that's something that we'll work hard to manage. I think what's important to point out about our model is our store format is actually being able to operate up and down the mall spectrum. So we can work in the high A volumes malls, we can work in the C volume malls. And because of that, that doesn't mean that all of our structure is variable. Where we do have stores where we are at minimum hours pretty much most of the time. And so in those cases, we don't have as much variability in that store operating.

There's a lot of other things that are going on in SG&A that impact where we are at. And I think to go back to the previous comment, we're going to work really hard to manage those as we move through the year. And especially in light of some of the headwinds that are up against us, and we'll be managing that cost structure at the store.

We're going to manage home office spending, albeit cognizant of the importance of long-term growth. And to the extent we need to that there will be areas we'll try to pull the reins back a little bit if the results aren't there and we don't think it's detrimental to the long-term vision. So again, high-level thoughts on the year around SG&A growth. But to the extent that the results are tougher, we'll be doing our best to rein those in.

Great. Thanks so much, guys.

Thanks, Ed.

Jonathan Komp, Robert W. Baird.

Hello, thank you, and hopefully you can hear me okay. Rick, if I could maybe ask one more question related to the current sales trend you are seeing in relation to maybe some of your historical perspective.

And I guess looking back on the historical data, it's a little hard to find another example where you've seen such a sharp deceleration in the trend line in one season, only to bounce back strongly positively in the next season. So can you maybe just share a little bit more light on what gives you comfort that this isn't the start of a sustained trend that you are seeing?

Sure I'm glad to do that, and I will start with what from my perspective is, is again, where we have been most challenged relative to our plan, which is around the seasonal categories. So actually those categories change. And that's probably -- so from a trend perspective, again, no reason particularly -- on the men's side of the business again is a particularly difficult. They're difficult on women's on the seasonal categories too. It's just, women are shopping more frequently. And they came in the store, we could sell the more things in different categories. So we have a comp up in May in women's.

On the men's side, where men don't shop as frequently, they're not in the mall as frequently. Particularly if there's no drive to go in. So that will change. So first, that's what I would tell you is that will change. And second, we are seeing success in many of our Long Bottoms and in many of our other top categories. As I said, we ran gains in a number of categories, just not enough to offset the loss relative to our plan in the seasonal business.

So in both those cases, that's where I would explain it to you. Is that I just expect that the male consumer is going to come out and shop during the back-to-school period. They need to replenish, they need to get new stuff as they head into school. It's part of the nature of the audience we serve. They want to be refreshed, basically, seasonally as they head into that product, that fall back to school cycle.

And then again, our problem seems to be right now focused around these seasonal categories, the lack of trend. And if nothing else, we can see the trend in Long Bottoms is going to clearly be away from the casual pants and back towards denim. So there will need some replenishment in the category business there too. And again, there other categories that we're doing -- we ran gains in men's, it's just not in the seasonal product.

Got it. That's helpful. And I guess one other, certainly we've heard signs of weakness from some of the other retail chains in the category out there. And is there anything that you are seeing that would say the weakness for Zumiez has been greater than maybe some of the weakness seen for others? Or any signs that the competitive dynamic within the category has shifted more recently at all?

I don't see any change in the competitive dynamic from my perspective. And again, as you know, we are really the one that is transparent here relative to monthly comps. And no one else is actually laying it out in the way I think that we lay out for you in a clear and straightforward manner.

We're committed to monthly comps. We believe in transparency with investors. We believe that it's better in our world where we share information deeply, that is better to have these types of conversations even if business gets tough it's a better way to do it. So I don't perceive in any shift in the competitive dynamic. I think most of our teen retailers, particularly if you looked at a stacked comp on a two-year basis, we are still leading the way even in May on a relative basis.

So I don't perceive any major shift in the competitive dynamic. I just think we have some challenges that we have to work our way through on the product side of the business. And again, it's more complicated than that. There's also this foreign exchange component, as Chris laid out, in border stores and our high tourist stores, that's impacting us there's no doubt about that in the US.

Now flipside, we're probably benefiting from some of that in Europe. That's part of the strength in Europe too. Which is, again, I think long-term, will be a really valuable part of our model as we're able to scale Europe.

So no, I do not sense any change at all in the competitive dynamic. And as I said in our prepared comments, I anticipate that we are going to see this year be another year of share gains for Zumiez in the marketplace.

Thanks. That's very helpful. And then maybe just one for you, Chris, on really the overall philosophy and thoughts on the buyback program. And I guess in the context of the direction of your stock that's gone year to date and given all the cash on the balance sheet. Is there any reason why you wouldn't get meaningfully more aggressive here in terms of the opportunistic buy?

Our strategy here has remained very consistent. So as we said on the call, we did not buy back anything in the first quarter. But this is the way that we think we can give shareholder return long-term, specifically in light of not only our cash balances today but our ability to continue to generate cash.

So just as you said, we will be opportunistic. And that will be something that we'll look at as we continue to move forward. So nothing that happened in the first quarter, but we will continue to update you guys on a quarterly basis with where we are at.

All right. Thanks for taking all the questions.

Richard Jaffe, Stifel.

Thanks very much, guys. And while I see the downturn you are anticipating, wondering from your seat if there is visibility for trends or improvement on the women's side in particular where you've seen such strength that would either internally give you guys hope for back to school? Or better yet, that you could share with us?

Again, I don't have a lot to say, Richard, outside of what I have said on some of these earlier comments. And again, women's we continue -- women's, we've been on a long run. And we continue to do that, and we're certainly, to be clear, we do not cap the women's business in any way, shape or form. We feel we have a good strategy on the women's side of our business, we feel that our strategy complements our Zumiez brand positioning.

We feel that we are aligned there. We don't see any conflict between what we are doing on the women's side of the business and what we do on the men's side of the business relative to our overall Zumiez brand positioning. We're very comfortable with that. If women's can keep growing, I'm thrilled about that. And in fact, I want it all to grow. That's my big mission. And women's has grown in the relative mix of our business for the last couple of years. I'm happy about that. And obviously, things like footwear have shrunk over the last year in particular as part of the mix of the business.

But to be clear, I want everything to grow. So yes, I'm hoping that we, as Chris said, we have seen footwear on the men's side, not so much on the women's side, but on the men's side we feel a bit more encourage on the men's side in footwear. We are working hard to continue to drive that forward. Our Long Bottoms business and many of our other men's top categories, as we said, we comped positively relative to what we planned in those businesses in the month of May.

So I'm encouraged by those, those are all things I think that will serve us well as we head into the back half of the year. I just think we are hitting this seasonal lull, where there is again, no reason for particularly the men's side of our business to come out and shop.

Wait and see. Thank you.

Thanks.

Paul Alexander, BB&T.

Hello, guys. Thanks for the question. Just on how you think about the comp guidance. Understood that the business slowed over the course of May, and you are basing the second quarter guidance off of the late May trend.

But why base it only on those last couple weeks of May and not the greater May result? Is there a reason why early May might have been better than the 2Q rate in general, whether that might've been higher clearance selling or something that was happening in May that might not benefit the rest of the quarter?

There is not something that we would point to there. I think the bigger rationale for basing it on the trends toward the end of May are that May does have Memorial Day as part of it. And we have seen trends historically where that is a mini peak within that period, and so we're basing the trends off of that.

We're also looking at this from, as we mentioned in our prepared remarks, the overall shift in Labor Day here in September, moving back one week. And while really the call out there is about Q3 and just making sure that we're all aligned and the impact between August and September as we do expect it to have a material impact on August with the volume moving into September. We also expect there to be a small impact on July.

So you couple those two things together just based with the trends we saw at the end of May. And so we did line up our guidance with the more recent sales trends versus the entire month.

All right, thanks. And just a follow up on the peaks and valleys sales pattern. You are confident that you perform better in the peaks, and the lack of trend is likely to make this pattern even more exaggerated again this year.

But the peak valley pattern has been happening for you guys for the last couple years, so do you think this is something beyond just the fashion and trend cycle? Is there something happening incrementally even more in the macro environment like shopping patterns among young people continuing to change, or the impact of the internet? What else do you think might be at play other than fashion?

We do believe, Paul, that there is some concern. Particularly when there is a lack of a driving must-have fashion item that, outside the peaks, we think there is some lingering hangover from the great recession for all consumer segments. That this is part of the reaction of consumers saving more money, of spending to pay down debt.

These are the periods where if you don't buy, these are the periods you don't buy. And unless it's, again, a cyclical rotation on spending, where it's towards housing or cars or other factors. And otherwise you don't spend on clothing and fashion without it being a trend driver to really push the spending forward in these lower volume periods.

So I think for us this is -- we talk about this internally. About how we just think the consumer comes out of that recession with the fear that's still in play today. So we internally talk about how we may see greater volatility around these low volume periods, particularly if there's no trend driving item or must-have item in the marketplace bringing in particular young men out to shop, which is the majority of our business.

And young men tend to be event buyers or strong trend buyers in the marketplace. So we expect that from our perspective, these lower volume periods the nature of the kind of psychological fear -- the hangover of the fear from the great recession is part of the aspect when there is no must-have item to buy.

Thank you very much.

Jeff Van Sinderen, B. Riley.

Hello, good afternoon. This is Austin on for Jeff. With that potential markdown pressure from the spring assortment, do you expect to be any more promotional than you were last year?

And then also just more specifically on geographic performance. Have you seen any unusual softness in the Western markets of California, Arizona and Nevada versus other regions lately? Thanks.

All right. Again, I'll talk about at a high level what we think about the markdown strategy. And we are not one to mark down, a lot of retailers mark down the store, they do all storewide promotions. To be clear, that's not what we do and it's just not our mode of operation.

We mark down items that don't sell and that have low sell through rates, right down to the individual SKU level. We think that's a smart thing to do. It's the right way to run a retail operation. So I can't tell you how we're going to end up. If we have a tremendously hot summer from here forward, we may be used to saying, well we're glad we own the inventory we have going through this and everything is going to be just fine.

But I can tell you, in the guidance that we have, based upon the trends that Chris described in May. We have allowed ourselves some room on margin. So if we need to, we will take markdowns, because again, we are very disciplined around maintaining the quality and the cleanliness of our inventory positions. So that is reflected in the guidance we have put out there. But we won't do it unless we need to do it, and we do it on a literally down to the SKU level. So you won't see it in any overall store promotions. That is just not our way of working.

And again, I did say earlier that California had been a stronger state for us on a relatively speaking. And again, weather will move around. As you guessed, the flooding in Texas really made business terrible in Texas at that point. And so you will see it move around in different ways from that perspective. But on a year-over-year basis, I don't really have any great other call out other than that California is probably one of our best performing markets.

And the only thing I would add to that. On the markdown side, as you do recall, a year ago, as we ended 2013 we were heavier on inventory than we anticipated. And therefore, had some margin pressure in Q1 and in Q2. And while we were able to get a lot of that back in Q1, fortunately year-over-year we still had a little opportunity in Q2 of last year.

So I think to add to Rick's comments as well, our promotional cadence is also not only made up of things we're marking down, but also our message to the valued consumer. So you should think of us in some cases we are really creating a buy for that valued consumer that we can still achieve the margins that we want.

So it's a combination of a few different things. But we feel that it will only be a slight impact on the second quarter.

Okay. Thank you very much.

Betty Chen, Mizuho Securities.

Thank you, good afternoon. I was wondering if you can quantify if it's a magnitude it all for the port delays? I know that you didn't call it out I think on the last call. Wondering if that had any impact on the seasonal goods, or was it just mainly traffic?

And then in terms of the tourist stores and border stores, can you remind us what is the percentage of store base that would qualify into that bucket? And then my last question, if I could is, given the out performance in Europe beyond just the typical winter season. Are there some thoughts in terms of perhaps accelerating the growth of that store rollout as we get into 2016 and beyond? Thanks.

Great, Betty. I will tackle a couple of the other -- particularly the last one, and let Chris maybe handle a bit on the first two questions.

Accelerating growth in Europe, it's just something we obviously talk with Gerfried, the founder of Blue Tomato, with in terms of laying out our five-year plan for Europe. Where we're going to go, how we're going to build the business, what the right cadence of growth is. We're in that process now with Gerfried as we work towards our August strategic Board meeting.

I'm not going to share with you what our thinking is around that other than to say that like Zumiez has done for a long time, the quality of the growth will determine -- our trust and our ability to grow with good quality will determine the pace of growth for us in Europe. And we're very cognizant of the fact that to be a great retailer, you have to have great teams of well-trained people that know how to manage retail stores. That know how to work with customers. And we don't want to grow at such a rate that we outgrow our ability to grow and put great teams of people in those stores. So that is going to be the governing factor as we analyze how fast we can go in Europe.

So to be clear, would we add 50 stores in Europe next year? No, absolutely no way. We couldn't handle that level of growth. Is there a chance that we could accelerate from this pace? Maybe, but those are things that Gerfried has to determine with his team that would be appropriate. And we'll be working through that here as we do our five-year plan.

But the governing, to be clear, the governing quality that we have to be concerned about is that we want the store to perform well. And that is not only about great locations, great product, but it's about great people too. And making sure that we have confidence in the quality of those teams of people.

That's helpful.

And to tackle your first couple questions on the port delays, do we quantify it? No, we have not quantified it. Obviously, these are things we have tried to attempt internally, but it's hard to confidently be able to give a number externally. I think we do have confidence in saying that footwear is one of the categories that was negatively impacted in the first quarter, and particularly men's. We do feel that as we move through the first quarter, that was done. So it wasn't as big of an overhang into May. But there are impacts there. So we're not quantifying, but we are laying out that men's was the main place that it impacted us.

From a tourist perspective, again, it's a tough thing to track because of where that tourist is going, but we're monitoring about 40 to 50 stores that we view as both tourist stores as well as border stores that we've seen high influxes of international. Not just tourists, but people coming to shop. So it's about probably less than 10% of our overall portfolio, but again probably 40 to 50 stores that we're monitoring.

And, Chris, is there a big variance in how those stores are performing relative to the rest of the chain?

Yes, and that's why we're calling it out. These are stores that are up on the Canadian border that when the Canadian dollar was much stronger, we saw that Canadian customer come to the US to shop to get goods that they could not get or they get at a better price point in the US.

In other areas of the country where we saw international tourists, albeit European tourists or Asian tourists, that are coming to our stores, and we're seeing that customer in our stores. So they're are in a variety of different places within the market.

An example of that, Betty, would be large outlets, large tourist driven outlet locations on the East Coast.

And is that also a channel where you have seen progressively weaker trends in the latter half of May as well, or that it's been pretty weak ever since we've seen the currency changes?

It was again an outsized trend, even relative -- it was outsized trend in May relative to Q1.

Okay, great. Very helpful. Thank you, best of luck. Thank you.

Pamela Quintiliano, SunTrust.

Great, thanks so much for taking my question. So obviously, most of them have been answered. But I did want to follow up on Europe a little bit.

And can you just talk more about what you are seeing there that you think is contributing to the outperformance? And also remind us of the product mix and how it's different than domestically? And then lastly, any learnings you can apply either direction quite honestly of either what you are seeing there, for here, or vice versa?

Great. I'll take a stab at that for you, Pam. And I'll tell you, the first thing about Europe, and we said this many times, I'm going to it again is the quality of the Blue Tomato team. This is a great group of people. These are great retailers. They've embraced -- in our Zumiez world, we believe in empowering people, letting them run their businesses in all aspects of what we do. That's why we are not top-heavy in this world. We're pretty thin, we're pretty efficient, because people's jobs really matter.

And in Europe, we work the same way. It's Gerfried and his team. They're a great group, great retailers that are culturally aligned with us. And first thing is, they are doing a great job. And I think that we are incredibly well positioned in Europe. It continues to be a highly fragmented marketplace. We believe that our omni-channel strategy is going to win. Gerfried has been a big adopter of our omni-channel strategy.

They're probably lagging us in terms of some of our omni-channel efforts, just because of scale. You have to have the physical scale to really roll out omni-channel initiatives. So Gerfried, as appropriate, is rolling out the initiatives as they are building marketplaces on that front. We're definitely seeing in Europe just like we see in the US, that building stores helps the overall business. Helps the overall omni-channel business, including the direct channel business. Those are learnings that are true in Europe, just as they are true in the US.

So Gerfried is appropriately watching what we're doing, taking what makes sense for his business on where it's at today. And again, it's a much smaller business than ours in the US. But he's applying and plugging in things that he believes are right from a cultural perspective for the European marketplace.

So I think those are some of the big important things that we're doing. And again, it's the way we work, it's our business. And that empowered nature gives people that accountability and they're running with it. And I think they're just doing a great job in executing our plan there.

Again, they are also benefiting from the reverse issues of foreign currency. So as you would guess, for countries around the European Union who don't use the euro, well it's a pretty good opportunity to buy using the euro. So they are benefiting from that aspect of it. There benefiting from -- I'm sure we're going to see this -- I'm hopeful this summer we're going to see an influx of tourists probably help some of the Blue Tomato locations in Europe.

On the flipside with both American and Chinese tourists going to Europe, I think those will be positive things for us in Europe. Now, we'll have to anniversary those at some point too as the currency trends stabilize. So I think those are some of the key things. First, it's just the quality of the team, the quality execution. And an opportunity I think the leader in the marketplace to consolidate share in a highly fragmented marketplace.

And learnings, on the learnings side. Yes, we're trying to learn from each other all the time. Again, that's part of the Zumiez culture too, teaching and learning all the time. Now as you've heard in some of these examples, Gerfried is appropriately steaming for us and where it makes sense for the European culture and his business. And plugging things in where it makes sense for them.

And of course, have people participate in our managers retreat for example this past May. And they don't go do exactly what we do, they apply it for what's right for the European market. But they are choosing to apply it, it's their choice and I think they are finding it beneficial for how they're thinking about training and developing their teams. We're certainly looking have at what Gerfried is doing. Particularly where he has a very advanced internationalized website, and saying boy, those are some things we can learn from potentially and how we might execute here in the US in our web business.

So I think those are just a common part. It's the way we work, they are fundamental to our value set here at Zumiez. That's the way it's going to continue to work here I think, both in the sense of opportunities to learn more from each other and I think what we still perceive given the long view is a tremendous opportunity in Europe.

That's very helpful, and thank you. Can you just remind us again of the product mix, and how it's differentiated there versus here?

Yes, they are of course like Zumiez, micro assorting or trying to assort by local marketplaces. So it is different than what we do here. If you look at their website, you will see that they have brands that they are selling in Europe that we don't sell much of at that this point here in the US. And I think that's a natural progression of trends. Since the action sports industry emerges here in the US, brands tend to be more mature in the US market than they are in Europe. So I think it's a natural cycle.

So there will be some brands there carrying that we don't carry here. There will also be some European brands that they are working with, and that we will look to look at to see if they would work here to come this direction. But there are those differences too that, where again, they're going to carry local European brands because that's what the consumer demands or the consumer wants and that's our job to deliver on it.

So there are definitely product differences between our mix and their mix in Europe. And there are actually different components of mix within the business in terms of category and department performances too that are unique to the European marketplace.

The other thing I would add is that at this point, they do not have the private label penetration that we do. Just given their scale, they could not do that. But this again, to Rick's points earlier, is an area where we really feel like we can combine our value and to the extent their customer has an appetite for it, we can mix that piece over there as well.

But again, those are decisions we leave to Gerfried and his team. They have to want to buy our private label. It's our job to sell it into him, and make sure it's going to work for them on their side. So I think that's very important.

And the other thing I would tell you that one of things Gerfried has recently decided to adopt is some of our merchant tools for his business. So again, they don't need the same level of merchant tools that we have here for the scale of their business today. So I think he's being very smart how they're adapting what we do. We have some very advanced micro assortment tools. He's beginning to adopt some of the most basic elements of that into his business, and that's another case where we're learning from each other and trying to improve the business.

Excellent. Best of luck with everything. Thank you.

Thanks.

Lee Giordano, CRT.

Thanks. Good evening, everybody. I apologize if you've already mentioned this. But, Rick, can you talk a little bit more about your big picture thoughts on the actions towards lifestyle as a category? Any secular shifts within that segment, and your overall thoughts on how kids are perceiving action sports today? Thanks.

Great. I'm glad to do that, Lee. And again, it's clear that the idea of an action sports lifestyle is a significant player in the marketplace today.

I will tell you we view things and we have always viewed things from a broader perspective here. And it has allowed us to do not only action sports, but fashion and art driven things and music driven things. So our job is all about allowing our kid to be an individual, and express themselves more strongly than the majority of teenagers do. That's always been the Zumiez job. And we have always traditionally done that through the lens of an action sports lifestyle retailer, and that is true today. But it's always given us room to move, Lee.

So yes, we are. But again, an action sports lifestyle retailer, but we're going to cover a lot of ground in that. That means streetwear, that means music, that means art, that means a broad perspective on this lifestyle, and it does mean skateboarding. It doesn't mean as much snowboarding. If you go back and look what snowboarding meant to us 10 or 15 years ago, it's not as big today as it was then. But that shows our ability to move and continue to grow the business and meet the needs of this consumer.

So I don't know how others think about it, but that's how we think about it. And we think about it particularly relative to technology changes in how consumers use technology. But this is a consumer that wants to be different, wants to be unique, that's who we're serving as our customer base.

That's why we've always focused on young and emerging brands. It's what our salespeople and our store managers represent, that own sense of style and fashion that they bring to the business that is part of what the lifestyle is about. And we have just done it through the lens of skateboarding in particular and the action sports world.

But we have a lot of room to maneuver. And I think I've said that on previous calls. And we feel confident that it's a big area for us to maneuver to serve this particular customer.

Great, thank you very much.

We have no additional questions. I will now turn the call back over to Management for any closing remarks. Please proceed.

All right, thank you. Again, I'll just wrap here's a thank you to everyone for your interest in Zumiez, your continued interest in Zumiez. And we will look forward to talking with you here over the next few weeks, and of course as we wrap up Q2. Thank you, everybody, and best of luck to all of you.

This concludes today's conference. You may now disconnect. Have a great day, everyone.