Zumiez Inc (ZUMZ) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc., first quarter 2016 earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

Before we begin, I would like to remind everyone of the Company's Safe Harbor language. Today's conference call includes comments concerning Zumiez, Inc.'s business outlook, and contains forward-looking statements. These 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. 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's 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. Joining me on today's call is Chris Work, our Chief Financial Officer. I'll start today's call with a few brief remarks regarding our first-quarter performance. I will then give an update on our broader strategy, and will hand the call over to Chris, who will take you through the numbers. After that, we will open the call to your questions.

2016 has started off more challenging than we would like, with continued softness across the retail sector impacting our top line. Net sales for the quarter came in at $173 million, or about 2.6% lower than the first quarter of last year, led by a negative same-store sales comp of 7.5%. In light of continued head winds, we remain disciplined in our approach to fund projects we see as key to our long-term success, while continuing to manage the bottom line.

During the first quarter, we generated a net loss of $0.08 per diluted share, slightly better than where we thought we would be when we released April sales a month ago; but nevertheless, not the results we would like to see. As we head into the second quarter, we see many of these negative top-line trends persisting. Net sales for the four weeks ended May 28, 2016, came in at $50 million, down from $51.5 million during the four weeks ended May 30, 2015. May same-store sales comps came in at a negative 7.6%, and were negatively impacted by the Memorial Day shift.

While these near-term results are disappointing, we remain as always focused on the long-term management of the business. We are cognizant that our ability to deliver value for our customers and our shareholders hinges upon our successful execution over the long haul. With this in mind, we are consistently investing in our platforms we believe will sustain the business during these cyclical challenges, and provide significant tail winds when the customer returns to buy.

The roll-out of our new customer engagement suite is under way in North America. While the full implementation of this interface won't be complete until 2017, we're excited about this investment will allow us to better serve our customers. This new leading-edge customer engagement suite will better integrate all of our sales channels, which we can use to help elevate both internal visibility, and most importantly, the customer experience.

The investments we're making in our omni-channel infrastructure will give us further power and flexibility to address localized trends in a unique and authentic manner through micro-level assortment planning; optimize each touch point with the consumer to enhance in-store telecommunications infrastructure, a faster and more stable web platform, and robust omni-channel functionality; develop and enhance an enduring relationship with our customers through our Stash loyalty program; and enable our best-in-class sales teams to serve their local customers with nearly 100% localized in-store fulfillment of online orders.

From the standpoint of physical store expansion, we are being thoughtful and calculated in our approach to opening new stores in 2016, in light of depressed consumer traffic over the last 12 months. While we still believe there's a long-term opportunity for expanding our global store footprint, we must acknowledge near-term head winds, particularly as it relates to our North American business.

2016 we now plan to open 22 new stores in North America, compared to our original estimate of 27, which represents approximately 40% of the new-store growth we executed in 2015. As the rate of new store growth slows in 2016, our focus shifts towards optimizing existing physical store footprint, and leveraging our integrated structural and technological platform to maximize the impact of each store within this geographic region.

Where new stores are planned, we are staying consistent with the strategy we've had all along. We do not want to open one more store than is necessary to serve the customer within each market that we operate in, and deliver optimal shareholder return. In Europe, we are still projecting seven new stores in 2016, up from six in the prior year. We remain optimistic about our potential in this region, as we grow our unique culture and perspective into this fragmented market place.

Before I hand the call to Chris, I want to underscore that we continue to believe the fundamentals of our business remain intact. During this challenging period with lackluster mall traffic, absent a clear and compelling fashion driver or reason for a customer to come out and buy, we continue to reinforce our commitment to providing a highly differentiated experience through a seamless, authentic perspective on serving our customers.

In early May, we again held our annual store managers' retreat. It's a great event that 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. 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. We left the event energized, and convinced of the strength and commitment of our team. It is our team and the considerable progress we've made on our omni-channel initiatives that will fortify our long-term success, enabling us to capitalize on renewed momentum once the up side of the cycle returns. With that, I'll hand the call over to Chris for his review of the financials. Chris?

Thank you. Good afternoon, everyone. Let me take a moment to briefly review the results of our first quarter, and then I'll outline our guidance for the second quarter, and how we are thinking about FY16. Then I'll hand the call over for questions.

First quarter net sales declined $4.6 million, or 2.6%, to $173 million, from $177.6 million a year ago, led by a decline in consolidated comparable sales of 7.5% in the 2016 quarter, offset by the net addition of 47 new stores over the last year.

While we did see some pockets of strength within certain product classifications, the comparable sales decrease was spread across all major departments, with hard goods, juniors', accessories, men's, and footwear all down for the quarter. These declines were fueled primarily by lower transaction volume, slightly offset by an increase in dollars per transaction. Dollars per transaction in the quarter were driven by an increase in units per transaction, offset by a modest decrease in average unit retail.

In terms of regional results, North America sales decreased $4.8 million, or 3%, to $156.4 million. European sales increased $0.1 million, or 0.7%, to $16.6 million.

During the first quarter, we added five new stores in North America and one in Europe. Total store count as of April 30, 2016, was 663, including 639 in North America and 24 in Europe. Gross profit in the first quarter was $50 million, a decrease of $6.5 million, or 11.6%, compared to the first quarter of 2015.

Gross margin was 28.9% in the quarter, down 290 basis points, compared to 31.8% a year ago. The year-over-year decline was largely the result of the de-leveraging of our occupancy cost from lower sales, worth 160 basis points; a decrease in product margins to clear inventory worth 50 basis points; and higher out-bound shipping expenses for customer orders as a percent of sales, worth 30 basis points.

First-quarter SG&A expenses totaled $53.9 million, or 31.2% of net sales, compared to $52.4 million, or 29.5% of net sales in the first quarter of last year. This decline is primarily related to de-leveraging of our store operating expenses, worth 160 basis points, and further de-leverage of our corporate costs, worth 50 basis points, offset by a 60-basis-point decrease related to prior-year expenses associated with the acquisition of Blue Tomato.

Operating loss in the first quarter of 2016 was $3.9 million, compared with operating income of $4.1 million for the first quarter 2015. First quarter net loss was $2.1 million, or $0.08 per diluted share, compared to net income of $2.8 million, or $0.09 per diluted share for the first quarter of 2015.

Our net loss in Q1 came in towards the favorable end of our guidance range, and better than we were anticipating at the time of our April sales release. This was due primarily to several quarterly accounting-related items impacting the valuation of our liabilities, and the timing of certain expenses.

Turning to the balance sheet, cash and current marketable securities totaled $62.1 million as of April 30, 2016, down from $75.6 million as of January 30, 2016. This decline was driven primarily by $12.2 million in stock repurchases activity, and $4.5 million in capital expenditures, partially offset by $3.1 million in cash flow from operations.

During the quarter we repurchased approximately 612,000 shares on the open market for a total of $11.5 million. As of April 30, 2016, we had $43.3 million remaining under our share repurchase authorization. As of April 30, 2016, we had $113 million in inventory, up 8.5% from this time last year. The change is primarily related to an increase in our global store count, with inventory per square foot increasing by only 1%.

Turning to our May sales results, total net sales for the four-week period ended May 28, 2016, decreased 2.9% to $50 million, compared to $51.5 million for the four-week period ended May 30, 2015. Comparable sales declined 7.6% during the four-week period ended May 28, 2016, compared to comparable sales decrease of 2.2% for the four-week period ended May 30, 2015.

As Rick previously mentioned, May sales were negatively impacted by the Memorial Day shift. We continue to see lower transaction volume during May, and dollars per transaction in the period were down. Dollars per transaction were down, driven by a decrease in average unit retail, partially offset by an increase in units per transaction. During the four weeks ended May 28, 2016, hard goods, footwear, juniors, accessories and men's posted negative comps.

Looking at guidance for the second quarter, once again I will start off by reminding 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, in light of the continuing head winds in the retail sector, we are currently planning second-quarter comparable sales results in the range of negative 6% to negative 8%, with total sales in the range of $172 million to $176 million.

We anticipate gross margins will decrease 200 to 250 basis points compared to the second quarter of 2015, due primarily to de-leveraging of our store occupancy costs. We anticipate SG&A will increase 300 to 350 basis points from the second quarter of 2015, driven by a de-leverage of our fixed-cost infrastructure, led by store operating costs; and investments in the business that we believe are important to our long-term strategy. Consolidated operating margins are expected to be negative low-single digits, with diluted earnings per share between negative $0.09 and negative $0.13.

Before I wrap up, I would like to give a few thoughts on the remainder of 2016. 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 first and second quarter tend to be significantly smaller, heading into the second quarter, we continue to experience the same retail head winds that have pressured sales over the last 12 months. Consumer traffic continues to be light, due to the lack of a compelling fashion trend.

Overall, we believe we're well positioned to perform better during the stronger peaks of back-to-school and holiday, when our customer has a reason to come out and shop. However, we believe there may be pressure in the short term related to continued consolidation in the retail sector that could negatively impact our results. Accordingly, we expect comparable sales to be softer in the second quarter, as our guidance indicates, and be stronger as we move into the later months of 2016.

For the full year, we anticipate the product margins will improve from 2015, with the largest year-over-year opportunity in Q4. As a reminder, 2015 product margins were pressured as we moved through the year, as a result of a decline in top-line performance.

From a cost perspective, we're still planning SG&A to grow at a greater rate than in 2015, as we continue to absorb minimum wage increases across the country, and invest behind what we believe are long-term growth drivers, including our customer engagement suite, continuing investments in the Zumiez team, and other strategic initiatives.

Our 2016 plan anticipates opening 29 new stores, including six in Canada and seven in Europe. As Rick mentioned, this is a five-store decline from our thinking this past March. New store openings will occur with a similar cadence to what we have done historically, with 2/3 of these openings occurring ahead of the back-to-school season.

Full-year capital expenditures are now expected to be between $24 million and $26 million, with the majority of our capital spend dedicated to new store openings and planned remodels. We anticipate depreciation and amortization will be approximately $29 million, slightly below the prior year. We are planning our business assuming an annual effective tax rate of approximately 37.5%.

Lastly, we are currently projecting our diluted outstanding share count for the full year to be approximately 25 million shares, excluding the effect of any additional share repurchases made during the year, which would further reduce our share count. With that, operator, we would like to open the call up for questions.

Thank you.

(Operator Instructions)

Betty Chen, Mizuho Securities.

Good afternoon, everyone. I was wondering if you can talk a little bit about, Rick, some of the long-term investments, and when can we expect some of the customer engagement suite, for example, when it goes live into 2017, to help the business? What are some of the efficiencies that you alluded to in the prepared remarks on the initial release? Thanks.

All right, thank you, Betty. Let me again shape your question. I think it's a good question, and let me shape it a little bit. To be clear, I always like to put our investments on over the long term. I think we've made -- they'll think about this over the last five or six years of investing and re-tooling our business for the modern consumer world. I remind you that we've really been focusing on for really since the beginning of 2009, our ability to micro-assort, with a whole new software suite there that we've been enhancing and customizing for our consumer base in the omni-channel world over the last five and six years.

We also had Zumiez Stash was a part of that evolution and the process of thinking about how we have to better serve customers through rewards. We're in year three, I think, of that now -- maybe 3.5 years into it now.

One of the big things that we've been looking for over that time frame was how to provide the connecting piece for consumers between all channels. We talked about the new customer engagement suite. That is really the piece we've been talking about. We looked in those early years, just couldn't find anything that lined up with our -- what we were -- what our requirements were for doing that. Then last year as we found a good partner, a really great partner, I think, for doing this, build on a new type of platform that we really think about as driving a commerce-engine approach, where all sales channels can plug into it as we develop the tool over time.

Outside of our ongoing updates, I'd like to just be clear about that, that we expect a new -- as we'll have to update our web platforms and things like that over time. I think most of our major software investments of scale are behind us now.

More what we're going to be looking at is how do we leverage these platforms now across our global operations over the next few years -- after we complete the roll-out, to be clear, in the US. Then you'll see Canada is next. Then we're working with our Blue Tomato team on how we can leverage these investments into Europe over the succeeding years, over the next three to five years. That gives you a bit of sense Betty for how we're think about those investments, where we're at in the cycle.

The timing, as Chris said in the comments, the timing of the roll-out and engagement is going to be into 2017. That's the full roll-out. We of course will not be doing roll-outs during peak windows of operations. As you might imagine we're progressing now. We will progress up to back-to-school. We'll stop, and we'll pick up the roll-out post back-to-school, and then into post-holiday time periods.

I think the investments you're going to see -- and you have to think about this on an integrated basis relative to all the other changes we've been making in the business around localization of our business ability to sell and link channels more quickly. There will definitely be some efficiencies in store operations from the tools. But more importantly, we're hoping that we can drive a better sales result for customers, Betty.

We're not going to put a lot of quantification around those. We believe we do have some hard cost quantification around it relative to store efficiencies; but really, the most important thing, as we said in our comments, is about the quality of our ability to serve customers and connect all channels together in a seamless way at every touch point for helping customers. That's really the goal, full roll-out into -- as we move through 2017.

The only other thing I would add to that, Betty, is just looking at our global footprint, right? Rick talked a lot about the customer engagement suite and how we'll look at leveraging those tools globally; but even our continued investment in Europe and growing our brand internationally, we think is a really competitive advantage for us over the long term. As we think about investments and we think about what's right for the long term, we believe it's a global player that wins, and that can serve our branded partners the best, and ultimately bring the best experience to our customers.

As we think about this investment -- we've talked about this before -- Europe is not operating at the same profit level that the USA is. That's something that we are continually working on as we grow that business; but as we've said previous calls, we feel good about the direction of where Europe's at, and we feel good about the growth that we are having in Europe. That will continue to weigh on the business, but it's not something that even in the short term we've decided to pull back on.

Okay, thank you. If I could sneak in two quick ones. Rick, you guys have always been very prudent and proactive in thinking about the store fleet, and by reducing the North America plan for this year -- I mean Americas US plan. If the difficult environment should prevail and continue, would you also continue to reduce the plan for next fiscal year, or what would you need to see to re-evaluate 2017?

My second question for Chris is when we think about the second quarter gross margin outlook, should we assume the bulk of that is de-leverage for occupancy, and that product margin could decrease as in a similar magnitude as first quarter? Thanks.

All right. I'll be happy to pick up my part of that question relative to our thinking on the store fleet in the United States, Betty. We're not going to comment directly on it at this point, other than I will tell you is that we have complete flexibility as we look into next year. Business will dictate the right thing to do. You're right, we've always been prudent in our thinking about that in our business. At this point, to be clear, we have complete flexibility on what we can choose to do or not do next year.

Yes, and to your second question around second-quarter gross margin and the declines there, the vast majority of that is de-leverage of occupancy. From a product margin perspective, we are actually planning that within this guidance at a better rate than what first quarter was. We said first quarter was down 50 basis points; we would expect product margin to be down less than that in our second-quarter guidance. You can tell by that the majority of our decline is in the de-leveraging of our occupancy expense.

Okay, great. Thank you so much. Best of luck.

Thank you.

Jeff Van Sinderen, B. Riley.

Good afternoon. I wonder, Rick, maybe you can touch on how much of the declines you're seeing in traffic and comps do you attribute to the lack of a major fashion trend or fashion driver, and how much of the shift toward e-com is maybe toward e-com -- the millennials not spending quite as much on apparel. Maybe weather's a little bit of a factor. How do you think about that whole thing and all those forces at work, and how much each one is contributing?

Sure. It's -- those are very complicated and interrelated questions, Jeff. I'll start with my comments in response to your question in saying that we fundamentally believe that our brand position and cultural strength are really good. That's why when we look at our business and we look at our core consumer within the business, what they're buying, generally we've been seeing over the last 12 months in this difficult cycle increases in dollars per trans. It's been really a transaction challenge for us.

You haven't seen a lot of product margin erosion in our business, outside of what we need to react to in terms of clearance of targeted product that hasn't met our sell-through rates. In other words, I think we've held up strong in our position, our overall brand position on our consumer position, as a full-price, full-margin retailer, serving a customer who wants unique, distinctive product.

I think brand and cultural strength -- and we always do every spring a culture survey in the organization. I can tell you we're at near all-time highs on the cultural strength within the Company. I feel very good, as we said in the comments, on the fundamentals of our business in terms of brand strength and culture strength as being impact.

For me, this comes back to are we doing, and are we pushing enough -- hard enough on the areas that are going to drive our business forward. For us, the things that have always been drivers of growth have been emerging and growing brands, key items, and fashion cycles. I think that is fundamentally where our issue is, and I think you've seen a lot of other really great retailers that are primarily again full-price, full-margin retailers with the same challenges that we have.

The first thing we can't do is screw up our brand positioning. It's a do-no-harm practice on that front of the business. We intend to maintain brand strength, be focused on our core consumer, and we are doing everything we can about pushing brands forward, about testing on fashion cycles, and trying to use our marketing tactics to try to drive more volume at full price, full margin

That's our thinking, Jeff, on where we're at as it relates to traffic versus how they are spending on other things. I read articles all different directions that would talk about how the consumer is adjusting to chang in their lives. I think it's an ongoing thing.

I'm not sure I'm convinced in the market place that they're spending more in other areas because those areas are more attractive. I think it could be they're spending more in other areas because we have nothing compelling from a fashion or trend perspective to offer. I think that will bring volume and traffic and dollars back into the segment, when this compelling brands, items, or fashion cycles for us to drive.

I feel very good about how we're positioned -- again, as we said in the comments -- about how we position in terms of investments we've made to unleash the power of our sales teams across all channels, whether that be our digital sales teams or are in-store sales teams. We'll be able to maximize trend cycles, and we'll be able to maximize them quickly as things turn.

Okay, all good points. Then if I could just squeeze in one more quick one. This may not be the quick, but on the e-com, omni-channel topic, just wondering if there is anything else you can give us there in terms of trends you are seeing? I know you don't like to break that out, but any color would be helpful?

Yes, I will give you -- I'll tell you how I think about it. Really, as Chris said, Q1 and Q2 in the scheme of our overall performance of the year aren't very important quarters. They're really -- Q2 is going to be about set-up to back-to-school. Let's really think about this -- your question, Jeff, relative to really how we're thinking about back-to-school, as we're approaching that window very quickly.

The things I would tell you that make me feel encouraged about our business is really the last few months the strength in our men's apparel business. As you know, this is our strongest -- our largest, I should say -- department in our business. The strength we've been seeing, as really men's apparel has been our best over the last two months, has been our best-performing department. The strength within that is being driven by brands. It's a mix of emerging brands and established brands.

Now for me, that's a really good sign, partly because it's the biggest part of our business, in terms of percentage mix of our business in the men's department. As you've heard us say over the last couple years, we've seen the penetration of our brands within the top 10 and 20 brands -- blue shared as smaller brands. I am hopeful that we may be seeing the emergence of a new brand cycle, and that I think we're very well positioned in this regard. We have some exclusivity around a number of these emerging brands. I'm optimistic about that, and I'm hoping that we can continue to grow that perspective as we head towards back-to-school.

Obviously, as Chris said in the comments, we have easier compares looking forward to the back half of the year, in both the sense of sales and margin compares, particularly in fourth quarter. That really reflects, again, is the lack of trend that we moved off from the peak cycles in the first part were really carried to the first part of 2015 and then fell apart in the back part of 2015.

We also have a few items, Jeff, and I would say key items in accessories that are working for us, and working for us well. The challenge that we have accessories, we have another big category that has been -- I think is going to be a head wind for us. We may see some offsets of these key items in accessories.

I'm hopeful that we're going to be able to grow these emerging brands some of these established brands we have. We can continue to grow that position in men's; as well as I'm hoping we can grow the business on the key items accessories during our back-to-school window. Then I said earlier we are constantly looking and testing around fashion cycles, also. If something were to emerge there, I think we are well positioned to take advantage of any trend, to respond very quickly to anything we see emerge on that front.

Now, the last thing I would say for back-to-school is what Chris mentioned in his comments is that we do anticipate that we are going to have to deal with the liquidation sales by some of our bankrupt competitors. I think that could be a challenge for us. The degree of the significance of that challenge will of course be based upon the amount of overlap we have with the stores -- the number of stores that are closed and the degree of overlap we have with those stores. That would be the only other thing I think I'd add to our macro thinking, Jeff, about the back-to-school cycle.

Okay, all very helpful. Thanks and best of luck.

Thank you.

Neely Tamminga, Piper Jaffray.

Thank you, good afternoon. Rick, I want to continue on that theme a little bit, on the confidence into the back half. Obviously you guys are always testing micro-trends, and they can be blown up, potentially the bigger trends. We're wondering specifically around catalyst categories like shorts. Obviously you're not necessarily a denim category, and denim seems to be the only thing that actually worked positively across the whole space -- with cooler temps, et cetera.

But it's going to get really warm and really warm this summer. We just want to know how well do you guys historically do with a shorts business? Is that something your customer really looks to you for? Can that be meaningful even on early back-to-school as a catalyst to be back in the store? Then I just have another follow-up housekeeping question. Thanks.

Sure, Neely, I'm glad to address that for you. As you -- as we look -- I would tell you that through the first quarter, spring categories weren't very good for us, in general, across both men's and women's. Now that being said, we were not that promotional on our shorts business on seasonal categories. Because we tend to have a pretty good short business all the way through August.

Historically, July and August have been some of our biggest short months for selling in our business. This is a case where again, as we plan our business moving forward, we don't really panic around what may be even a soft spring, because we're planning for the longer term. We're looking at where we think our flexibility is in those categories in our open-to-buy planning.

Our biggest month for shorts tends to be the latter months of the year as we head towards -- of the summer season. We can sell a lot of shorts in those seasons. We also will sell a lot of denim to our customer in the back-to-school season. We have seen some strength in denim. I think you'll see us launch -- now that's been offset by the casual trend, to be clear, in our world -- the fall-off of some of the trend-driven things from the prior year in casual pants. We will be -- we're by most of that, I think here, as we get over the next couple months, in terms of the big head winds in casual pants.

Denim has been good for us. You'll see us experimenting, expanding our selection in finishes and washes in denim here at back-to-school. But generally denim has been a positive; it's just offset by the peak trends we had in prior years relative to casual pants.

In the context of potentially weeding out some competitors, I think in the space too where they might have actually been a pretty decent denim destination, too, for active lifestyle, is that something that you'll really be able to partner with some of your third-party brands, or is this something that Zumiez intends to do more in a private-label way?

I think again, we look at that on literally, Neely, a store-by-store basis as to who sells. This is the advantage of being a -- having I think the incredibly strong capabilities we have from a technology perspective, and a skilled buyer perspective.

We literally look at that question on a store-by-store basis as to which stores sell branded denim vest, which stores sell private-label denim vests, what the right mix is at every location. That's the level of detail we're planning at. If there's that opportunity there, our buyers are positioned to take advantage of it. We're clearly partnering with our brands and trying to have them supporter us in those efforts, as well as position our private label at the same time, with the flexibility again, by really detail assortment planning those major categories by season.

For us, as we look at it, you really have to think about it down to individual store level what's going to work, how do we think about it in the trade area, which brands sell best, and then merchandising and assorting each store in each location to the demand in the customer base.

That is some exciting scientific analytics coming around the corner. We're excited about that. One thing, though, from a housekeeping perspective. Thank you, Rick. Chris, maybe you can help us understand the Memorial Day shift. Either conceptualize what you think the impact is, or more importantly, if you stacked Memorial Day on top of Memorial Day, did you see like others have been saying, at least some sort of sequential improvement versus beginning-of-month trend? Thank you.

I think the best way for us to look at it is looking at how we reported May, and then followed up with guidance from the standpoint of as we're looking at this business, obviously as we've indicated already in our prepared remarks and some of our answers to our questions, the compares are getting easier as we move through the quarter. However, we are -- while we're optimistic about some of the things that are happening in the business, we've got to prove out what we're doing.

As we look at the guidance range and how we're looking at how we look to set the guidance, it really is more in tune with what our trend line has been, which would tell me that the Memorial Day shift is worth 150 to 200 basis points on the comp there. As we look to move forward, we've got to prove that we can beat that. But that's been basically our run rate. We're going to -- we're a results-based business. It's going to shoot to beat that, and we'll have more to come in the coming months.

Thank you so much, you guys. Best wishes out there.

Thanks, Neely.

Jessica Schmidt, KeyBanc Capital Markets.

Hi, thanks for taking my question. Can you talk about some of the fashion trends that you're seeing now? Is there something you're seeing or changing in the product assortment in the back half of the year that can drive an improvement? I'm trying to understand if second-half results could get better without assuming the environment gets better?

Again, I will hearken back to some of the comments earlier, Jessica. I would tell you we're -- we feel more encouraged about brand trends in terms of emerging brands, and growth in emerging and growing brands for us. That's a more powerful positioning for us than fashion plays. Every retailer in the world can play a fashion trend. We always hope to be at the leading edge of it. We believe that most times, if it's right for customer, we'll be at the leading edge of a fashion cycle. But pretty much everyone can play in a fashion trend.

I feel more strongly about the fact that I think we see some exciting opportunities with some emerging and growing brands on our side, where we have some exclusivity around those brands in the market place. That's where I put stronger emphasis as we think about our business moving forward, particularly in the back-to-school. As well as I said, there's a few key items I think that could be really helpful to us that we could be -- we could see growth. I don't know whether they're going to grow fast enough to offset a drag in another key accessory category.

I'm more optimistic on those two fronts than I am around fashion cycles at this point. Yes, we're going to play the denim fashion cycles. We're going to play the cycles in shorts, and we're going to play it in casual pants, jackets, all those things that we can do on those fronts. But there's nothing particularly strong that anyone else can't do at the same time at this point in those areas.

I'm more optimistic about it. We always talk about those three areas that can drive our sales, which I think is an advantage to our business, as opposed to your pure fashion retailer -- emerging and growing brands, key hot items, and then fashion cycles. I'm more optimistic about those first two than I am the latter at this point.

Great, thank you.

Richard Jaffe, Stifel.

Thanks very much, guys. Exciting news about the brands. Obviously a little newness, or a lot of newness would be a great relief. A question on what's been an interesting effort, which is the in-store fulfillment for e-commerce, and wondering how that's playing to both the cost equation -- are you saving money, getting things to consumers faster and more cheaply, and how the logistics are working for the in-store people?

Okay great, Richard, and thanks for the question. This is one of those areas where I think we're really leading the way in terms of our thinking about serving customers and improving our brand position in an omni-channel world. Let me talk about it from the brand perspective, and I'll ask Chris to talk about it from how we're thinking about it from a financial impact, and how we're modeling that within the business on our side. Let me talk for a minute about the brand perspective and cost and benefits.

I'd start, Richard, by saying I think just as you intimated in your question, customers have very high expectations today at all touch points in the omni-channel world. That includes as it relates to the digital experience. I think that's being driven a lot by the major player in the market place. We have to work very hard to meet those expectations at every consumer touch point.

For us, localized fulfillment is most importantly about delivering a great brand experience. Speed is definitely an important component to that for our customer who wants to buy unique, cool stuff, which is what we're trying to do for them, allow them their chance to individualize who they are through what they wear and their connection and attachment to Zumiez in that regard. Speed is important in our ability to serve them.

As we've talked about how we -- what's important to our customer, we really want to be in the position to be able to say that our long-term goal is to make sure that within a trade area that we have the ability to have virtually every piece of product we're selling within that trade area available same day or next day for that customer. Now we'll define same day many ways, including allowing customers to shop their local stores digitally, which they can do on our site today.

But it also means that local fulfillment then has to be dramatically faster than it was when we were fulfilling out of a centralized fulfillment center. I can tell you that we have achieved that objective. We have significantly improved the speed to our customer through localized fulfillment.

In addition to it, we are really working hard to connect that fulfillment experience, connect our customers and our store employees, our local store employees, together through that fulfillment process. I won't share about all the things we're doing on that front, but we're going to improve the brand experience, which is the real goal for the long run.

Faster everywhere, with a better connection. The way we've characterized this for our store teams, you remember, you know our culture well from being involved with us. We're about empowering team throughout the organization to serve their customers to own their job and what they are accountable for in the Zumiez environment.

We've been able to say to our store teams, what we're doing for you is we're giving you back the power to serve your customers and your local market. We're backing that with the strength of our ability to micro-sort, and I hope you start to see how all the dots are getting connected here.

What we're going to see through learning this, how we change our order-routing algorithms, which we will periodically adjust to try to maximize the brand experience, as well as improve the cost and labor utilization within our business. There's going to be hopefully a virtuous feedback loop that is going to be able to do all those things simultaneously -- improve speed, improve brand experience, connect our local sales teams to our local customers, while improving labor utilization rates and reducing cost across the board.

That's going to take -- you have to think about this over a period of years in the cycle, Richard. But those are all the things we're going for about. We believe a better brand experience is about connecting our sales -- our local sales teams together with our local customers in all the facets, whether it's digital or physical world.

Now these are also going to be the key ingredients over the long term that are going to help us think about, again over the long term, how we optimize our store portfolio within a trade area, getting back to all these fundamental agreements of micro-assortment, our ability through technology to serve customers seamlessly and solve all problems from any touch point, to do localized fulfillment, improving the brand experience across these touch points, to integrate Stash into these things across all these touch points, and then improve our -- through learning again, improve our messaging to our consumer through more personalized and localized messaging.

That's the perspective of what we're trying to achieve from a brand experience. Again, I want to connect the dots over the last five or six years, because teams have worked really hard to get us to this position. I can tell you this is one of the reasons I think our managers are so excited and were so energized coming out of the manager's retreat; because we've been talking about this for a long time. They're seeing it all come to fruition. I think that's been very energizing for our managers, because they want to own their local customers.

I think we're very unique in this. I would tell you that I think this is probably more important for us as a retailer because of the nature of our business and how we can -- how local assortments do vary across our business versus a lot of other retailers.

I think this is probably even more central to our business than maybe for other teen retailers, but it is about providing unique differentiated brand experiences, connecting customers to -- local customers to our local shops and through our digital channels. With that, I'll let Chris talk a little bit more about how we're thinking about the overall implications financially. Chris?

Sure. From a cost side, I'll reiterate the thoughts we had coming into the year, which we view this as a break-even proposition, when comparing 2015 cost structure to 2016, with really the cost of the Kansas fulfillment center that we operated through the end of January of last year going away, and a higher cost structure associated with really two areas, a store labeler and our shipping costs.

The reasons behind that are obviously we're careful about where we have to increase labor. We do feel like overall this can be in low-peak or non-peak periods, we have the ability to really leverage our existing store labor in some of the lower-volume centers in which there's opportunity to utilize that labor during their non-peak hours. But in high-peak windows, back-to-school and holiday, we will have to insert some labor dollars into the plan to be able to fulfill the customer orders.

Secondly is on the shipping side. Obviously, as you de-centralize fulfillment and you have most orders of around two units online, you will have more split shipments within your chain. As we're looking at this in 2016, we're looking at this as relatively break-even from a cost structure perspective, albeit slightly different geography on the income statement.

Then as we move forward, it touches on all the points that Rick got to, which are we're really going to be working hard to harvest the efficiency of this model. It ties back to those things that Rick just mentioned -- assortment planning, algorithm planning, our ability to optimize store labor.

Lastly, there hopefully is a benefit over the long term of increased margin, by being able to harvest slow-moving product in certain locations or regions as we fully optimize this model. Again, through three months, we feel good about the changes we made at the end of 2015. We'll continue to update you guys as we move forward.

Thank you. As Rick pointed out, this is a long-term project with a giant circle to be closed. I think I get it, and I wish you luck, thank you.

Thank you.

Jonathan Komp, Robert W. Baird.

Yes, hi. Rick, If I can maybe follow up on some of the comments, it certainly seems like -- if I could characterize it as green shoots that you've seen on the brand and merchandising side recently. Maybe asking in a little different context, and wondering as you look back over the last 12 or 14 months where you've had negative trends, have you seen similar positive early signs on some of those brand and merchandising fronts throughout that entire time period that maybe just didn't pan out? Is what you're seeing today a little bit different than what you've seen over the last year? Any context on that front?

Yes, certainly, Jonathan. I would tell you that we launch a lot of new brands every year in our business. We expect historically that those brands -- brand launches, right, most of them don't necessarily make it to be bigger brands in our business. We can continue to sustain them for a while, but again, the brand partner has to continue to evolve, too.

The brands you're seeing, that we would say we're seeing emerge, we're more optimistic about our position today, are brands we launched a few years ago in the process. Again, you have to think about this as the pipeline coming through. How do we build brands, how do we work with our partners on building brands.

Yes, I could tell you that over the last 12 or 14 months some of these same brands have been growing. The issue is scale. As they've grown, they're going to be a more important part of our business as they -- mature's the wrong word -- as they emerge -- as they become -- they emerge from being an emerging brand to being a growth brand in our business. They're the same brands that I felt good about over the last few years. We're just working with them at a different scale level now -- in other words, they're making a bigger impact on the business.

That's the way I would characterize it for you. That's the difference. They've been these same groups up out there. Hopefully, the brands we're launching this year will be brands we're going to continue to see evolve in the next two and three years.

But there is a process to this. We don't do -- no new brands at Zumiez, virtually no new brand at Zumiez, starts in all stores. It usually starts in a small group of stores where the brand is relevant in local markets. We still have brands that are great brands that we only carry in a limited set of stores in a geographic region.

Then what we do is we listen to our teams, we listen to the response in the market place, and we'll expand the brand as necessary. We don't want to push it beyond where it should be, because that's a negative for our brand partner. We don't want to see a brand with equity mark-down out in the market place. We're very cautious about working at the right pace for each brand based on their development as a brand.

Again, you should think about the brands that we're feeling about that are having a bigger impact on our business is brands we've been working with now for a few years. We're at that point where again, through cycles where we saw de-concentration in our top 10 and top 20 brands in the smaller brands. We tend to go through these cycles where our -- optimistically for us, is what we're hoping we'll see some re-concentration as volumes condense into back to the top 10, and these brands grow to be a bigger, more important part of our business. We have great exclusivity around the emerging brands.

Those are the real strengths of our model. We're not just dependent upon fashion cycles. We can play fashion cycles well and benefit from them. But we're also very tied to supporting young brands and helping young brands grow, as well as being able -- we're optimistic then around key items that are still legitimately aligned with our brand position in the market place, and being able to run those, too. I think that's historically what's made our model so dynamic and so strong is that flexibility around brands, key items, as well as fashion cycles.

Okay, that's very helpful. Then one more for me just on the SG&A front for Chris. It certainly sounds like the first half sales a little disappointing relative to your prior expectations, and yet the full-year SG&A spend growth really sounds like it's unchanged, even though maybe you'd have a little bit lower incentive compensation, and a few puts and takes like that. Can you maybe talk about how much flexibility, if any, on the discretionary side for the year you have on the SG&A, and if there's been other talks that have gone against you like on the wage front? Any perspective there?

Yes, no problem. From an SG&A perspective, our thoughts from March to now are still the same, that we still are looking at SG&A as growing ahead of our 2015 growth rate. That being said, it has come down slightly. We continue to manage the business in light of the head winds we have on the top line.

Now we have cut some of our growth initiatives. We haven't cut things like our commerce engine that led us into 2016, talking about it being a little more of an investment year. We continue to manage it to the best we can, with the results of the business, managing the top line with the bottom line.

In regards to where our opportunities are, this is a business where we still -- our business is tied to labor and occupancy, and some of those things. We do not have a lot of what I would call fat in the organization to cut. That being said, we're being very careful about how we plan people, how we plan hours in the storefront if we're seeing declines like this. We're being careful with our home office management spending, and really looking at things like -- be it marketing or other engines where we can look at those areas without impacting the long-term brand impact of touching the customer.

You did touch on incentives, which is something that we always look at, being a Company that's hinged on incentive comp. At this point in time we have not made -- we are not planning full incentives for 2016, but haven't made the cuts that may be needed out there if these results were to persist, so we have some opportunity there. But we will continue to manage those.

Lastly, I would -- you touched on the minimum wage increases and what's recently been announced with FLSA. Those are all -- those are things that are impacting this business. The results of those are in line right now through three months with how we plan the business, but they are significant investments that we and all other retailers are going to be forced to deal with as the cost of labor continues to increase.

Okay, thank you very much.

Pam Quintiliano, SunTrust.

Great. Thanks so much for taking my questions, guys, and for all the detail you've been providing on the call. I just had a few for you. You're among -- the only one I can think of this earnings season who hasn't blamed weather, because that's the big theme. Anything on the regional performance that we should be aware of would be very helpful, particularly as it relates to those traffic trends that we've seen. Obviously it was a big detriment this quarter. Then yes, if you can answer that, then I'll ask my other ones.

Sure. I'll take this. I tell you, regionally it's -- there is some differentiation in the business here. We haven't blamed weather. It hasn't historically been our process. Why I say that is yes, weather impacts us, and because we are -- have an international footprint and obviously a complete domestic footprint, sometimes it impacts us for the better, sometimes for the worse; we have tried to stay away from that.

Domestically, I tell you regionally we continue to see strength of our business centered around the west coast, and where we have our most mature markets here. These trends were really consistent with 2015. We've talked about this that the west coast has been our strongest performer; however in Q1 of this year, we also saw the northeast perform stronger. That was what we saw as a good sign.

All other areas were more challenged, specifically those that are dependent on oil, as you look at the center of the country here domestically, as well as in Canada, and also areas representing tourism. We've talked about this in some of the prior calls. But we still continue to track about 10% of our stores that are tied to tourism that have been negatively impacted by the strength of the dollar, are representing almost 18% to 20% of our loss here in the first quarter. Internationally, Canada has been better than the consolidated Company, but similar to domestic trends, as I just mentioned, has been impacted by depressed oil prices in the center of the country.

For Europe, this first quarter we did see comps that were below -- our comparable sales below our consolidated levels. As you may recall last year, we ran significantly -- comps that significantly exceeded the consolidated entity in Europe. While we saw strength last year across most departments, we really over-indexed in one department, and this year we're seeing declines in that department, while we are still seeing gains across the other department. However, the declines that we're seeing in this one particular area are enough to bring the total entity into a negative comparable sales level.

That said, as we look at this over a two-year comparable sales stack, Europe -- we still continue to feel really good about where Europe's that. They over-indexed so much last year that what they're offset this year, they're still in a really meaningful positive two-year stack comp. Yes, there is some variability across the regions. Hopefully that answers your question.

That was great and very helpful. Thank you. In terms of inventory, you have given us the inventory per square foot information, as well, and total inventory. How do we think about how you're planning inventory for Q2 and then into the back half of the year, balancing some excitement with the brands with your viewpoint on the expectations for traffic as the year progresses?

Yes, I'd tell you, I think we've got a pretty good history of managing inventory. As you can see here this quarter, we're pretty much in line with our square footage growth, with just slight growth over prior year on a per-square-foot basis.

As we think about Q2 and the rest of the year, our goal is really to grow sales faster than we grow inventory. We're going to work really hard to match those two things. If we start to see the sales pick up, you're going to see us chase on the inventory side. If things were to go the other way, we're going to continue to manage it as conservatively as possible. That includes really being strategic in our mark-down cadence. Where we do see the opportunity to move on inventory that's aging or falling out of season, you're going to see us do that as well.

I think the inventory story for us is really going to be a tale of where we see sales go. We're going to work to manage it as closely as we can. I feel pretty good with the cyclatory data at the end of the first quarter from an aging perspective, and how current it is. Our goal will be to keep it is current as possible, even in these tough times.

Great. Then last one. I don't know if this could actually be answered. I know we've touched upon it in prior questions. How do you think about the health of your consumer domestically and internationally? We've been hearing a lot of positives from a macro perspective, yet they're not necessarily spending on apparel. If you could frame that for us?

Sure. Again, I think it's a very complicated question, Pam. I think there are many factors around that. I like to talk about the things I think that are -- that we can impact and control. That's again how we take advantage. I think to a large degree, specialty retail is suffering from a lack of interesting product for consumers.

I think as trends change -- in our case, again, brands -- that means brands and items, as well as fashion cycles -- move, the one thing that my experience in now decades of doing this, is that things always are cyclical in the consumer world. I don't see that as -- I don't think that has fundamentally changed in any way.

In fact, I would tell you that I think what we're seeing here is part of the cyclicality of consumer spending as they're rotating dollars to where there's interesting things to spend. When can offer interesting things in some of the brand items and fashion cycles, the consumer returns to spend the money back on fashion and style. I don't think any of those fundamentals have changed around the world.

I do think that we also have to put this in the context of the longer-term trends of how every retailer, I think, has to -- I think we have to understand that part of the hangover of the great recession is a level of frugality amongst all consumers. I think we have to factor in and discuss how we provide value for that consumer.

Value can be defined many different ways based upon each retailer's niche positioning in the market place. For us, I think that goes back to how we can -- and how we're felt about as a brand by our consumers, as well as we do have a value strategy we're constantly trying to play to give our consumer a choice there.

I think we also have to understand that part of the challenge in the retail world today is about shared consolidation in the market place. We are going through, as a retail industry, a very painful process over the last five and six years niche. You have to look niche by niche within the retail segment of consolidation of share. As you've heard me say before, I think in each niche there's going to be a dominant player that emerges a winner, a winning player in each niche of retail. That will defined differently whether you're a commodity player, and lifestyle player, or a fashion player.

I think in lifestyle retail, where we're playing, I think the winning model in my opinion is a global lifestyle footprint where you are doing something in a highly differentiated perspective, again working with young brands and helping young brands grow their business across a global platform. As a global retail partner for them, you're providing a very distinctive in-store experience as part of a community. Then you're leveraging all that on a domestic and global basis, with an incredibly strong integrated channel-less, omni-channel effort.

Those are the things I think that determine winners over the long term. I think you have to ask is not just about the power of the consumer, because consumers get some pretty great deals in today's market place. It's about that these deals aren't sustainable over the long term. There will be a class of retailer that emerges as defined uniquely by the position of each niche of retail. I think we'll see dominant players emerge over the next five years.

It's not just about the health of the consumer, it's about the health of retail to a certain extent. The consumer is just taking advantage of what I think is going to be some spectacular deals -- there has been. I think unfortunately in our segment, as we said in back-to-school, there's probably a group more spectacular deals with some of the bankrupt locations closing.

I think it's a complicated question, both about the consumer's position in the market, how they're feeling about it, and then have to go with the tremendous shifts in consumer behavior around technology, and the speed of trends on a global basis.

That was really great insight. Thank you so much, and best of luck.

Thank you.

Howard Tubin, Guggenheim.

Hi, guys, thanks. When you think about marketing, maybe as opposed to looking at it as a way to save SG&A dollars, is there an opportunity to maybe spend a little more, do some things differently, whether it's social media advertising or print or whatever, to maybe help drive traffic and call attention to some of these brands that you're excited about for fall?

Sure, Howard. Let me address that. We think about marketing in two regards from our perspective. We are again -- I think we have a unique brand position. I think the market -- our consumer market research we've done, and we've talked about some of the conference over the last year have supported that we have a very unique, very strong relationship with our customer from a brand perspective. We're seen as peers, as one of our customers' peers in the market place. I think we've seen nothing but further support in terms of market research of that over the last year, the strength of our customer positioning.

When we think about marketing, we break it down into two groups. We have our brand marketing team, and we have our tactical marketing team. We are spending a lot of time on the brand marketing side right now. As you know, over the last few years we've spent a lot of time working on redefining our brand experience, and doing the consumer market research -- the first time we've ever done consumer market research at Zumiez. We've confirmed, I think, our unique positioning from the consumer's perspective, that it's been consistent with the brand position we've had in place for a number of years.

Now what we're challenging ourselves on across the organization is that we're looking at this new generation of the consumer -- I'll refer to the generation as the group. We are challenging ourselves in every consumer-facing aspect of the business today, how do we have to function differently in this area, and laying out plans over the next three years to execute against that. You're not going to see us cut back on those plans at all when we're talking about long-term brand efforts; because again, we think the culture and brand are the pillars that underlie these successful winning retail positions.

Now that's the brand side. We also have our tactical marketing sides, which is really where Chris was talking more about our opportunity to both cut as well as push. Trust me, if we are getting results in our tactical marketing efforts, our email campaigns, our page search campaigns, our search engine observation campaigns, we're going to invest more dollars, not less.

Now if the page search doesn't return at an appropriate ROI, then that's where we may have to think about it. We have to think about that in terms of the catalog efforts we have been doing, and how widely we would mail those. We will push on all these fronts if we can, but it's all about delivering on the tactical side actual results.

I think the way we're going to do that fundamentally is yes, we can drive some more traffic to the stores through those techniques; but most importantly, we have to focus on making sure that we have the product people want to buy. That's even more of the connecting dot for us, is how do we make sure we're pushing on the key product areas, putting the right touch points, whether they be digital, print, catalog, whatever it is in front of our customers at the right time, and then maximizing those through the omni-channel campaigns. That's how we're thinking about it. Again, it's about leveraging and getting ROI on the investments on the tactical side.

Got it. Thanks very much.

Thank you. I'm showing no further questions. I would now like to turn the call back to Rick Brooks for any further remarks.

Thank you all for your interest in Zumiez. I am going to conclude the call, as -- echo some of what Chris said, is we are at the point where based on our results over the last 12 months is we need to be show good results for the consumer. We're in a show-it mood at this point. We're -- while we might feel good about green shoots, we need to deliver it and see what happens over the next few months in our business. We appreciate all your support. We appreciate the quality of your questions today. We'll look forward to talking again here over the next few months Thank you, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.