Zumiez Inc (ZUMZ) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. second-quarter 2016 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 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 the number or 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'll turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Good afternoon. I'd like to thank everyone for joining us on the call today. With me I have Chris Work, our Chief Financial Officer.

I'll start today's call with a few brief remarks regarding the second quarter and also provide an update on our broader strategy. I'll then hand the call over to Chris who will take you through the numbers, after which we will open the call to your questions.

Second-quarter results came in ahead of our guidance, though we continue to be impacted by the macro level headwinds that have been affecting the retail sector for the last 18 months. Net sales for the quarter were $178.3 million, with comparable sales down 4.9% and a loss per diluted share of $0.03. All three metrics were above our guidance ranges though well below results we expect to deliver over time.

That said, we are encouraged by improving monthly comps during the quarter and the continued execution by our team at providing a great customer experience while managing expenses in light of this challenging retail environment. As we moved in August, our teams continued to execute well.

And, while August comparable sales declined 1.1%, we saw meaningfully better results in the last week of August through Labor Day weekend and into this week, turning the quarter- to-date comparable sales through Wednesday, September 7, to a positive 1.2%. This increase has been largely driven by transaction gains and centered around our apparel and accessories departments.

Similar to prior years, we've seen the back-to-school season compress around the important weekends before and after the start of school in each region. As we head into the back half of the year, we remain focused on effectively balancing our strategic growth objectives while protecting our near-term profitability, while remaining disciplined with our spending while focusing on the right investments to exceed our customers' expectations.

We believe our hyper-localized merchandise assortments, combined with our expanding global presence, has us well-positioned for both the near and long term. To that end, the investments we are making in our omnichannel strategy remain key to staying in touch with our consumer on a personalized grassroots level to ensure that our brand continues to resonate in an authentic manner.

Underlying these investments is the same commitment we've always had to our brand and culture. [enhance to making] to product delivery and our world-class customer service are first and foremost aimed at augmenting our positioning and relevancy to our core customer base. Our efforts to date have driven significantly faster delivery times for our online orders through our localized store fulfillment program.

As we implement our customer engagement suite in North America we will gain additional touchpoints for our customer, a faster, more integrated commerce platform, and enhanced omnichannel functionality. This will allow us to further interact with our customers to facilitate alignment between our customers' desires, our brand offerings, and positioning. We are excited about the long-term potential of this new system and anticipate completing a full roll-out across North America in 2017.

In terms of physical store expansion, we anticipate opening 22 new stores in North America and 7 new stores in Europe in 2016. Our strategy for new store openings remains the same. We're committed to opening only those stores that are required to best serve our customers in any given trade area.

Accordingly, as we begin to approach our target for total mall store count in North America, our new store openings have slowed. Our focus has shifted towards optimization of the store base as we leverage our integrated structural and technological platform to maximize the impact each store has on its respective geographic region.

In Europe, where the market remains highly fragmented, we're still in the early stages of expansion. We're projecting a rate of new store openings in 2016 that is slightly higher than 2015. We believe that significant opportunities exist in Europe, as well as other international regions, which provide additional growth vehicles as we move forward.

To that end, we are happy to note that on August 31 we completed the acquisition of Fast Times, a Melbourne, Australia-based lifestyle retailer. Fast Times was established in 2008 and currently operates five stores and a website in Australia. That position at Fast Times connects our North American and European retail networks with another important market in Australia.

We are excited about the opportunity to establish a strong foothold in the market and join forces with a successful leading company that shares our core values and operating philosophy. We look forward to work with the Fast Times team and helping them grow in the Australian marketplace and beyond.

In wrapping up, I'll underscore that with the current challenges in the retail sector, our focus remains on making those decisions that best align our investments, expenses and growth strategies with our commitment to providing a unique approach to the market through an authentic brand experience for our customers. We're confident that we are making the right decisions now to sustain us in the long term, and in doing so we believe are well-positioned to capture global market share.

With that, I had the call over to Chris for his review of our financials. Chris.

Thanks, Rick. Good afternoon, everyone. I'm going to start with a review of our results for the second quarter, and then provide some thoughts on the third quarter and the remainder of FY16. After that we will open the call up for your questions.

Second-quarter sales declined $1.5 million to $178.3 million from $179.8 million a year ago, driven by lower comparable sales down 4.9% from the prior year, offset by the net addition of 33 new stores since the end of the second quarter last year. This decline was driven primarily by lower transaction volume, slightly offset by an increase in dollars per transaction. Dollars per transaction in the quarter was driven by an increase in units per transaction, offset by a decrease in average unit retail.

Comparable sales results improved as the quarter progressed, with notable strength in the men's category. Other major product classifications, including hard goods, juniors, footwear and accessories, all comped down for the quarter.

In terms of regional results, North America sales increased $0.4 million or 0.2% to $165.9 million, and European sales decreased $1.2 million or 8.5% to $12.3 million. During the second quarter we added 9 new stores in North America and 1 in Europe. Total store count as of August 27, 2016 was 674, including 649 in North America and 25 in Europe.

Second-quarter gross profit was $54.8 million, a decrease of $3 million or 5.1% compared to the second quarter of 2015. Gross margin for the second quarter was 30.8%, down 130 basis points compared with 32.1% in the 2015 second quarter. The year-over-year margin decline was largely the result of deleveraging our occupancy cost on lower sales worth 140 basis points. Product margins were up 30 basis points for the quarter from the same quarter in the prior year.

SG&A expenses for the 2016 second quarter totaled $56 million or 31.5% of net sales, compared to $52.5 million or 29.2% of net sales in the year-ago second quarter. These changes are the result of deleveraging of our store operating expenses worth 160 basis points, and deleveraging our corporate costs worth 90 basis points.

During the 2016 second quarter, we generated an operating loss of $1.1 million, compared with operating income of $5.3 million in the second quarter of 2015. Second-quarter net loss was $0.8 million or $0.03 per diluted share compared to net income of $3.2 million or $0.11 per diluted share in the second quarter a year ago.

Turning to the balance sheet, cash and current marketable securities totaled $52.3 million as of July 31, 2016, down from $75.6 million as of January 30, 2016, and $80.8 million as of August 1, 2015. Year-to-date stock repurchases totaled $18.3 million and capital expenditures totaled $11.9 million. During the 2016 second quarter, we repurchased approximately 447,000 shares on the open market for a total of $6.7 million. As of July 31, 2016, we had $36.1 million remaining under our share repurchase authorization.

We ended the 2016 second quarter with $131.8 million in inventory, up 7.9% from the end of the second quarter of 2015, driven primarily by our increased global store count and, to a lesser extent, an increase on a per square foot basis.

Turning to our August sales results, total net sales for the four-week period ended August 27, 2016 increased 2.6% to $89.5 million, compared to $87.3 million for the four-week period ended August 29, 2015. Comparable sales decreased 1.1% during the four-week period ended August 27, 2006, compared to a comparable sales decrease of 10.7% for the four-week period ended August 29, 2015.

The decrease in comparable sales was driven by a decrease in dollars per transaction, partially offset by an increase in comparable transactions. Dollars per transaction were down due to a decrease in average unit retail, offset by an increase in units per transaction.

During the four weeks ended August 27, 2016, footwear, juniors and hard goods posted negative comps, partially offset by positive comps in men's and accessories. As Rick mentioned earlier, sales were much stronger exiting August and through the important Labor Day weekend, turning our quarter-to-date comps positive through yesterday. Year to date through August 27 our comparable sales were down 5.2%.

On August 31, 2016 we acquired 100% of the outstanding common stock of Fast Times headquartered in Melbourne Australia. The acquisition price was $6.9 million, consisting of $5.5 million in cash and $1.4 million in shares of common stock subject to certain pre-closing and post-closing adjustments.

Fast Times revenue for the 12-month period ended June 30, 2016 was AUD9.2 million, with approximately 10% pretax operating margins. Going forward, we do expect to make select investments to scale the business, as well as incur certain purchase price accounting charges, but expect the overall business to be accretive to earnings in 2017 and beyond.

Turning to guidance for the third quarter, once again I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margins and earnings growth, given the variety of internal and external factors that impact our performance. Keeping that in mind, we are currently planning third-quarter comparable sales results in the range of negative 2% to flat, with total sales in the range of $209 million to $213 million. We estimate gross margins to decreased 75 basis points to 125 basis points compared to the third quarter of 2015, due primarily to deleveraging of our store occupancy costs. Consolidated operating margins are expected to be between 4% and 5% with diluted earnings per share between $0.21 and $0.26.

In addition to our quarterly guidance I want to again share some thoughts on the full fiscal year. Heading into the third quarter we are encouraged by our most recent result during the peak selling of back-to-school, but remain cautious based on the same retail head winds that have pressured sales over the last 18 months. While metrics have improved quarter to date, mall consumer traffic continues to be lighter than we like due to lack of compelling fashion trends.

That said, with our results reported through back-to-school today, and the important holiday period in Q4, we believe we are offering our customer a reason to come out and shop, and are well-positioned to perform better in the fourth quarter.

For the full year, we anticipate 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 the decline in top-line once. From a cost perspective, we are 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 make the right investments for the business over the long term.

We're on track to open our planned 29 new stores in 2016, including 6 in Canada and 7 in Europe. New store openings will occur with a similar cadence to what we have done historically, with the majority of these openings occurring ahead of the back-to-school season. Full-year capital expenditures are still 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 to be approximately $29 million, slightly below the prior year. We're 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.

And with that, operator, we would like to open the call up for questions.

(Operator Instructions)

Neely Tamminga Piper Jaffrey.

Great, thank you. Good afternoon. It's really great to hear about the acceleration in trend during such a critical time in your business, so congrats on that.

Rick, I was just wondering if you could help us out a little bit on better understanding some of the things going on in the store. We actually in our store walks have seen an improvement even in visual merchandising execution, some interesting new brands. Are there things specifically you're seeing in the acceleration of trend that the consumer is responding to that gives you that avid, really, confidence that they are something interesting, new and a trend change versus just a blip? We're just trying to understand that a little bit better. And I have a follow-up question.

All right, thanks, Neely. I'll be glad to try to help you out a little bit with that. As Chris said, in particular our men's business really has been doing well. It was up in Q2, continues to be stronger here quarter to date for us. It's leading the way. And, as you know, that's our largest proportion of our business.

We've been talking all year, going back, I think, into Q1 and through Q2 about our encouraging feelings about some of our emerging brands partners that is continuing to accelerate. So, I think we feel good about that, Neely. That's a positive for us.

I can tell you that virtually in our men's business everything's working. It's hard for me to find something we're not doing well in our men's business at this point, which is both about a brand story as well as it's about the quality of our private label efforts, too, I should add, in terms of the work our team has done there. So, I feel good about those aspects of where we were at.

I'm not going to talk about individual categories within departments or brands. Those tend to be propriety information for us.

But, generally, the other thing I'd say is you've seen the transaction gains coming through the quarter to date numbers. We haven't run a transaction gain since I think the fourth quarter of 2014. This is also, from my perspective, encouraging.

All that, Neely -- and I'm glad you're noticing individual merchandising. We're spending more effort on that front, and I think you'll see us do more over that here over the next few months. As you know, we are never one to sit still and rest. We're going to continue to push and try all sorts of new things. We can talk more about that and around, in this call, other things we're doing around localization and other aspects of our efforts, too.

But that all being said, feeling a bit encouraged. But I think Chris and I both feel that peaks are different than non peaks in this world, so we're being a bit cautious relative to what's going to happen when we move out of the peak back-to-school cycle.

We're also cognizant that we have to do better than this positive comp in this quarter to really leverage our cost structure. We have more work to do on that front. And, again, we're going to challenge ourselves in so many areas of our business to do better.

So, Neely, I'd wrap it up by saying, yes, there are a number of things I think we are encouraged about. You've seen some of them. Again, we're encouraged about the private label, our good work there in both men's and women's. Likewise, the brand efforts that we are seeing in emerging brands. But we still have a lot of work to do to drive results and continue to win share in the marketplace. So, let's hope this is good but we're cautious yet, too, as we think about the rest of this year.

Thank you for that, Rick. And I just have a follow-up question. There's been so much written in the past over the last seven days around some of the potential shipping delays from a particular transportation company. Anything you can share with us about whether or not you guys are being impacted by that to help navigate investors' thinking about that. Thank you.

Yes, absolutely, Neely, I'll take that one. As you expect, we are currently monitoring the situation. To date we have not been made aware of any significant disruptions in our supply chain from our branded partner. We are closely monitoring, as well, for our own private label goods that we take more ownership of, of bringing over here.

We do have some direct dealings that are caught up in the situation but the amount currently impacted product is certainly not material to our overall private-label business or our combined business. So, we feel okay about where we are at and I think the teams have responded really well to working around the issue, and we will keep moving forward as business as usual.

Thank you so much for that, guys, and best of luck out there.

Jessica Schmidt, KeyBanc Capital Markets.

Hi, thanks for taking my question. Just, first, on the product margin improvement that you're guiding to for the full year, can you just talk about what's driving it? Do you think that the promotional environment is getting a little bit better or is this really something more that you are doing?

For me, I'll start it off, Jessica, and then Chris can add as he feels necessary here. For us, you've heard us say over the last couple of calls that we think that there are -- this is a game we are playing, in a newly empowered consumer world that's about share consolidation. I think we suggested a couple calls ago that we thought there were indicators of those that were going to win share in markets.

One of those indicators was the continued strength and stability of product margin, which reflects, I think, and particularly for our business, our ability to sell at full price and full margin to our consumer, which really for me represented a brand strength, our Zumiez brand strength. Meaning that our consumer sees value in what we are doing and is willing to pay full price. So, that is part of what you're reflecting there.

I think our buyers have done a great job. It reflects back to our previous comments here on the call about having unique brands that are emerging in the marketplace. It reflects back to the comment we made about the strength of our private label performing well. And it also reflects back to the fact that we were down a little bit last year. So, we intend to get that back, some of that, particularly, I think, as Chris say, looking forward into the back half of this year.

So, for me, the strength of product margin we focus on a lot. Yes, it's very competitive out there. You will find, I think, that we are not playing that competitive game as we think about it.

We feel pretty good about where we are at from an inventory perspective, I think. And we're clearly planning for value in our business so we can deliver value to our customers. But we think about that, again, as full price and full margin in terms of how we think about offering values to our customers. So, feel pretty good about where we're at on the product margin space. I don't know, Chris, if you have anything to add.

Yes, I'd just add a little more color on the cadence of product margin. We were down in the first quarter about 50 basis points. And, as we stated on the call today, the second quarter was up 30 basis points. So, we feel really good about how our products team has managed product margin here coming through the quarter.

From a Q3 perspective, our guidance contemplated today, basically flat margins for the third quarter. And, as we said in our prepared remarks, for the year we really view the fourth quarter is where we have opportunity in product margin. And as you may recall from last year, it was our lowest performing quarter overall from a product margin perspective.

So, again, coupled with what Rick talked about as far as how we are able to drive product through the store that resonates with the consumer, we feel like the opportunity is still ahead of us on the product margin side.

Great. And just as a quick follow-up, can you talk about any changes, if you're seeing this or not, in terms of the footwear aesthetic for this season, if there is a shift going on how you're managing to that?

Sure, I'll take that, Jessica. Footwear, as you are aware, putting this in context a little bit, it's been tough for us almost for the last four years. Now, you might remember we had about a four-year positive run with footwear prior to that.

Footwear for us over the last four years, and I think what we would characterize, and I think the market characterizes it as more of a performance athletic or basketball trend in footwear, just one we've not been able to play in. So, we've ceded share in that regard over the last four years in footwear. But we picked it up in other parts of our business, too.

Now, we certainly are seeing some things that are working in our footwear business that I've heard it characterized as fashion athletic, classics. Those are things that clearly care working for us. I think some of what we're seeing, again, as we think about this modern consumer power world is just how fast things can change. And that's really our thinking, like we talked about with jogger pants in the past, that trend cycles, when they move they move quickly.

So, it's still to be determined, in my mind, as to how this footwear cycle is going to play out. We're definitely, I think, getting in the latter part, in my opinion, for a four-year run. We're looking for something new. We're clearly playing with a lot of different things in our store, trying new things in footwear in both men's and women's, trying to find that next element for us. But I think wherever it goes the winners and losers are probably still to be determined in footwear.

And, as you heard us say in our remarks regarding the quarter to date, the positive comp that we achieved so far quarter to date is being driven by men's and women's apparel and accessories. Footwear for us at this point has continued quarter to date to be a laggard.

So, the strength of our model has always, as I think I said earlier, been about diversification around lots of categories of business, lots of brands within our business. So, our goal is to use that diversification to find trend-right unique product for our customer. I like to think that over the long run we can find ways to drive sales even if a department like footwear may be a bit challenging for us.

So, that's currently where we are at with footwear as we think about it today. We've got some challenges out there yet. I'm not sure exactly where it's going, but quarter to date continues to be a laggard in spite of us getting significantly better in other parts of our business.

Thanks. I'll pass it along.

Randy Konik, Jefferies.

Hi, it's Janine Stichter on for Randy. We just have a question on the international strategy, hoping you could elaborate a little bit more there, specifically what attracted you to Fast Times and any plans you have for the business. And then anything you've learned from Blue Tomato that maybe can be applied here. And then, lastly, what markets you are not in that you think could be opportunities going forward.

Okay. Let me share a little bit about our thinking around the acquisition of Fast Times. Remember, this is a small acquisition for us. First, let me start off just by saying how excited we are about welcoming the Fast Times team to the Zumiez family.

I will tell you that in the case of, one thing that is consistent between Fast Times and Blue Tomato is that they are both strongly aligned with the Zumiez culture. And that is very important that we have value of alignment amongst ourselves in terms of how we think about running a business in different parts of the world, because there we can truly rely on our partners around the world and we can leverage our strengths as an organization across our global businesses.

I can tell you that the Fast Times team is tightly aligned with us in terms of wanting to own their business and wanting to learn and grow all the time, and being super competitive. And these are all key parts of the Zumiez value system. So, we feel very great about that. And, again, welcome to the Fast Times team. They're going to be, I think, a fun partner for us to have as we look at now growing in a new part of the world.

I also want to back up a little bit, just to make sure that when we talk about what we're doing internationally, I want to put this in the context of our long-term strategy. So, I want to talk about that first from the consumer point of view, and then, second, from our brand partner point of view.

We definitely -- and we've been saying this for a while now -- believe our consumer is a global consumer. They shop for brands and trends globally. And we see that is true for our domestic businesses in Europe and the US and Canada, as well as we see it from consumers buying from us on our websites in both Europe and the US, buying from us from locations around the world where we do not have stores.

I think we'd also look at the initial work and research we've seen around Gen Z and say -- this is even going to be more so with this next demographic wave of the Gen Z consumer. The definitely embody this idea of wanting to be active in their local communities but also be part of the broader global community.

So, we have felt that this was a way the consumer is going, and the reason is because how empowered the consumer is because of the sheer computing power and the ability that transparency has been created by mobile phones. This has been part of our thinking for a while now.

We would also tell you that in the current modern world we see brands, and we believe brands will emerge from anywhere -- new brands can emerge anywhere -- and quickly reach our niche consumers anywhere in the world through these mobile devices. And we're definitely seeing evidence of that in our business today. And that's a pretty exciting thing for us, too.

From the brand point of view I think our goal has always been to be the best retail brand partner for the brands that we work with around the world. And what we're trying to do is provide them the highest-quality retail distribution platform so we can help them easily grow their brand in key markets around the world. We began this process in terms of a long-term strategy doing a lot of work in Canada and then opening our first stores there in 2011. Again, a lot of work in advance in Europe before the acquisition of Blue Tomato in 2012, and now adding Fast Times here in 2016.

Again, as part of the long-term strategy, we intend to grow these markets, and as we grow these markets our goal is going to be to roll in our full suite of omnichannel tools, our full suite of merchant tools including our ability to micro-assort local markets. And I think we're only now beginning to explore the idea of a global omnichannel model, which is, I think, a whole new way for us to be thinking about how we're going to serve a global consumer.

So, to sum this up, from a long-term strategy point of view, we want to be aligned with our consumers, we want to be in service of our brand partners. And our goal is the same as our customers' as they think about how they work in the world. We want to be their local shop but we want to be the local shop with global reach and global scope.

That's how Fast Times fits in this for us. It was an important aspect within our lifestyle niche. It was probably the next most important developed country that we were not doing business in. It had been on our list for the last few years to look at. I think we have partnered with the strongest player in Australia, so I think we feel very good about the opportunity.

Chris, do you want to add anything?

I think you covered it.

Did that answer your question?

Very helpful color.

Richard Jaffe, Stifel.

Thanks very much, guys. I'm really encouraged by the men's apparel business and accessories, and I'm wondering if you could provide a little more detail. It sounds like things have comped positive end of the quarter and now into September. I'm just trying to get a better sense of if the trends are consistent that it's men's and accessories. You mentioned footwear continued to be a laggard.

And then if you could talk about, now that things are working, the stores are looking a little bit more innovative -- I don't want to say crisper because your stores aren't that kind exciting --.

What? -- Richard, I can't believe you're saying that. (laughter)

The visual merchandising efforts, if you could talk about marketing and making your stores more appealing from a marketing standpoint, as well. Sorry about that.

I just want to, on that last point, Richard, I always appreciate your input, you know that. But we know our consumer incredibly well, and we know what we're trying to do for them. I think we know it better than anyone about how we appeal to them. And we certainly think we have some opportunities from a visual merchandising perspective. You'll see us put some effort around that here. We already have. You'll see more, I think.

But our business is about serving a very unique consumer. We don't serve all teenagers. We serve a niche of young people who want to express themselves more so in a more dramatic way than the vast majority of people within their age demographics.

We've always done well in this marketplace and we're winning. I believe we are the winner in our niche of market. So, I just want to encourage you to think about it from a different perspective because we do know what we're doing in this area, and I think our performance over the years reflect it, and I think our performance over the next few years will reflect it even more so.

As it relates to the quarterly, I'm not going to add a lot of color. Again, we don't want to talk about specific categories of business. We don't want to talk about specific brands, again, because our story has always been about diversification.

But, as we said, the men's business, virtually everything has been working well for us. We are doing quite well on the men's side. So, I hope this can be a foundation for us.

Now, again, as we said, we have some caution about that just because peak is different than non peak, and we know that, and we have more work to do. A 1.2% comp is not good enough to leverage our business. We've got to continue to push and innovate and do better, and do better at serving our customer, attracting them to shop with us in all channels. So, we have more work to do there, Richard.

I would add a bit of color around women's. We definitely saw women's meaningfully improve as we moved into the last week of August and the first 10 days of period eight, so that was encouraging for us, too.

And then accessories was good throughout the cycle. Again, there's obviously some rotation, to be clear, there's some categories in accessories running negative, and others we're just running big gains in. Again, I think the team has done a great job because the gains are exceeding our negatives in accessories at this point time in both men's and women's accessories. So, feel good about those.

And then, lastly, again, having a gain in transactions, I've always said I like gains any way they come, whether through a combination of transactions and AUR. I'll take them any way I can get them -- more units. I'll take a sales gain any way I can get it. But I think this is an important cycle for us and I'm very encouraged that we are seeing transaction gains here through the quarter to date number.

So, that would be about as much as I'm going to add, Richard, to the comments at this point.

Okay, appreciate the help. Thank you

Betty Chen, Mizuho Securities.

Thank you. Good afternoon. Thanks for taking our question. Congrats on the nice start to the quarter. I was curious, Rick, on how you think about the back-to-school season. It seems like we've heard that sometimes in the past it's more procrastinated and people buy a lot more even after school starts. What is your thinking in terms of what you're seeing this year versus prior years' pattern?

And then my second question was more about going into the winter or the fourth quarter. Chris, you mentioned that there's meaningful product margin opportunity. We were also curious, when you look back, hindsight 20/20, what were some of the learnings from last year's holiday season that you think might be helpful for this year? Thanks.

All right, thank you, Betty. I'll take the first part and let Chris address product margin in the back half or the main half of the year.

There's no doubt, we've been seeing year over year that all peak seasons have compressed into fewer and fewer days. I think this is the nature of the modern world -- again, where people have access and complete transparency on price and availability of product via their mobile devices, Betty. So, I think this, in a lot of respects, is a natural evolution of the consumer having power.

I think also, the consumers are very smart. They will wait and try to wait out the retailers on price. And a lot of retailers are willing to accommodate consumers on price, I might add, as it gets later and later into the season. We have not been one to do that historically over the long view of what we try to do.

We try to hold price. We have constant -- we do not price differently between channels in our business. We're very disciplined about that because we believe if we have it in both channels there must be complete price neutrality between both channels.

So, we're really disciplined about that and we've seen this continued progression, both in holiday and, I would tell you again, at this back-to-school season of further compression towards the last weekend of back-to-school and even more movement towards the first weekend post schools going back. We actually track this. We can actually report on which stores are going back at what point in time. And we actually track what happens each week before they go back and each week, based on their starting date, what happens the week after they go back.

And there is no doubt that we saw the same pattern pretty much throughout the entire back-to-school cycle -- a slower build up before school started, hit right at the few days before school goes back, and then a bigger post back-to-school shopping in those areas after they go back. I would say that was probably the most pronounced we've seen it in recent years, and maybe ever, in our world. That is probably, though, why we are telling you so much and focusing on the quarter-to-date numbers because clearly volume got consolidated.

The big weeks in our back-to-school cycle are week three of August, week four of August, and week one of September. That's why I don't think that August itself, the 1.1% negative comp, told the whole story there because everything was compressed tighter to the go back date and then post the go back.

For me, this continues a trend and I think it is related to what consumers can do and how we are empowering them to see what we have, when we have it. And I think they're smart to try to wait out people on discounts. We just try to avoid that trap, if we can. We don't believe it's the right thing for our brand partners. And we want to sell unique cool stuff that's hard to find. That's our mission. So, that's how we're thinking about it -- more pronounced than ever, I'd say.

Rick, could I just ask a quick follow up on that? That was really helpful to know. I was curious whether you saw similar web behavior online in terms of the peaks around weeks three and four and week one of September.

The answer is yes, we do. When we talk about business we look at business in trade areas now. So, so we can actually look at, when we talk about sales, Betty, we are actually looking at sales on a trade area basis. So, yes, we have seen the same cycle around that.

We don't really think of the web as a different channel at this point. We think of it as just another way that customers buy from us in a trade area. And we think of the two channels as incredibly tightly integrated, which is why, in my opinion, you can't price differently between the two channels.

Now, there's challenges around that, to say the least, but that's why the discipline for me is so important because consumers are smart and they will learn to play channels against you if you play that game yourself. When we think about it we think about it as one. So, yes, you find the same general patterns in the digital world, too.

I'll answer the holiday question here in a second, but before I move to that, just to put some quantification to the quarter and everything Rick is saying, when you just look at August alone, August represented about 43% of the quarter. And with a negative 1.1% and then obviously getting to a positive 1.2% over the first 10 days, you can tell the magnitude of the push and the lateness of back-to-school. I think that's the piece we're really trying to highlight with the quarter-to-date numbers.

As you would think about holiday and the opportunity there, I'm going to refrain from giving Q4 guidance other than to go back to what we said in our prepared remarks, which is really this. From a sales perspective, we believe we are doing some things that are really working in the business. And our team, in connection with our branded partners and our sales teams, are all very much aligned in how to serve the customer to the best way possible.

And with that, we do expect to see better results than what we've laid out here in our guidance for Q3 in the fourth quarter. I'm not going to quantify what that is at this point because I think we still have a ways to go and a lot to learn. But we continue to believe we have opportunity here in the fourth quarter on the sales side.

From a margin perspective, again, we were down 110 basis points in margin in Q4 last year. So, as we think about the opportunity from a margin perspective and some of the things we have working in the business, again our expectation is that we should be able to drive value in Q4 while really serving the customer in the best way possible and providing them what they're looking for.

That's why we gave those comments of color just to try and outline the year. As we wrap up the third quarter in our third-quarter earnings release, we will give some more color on what we think that actually will come out at.

And I'd only add, Betty, that we didn't do a lot right last fourth quarter, so it's reflected in the sales and the margin. So, we can learn a lot from that. Hopefully we've seen some of the stuff we've done here play out better. I think hopefully back-to-school will be a better indicator of what we might be able to achieve at holiday. And then, of course, it would be great if we had winter broadly across the country. As you know, if we have a strong winter, that would be a positive for our business, too.

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

Pam Quintiliano, SunTrust.

Thanks so much for taking my question, guys, and let me add my congratulations on the quarter. You've mentioned a number of times about the peaks versus the non-peaks and cautioning us about back-to-school definitely being the peak season. But how do you think about communicating with the customer during those non-peak periods? Is there any change in your thought process there? Are you reaching out to them more, reaching out to your loyal customers more, doing anything different online? How should we think about that?

Yes, that's great, Pam, and let me help you with that a little bit. Clearly we have different strategies in non-peaks than we do peak. In peak windows we are all about, our communication with customers are primarily about driving volume and about sales and about uniqueness of product in the stores, as well as value messages. We definitely, as a lifestyle retailer, we appeal to all socio-economic groups. So, we want to provide value.

Plus I think the overriding thing with all consumers these days is they all want a value offering. So, in a peak it's about those things. It's about sales now.

In a non-peak you're going to see us switch much more to a mode that is about unique product, that's about unique experiences both from a grassroots event perspective. We do a lot of events throughout the year across the country of all scales -- small little tiny ones in markets, really big ones in key markets around the country where we want to focus our attention within those markets. So, you'll definitely see us focus.

I would characterize it this way, is that peaks are about driving volume and they're about, clearly, product messages. They are about connecting our customer to product in our stores relentlessly. And in non-peaks it's about brand and it's about the brand experience as expressed through what we can tell stories with at Zumiez, and how we tell stories through our brand partners working together with them.

So, thematically, those are the big switches you will see in there. And then we would also be talking about brand launches within there and seasonal differences and seasonal floor set with, for example, when snow product will hit in key markets around the country.

So, broadly that's how I'd characterize how we think about messaging to consumers. Peak is about product and sales and driving volume and connecting with the consumer on value. And non-peak is about brand experiences and connecting with them, connecting with our core consumer in a more intimate and personal way.

Forgive me for what may be an obvious question, but is there, given the dramatic shift between peak and non-peak versus historical -- and I know you guys have always done a great job keeping it real with your customer and offering a lot of very differentiated events -- are you doing more of that than you have historically, even though it's the same kind of through process? Are you amping it up or should we think about it as similar to what it's been over the past few years?

We have over the last couple years amped it up. It's a bit of a change in strategy away from major events and more into localized events and in clear partnerships with our brand partners. The types of events are also much more varied, I would tell you, too, as we've talked about, what we've done over the last couple of years.

We're doing -- do you know, Chris, the number of events a year? It's approximately on the 300 number, to give you a sense of the scale of events we are doing. And if we can do more we'll do more because you have to think about these as not some grand global event structure we're doing, it is about localized personalized events that are targeted -- just like we're trying to micro-assort stores -- they're targeted at certain regions of the country because that brand resonates there in a way it doesn't in any other part of the country.

So, there has been a change over the last couple years in how we have been doing this. And as we can afford to invest I think you'll continue to see us do more things like this.

That was very helpful. And if I could just do one follow-up, regarding the brands and some exciting new brands that you have out there, is there any way to think about how much exclusive you have with that product and how you're able to protect it, especially as we head into the important holiday season?

Again, I would tell you the brands we've been talking about over the last few months, it's ourselves, we're their biggest partner, and there are local shops that are carrying the product. But outside of that that's really where they're limited at this point.

We do think about this and, as you might imagine, spend a ton of time in how we think about unique product from all of our brand partners. And, of course, we would love to be a long-term partner for young brands that emerge. That's part of our trying to build a global platform -- how can we help them grow quickly and efficiently in a low-cost way around the globe.

That's part of our internationalization strategy with Canada, with Blue Tomato, and now with Fast Times. And I think we can do a lot of work there yet, Pam, on how we can be a better partner for our brands as they move from emerging to growth brands, and hopefully in a way that they can make more money and grow their business quickly but always be in a full-price, full-margin environment in high-quality culturally driven brand experience like at Zumiez.

Thank you so much for all the detail and best of luck.

[Benjamin Bray], Robert W Baird.

Hi, thanks for taking our questions. Could you comment on the concentration of the recent comp improvement? Obviously men's is getting better, accessories seems to be getting better, but are some of those lagging categories also getting less negative?

Yes. Just to give you a little bit more color around that, Benjamin, footwear was a laggard but it did get less negative. Skate hard goods lagged even more and actually got more negative within the peak. Now, that is not unusually, to be clear. Back-to-school is not a big skate hard goods window. That tends to be more in the spring, more towards holiday and gift giving.

So, it's not necessarily a signal about skate hard goods, would be what I'd tell you at this point. It's just the nature of back-to-school. It's not where dollars are spent. They're more spent in apparel, more spent in accessories, more spent in footwear.

Okay, great. And then on the Q3 margin guidance it seems like that implies a decent amount SG&A growth. Could you just walk us through some of the components of that growth in the near term?

Sure. I think I'd go back to how we started the year. When we talked about this at the beginning of the year we talked about SG&A growing at a higher rate than what it did in 2015. We put that mostly on the increase in minimum wage/ I think there's certain investments that we believe are important for the long term here.

As we've looked at SG&A in the third quarter, we've been trying to manage costs pretty well through the first couple quarters but there are some investments that are coming in line here in the third quarter. I think when you look at SG&A, and based on our guidance you can tell there's some deleverage there, the biggest impact of deleverage here is still the flat comp and the fact that even at the top of our guidance range at a flat comp that we're going to see some deleverage in SG&A.

I think some of the spend that we have tried to moderate in Q1, Q2, we are going to move forward in a small way there, so you're seeing a little higher increase there in SG&A. And, lastly, I think there's just some general timing into the third quarter that we didn't experience on the same cadence last year around things like the marketing events, I think there's some discretionary spend items around incentives and things like that, that are just hitting a little harder in Q3 this year.

Overall, we continue to maintain that annual SG&A guidance, that our SG&A growth for 2006 will be greater than what was in 2015. And I think you're just seeing it magnified a little bit more in Q3.

All right, thanks very much.

Jeff Van Sinderen, B Riley.

I actually got on the call late so apologies if any of this is repetitive. But just wanted to clarify, on the men's business, the performance there is not really concentrated in any certain categories of merchandise. It sounds like it's really across the board? And then, also, as far as the transaction gain, I think you spoke to quarter to date. Is that due to an increase in traffic? Just a clarification on both those.

Okay, great, Jeff. We have not answered those so I'll be glad to take a shot at it for you. Again, on the men's business, we are doing well of virtually every category product we had.

Yes, some are doing better than others, clearly, in the business. Some are driven by our private label business in terms of what we are doing. Others are completely brand driven.

So, on men's, the strength is broad. That's, I think, a pretty encouraging thing. We don't have in our store traffic counters so I can't tell you whether or not the transaction gains are driven by higher conversion rates or more traffic. I can't answer that specifically. I'm just happy to have more transactions.

Okay, that's helpful. And then just a follow-up, if I could, on SG&A since that topic came up around Q3. I'm just wondering how we should frame our thinking about SG&A for next year. Obviously this was an investment year in 2016. Within the context of unit growth you have planned for next year, just wondering how we should think about maybe speak to SG&A dollars for next year. I know you're not going to give guidance but maybe when you think that the leverage point may start to arise. Is that a Q4 thing possibly if comps are good, or is that -- I don't know. Any color you can give there would be helpful.

Yes, Jeff, you know me too well. I am going to stay away from providing any guidance on 2017. I think what I'd continue to reiterate is, as we look at our expense model, we continue to see a 3 to 5 comp is leveraging here. And as we think about where we are at in this type of environment, our focus is very keenly on looking at expenses and investments to try to leverage on the lower side of that range.

So, as Rick said in his comments earlier in the call, we are excited by the change here, the trend here over the back-to-school, the last couple weeks of back-to-school. But we've got to continue to do better. So, our focus is to get the top line higher and try to manage expenses the best we can. But we're not going to do that at the expense of what we think is right for the customer, as well.

So, there will be continued investment. We will continue, as we said in our prepared remarks, we're going to roll out our commerce suite in 2017. We would expect to have that fully rolled out in North America. So, we are working very hard right now getting that in place and getting it all tested and ready to roll. But we expect to be rolling it out here and those costs will also come into 2017.

We will provide more color as we move through the year and have more clarity on how we are looking at things. But what I can tell you is we're going to take a very detailed approach to planning 2017 to make sure that we're making the right investments over the long term but managing costs based on where the results of the business are.

Okay, thanks, and best of luck for the rest of the quarter.

Sharon Zackfia, William Blair.

Hi, good afternoon. I just wanted to follow-up on the peaks versus valleys commentary that's been going on for years. I'm curious from a labor standpoint. As labor gets scarcer and scarcer and wages are going up, what, if anything, have you been able to do at a store level to optimize that labor better given the compression in your seasons?

Yes, thank you, Sharon, for the question. We actually have a whole team of people that's focused on this topic about how we're going to have to adjust our business. It will include many factors as we'll think about this. I think to some extent we have to redefine roles of our team, and how we think about even down to the role of temporary part-time workers and how they fit into the current business model we have, the omnichannel model, the localized model; how we really make sure that our sales leaders are focusing wholly on sales. It will include how we think about order routing algorithms over time.

These are all the new complexities that we have now a chance to impact our business on, now that we've gone to this fully localized route. As you know, we also don't have the labor of a centralized fulfillment center, so we've been able to think differently there. And this is actually, from a peak/non-peak perspective, is probably, I think, in the long term an advantage for us. Not only are we faster but many stores in a non-peak are at minimum hours. So, I think there's some opportunity there over time.

That gets around to how we think about the sophistication of our order routing algorithms and is why is certain times we order route order to different volume levels of store than we think about it other times of the year. These are all options out there for us.

Now, the opposite force is around wage levels going up. I can tell you that -- Chris has said this on previous calls -- the worst possible scenario is what's happening to us now, which is that we get cities with different minimum wage laws, states with different minimum wage laws. We would much prefer a national solution because I think it would allow us to think, and allow our brand partners to think, about how we might price differently when we had a national solution to minimum wages because I think it's pretty clear that those countries with higher minimum wages do have higher prices in their cost structures.

And of course this also, Sharon, the other aspect that I think we have to think about in regards to your question, adds a level of complication to it, is that there has to be pricing rationale in the market to start with. This gets back to who is the long-term winner, how do you think about that, how do we drive out excess capacity particularly in the US marketplace. Those, I think, are still longer-term challenges for us in that regard, because, as much as we might like to think there's a long-term pricing solution with a national change in minimum wages, we also have to deal with irrational pricing by those retailers who are struggling just to survive.

So, I still think I have a long-term view about that. I think there are things we can do in the short term, Sharon, that we can manage the business more effectively. As I said, we have a team of people working on it. There will be a number of different levers I think we can pull. But it is going to be challenging in it ties back to the question a moment ago about SG&A and wage rates at the store level. Obviously we have the FSLA challenges coming up here in December. Those are going to challenges for us.

So, short term -- challenges. I think long term we can turn those challenges into an opportunity

Could I just ask a quick follow-up? Do you happen to have what your average hourly wage inflation is for this year?

I don't have it off the top of my head. It's something we could look to provide.

Okay, thank you.

Adrian Yi, Wolfe Research.

Hey, guys, this is actually Doug Drummond on for Adrian today. Thanks for taking our questions. Just switching gears to Blue Tomato, Europe was down 8.5% net sales inclusive of the two net new stores over the last 12 months. Can you just talk about the current trends there? Do you see a potential course correcting in the second half of the year? Thanks a lot.

I'll take that one. From a Blue Tomato perspective, I think that the story is pretty consistent if you've been following our monthly sales calls. As we think about 2015, if I go back to 2015, 2015 was not a strong year of performance for our domestic business here in the US. But we talked pretty openly throughout much of the year about the strength in Blue Tomato. They were really strong in one category in particular, although almost all categories were up throughout the year.

Now as we have moved into 2016, we've seen a little bit of falloff in that category and it has impacted their overall results. I think what gives me some comfort there is when we look at the multi-year stack, both for that category as well as for the entire business. We're still looking at a business that's running double-digit improvement.

Overall, I think there is a little bit of a pullback here on the Blue Tomato side based on some trend issues over there, but the teams continue to work through that, as well. And, as I said, on multi-year we feel pretty good about where we are standing.

And I'd just add to Chris's comments, Doug, that this is, again, reflective for me of how fast trend cycles move today. We had a huge gain, as Chris said, in this particular category product a year ago, Blue Tomato, and now it's reversed this year. And the magnitude in both directions was big. I'd just, for me, that's a reflection, again, how fast trend cycles move in the modern world.

Again, we still feel great about where we are at there. And as Chris said, on a stacked comp basis over the last two years, we're still in a big gain at Blue Tomato. And I would add that other categories of business, we have other categories of business at Blue Tomato that are running gains, just not sufficient enough to offset this trend item.

Okay, understood. And then switching gears to promos, obviously your Labor Day sale was quite important. This year I know you ran a quite different sale in both timing and the style. Can you help us with the rationale behind that? Thanks a lot.

We are reacting at different times for different reasons in our business. At different points in time, Doug, our strategies will depend upon where our inventory position is. A year ago we would have been much more aggressive on price and promotion than we were, just because of the trend in the business. This year we didn't feel we needed to be.

We feel that the way we structured the business was one where, based on what was working, is we could take a promotional stance. And, again, I think you have to break this down, in this case, by where consumers want to buy what channel in your business. There are certain categories of business that consumers are just driving to the internet. That would be clearance and a lot of sale product.

Again, if we look at it on a trade area basis, we're finding that we feel pretty good on our overall promotional strength and what that meant for product margins through quarter to date. As Chris said, we are planning essentially flat for the quarter to date. Our strategies depend upon our inventory position, where we are at at that moment and how we are thinking about it. And if we can be less promotion because of the strength of our business, we certainly will be less promotional.

Okay, thanks a lot. Appreciate the color, guys

Thank you. Ladies and gentlemen, this now concludes our question-and-answer session. I'd like to turn the call back over to management for closing remarks.

Again, I'd just close the call with my thanks to everybody for your time and interest today in what we are doing. I think it's been fun, interesting back half of the year for our opportunities here at Zumiez. We feel good about where we're at. A lot more work to do and we know we have a lot more work to do to deliver for our shareholders. So, look forward to talking to you on our third-quarter call later in the year. Thank you, everybody.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program. You may disconnect at this time. Everyone have a great day.