Zumiez Inc (ZUMZ) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated third-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 Incorporated business outlook and contains forward-looking statements. These forward-looking standards 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'll turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, Sir.

Hello and thank you, everyone, for joining us today on the call. With me is Chris Work, our Chief Financial Officer. I'll begin today's call with a few brief remarks regarding the third quarter and then provide you with 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.

Third-quarter diluted earnings per share increased 19% to $0.43 from $0.36 a year ago. This is well ahead of our initial guidance range of $0.21 to $0.26 due primarily to stronger than expected sales. During the third quarter, monthly comparable sales trends accelerated trending positive in September and October to finish the quarter at a positive 4%. This compares with our original outlook for comparable sales in the flat to down 2% range.

It was particularly encouraging to see this top-line strength across several key departments as we recorded gains in our men's, accessories, and juniors' departments. We were also encouraged to see the sales growth driven by transaction gains in both our physical and digital channels. Our momentum continued in November as comparable sales rose 5.7%.

While these top-line results are a great sign of our brand strength and a testament to the strong execution by the Zumiez sales teams, we are cognizant that headwinds persist throughout the retail industry and challenges associated with muted mall traffic and macroeconomic uncertainly are still bringing unpredictability across the retail sector. Accordingly, we are proceeding cautiously and tightly controlling expenses to protect profitability.

Our primary focus remains on executing the strategic objectives that best position us for the long-term. This includes serving our customer in the authentic and personalized manner they have come to expect, including a hyper localized product assortment, best-in-class sales teams, a superior omni-channel experience, and our continued efforts to localize the Zumiez brand experience, including initiatives such as our in-store fulfillment.

During the year, we have continued to make progress on our customer engagement suite in North America. And while the enhanced touch points are only represented in a minority of stores, we believe the ongoing rollout over the remainder of 2016 and into 2017 will continue to enhance our ability to engage with customers whenever and wherever they choose to shop.

By improving the customer experience, we can created a continuous two-way conversation, enabling us to stay in lock-step with their changing needs and desires and drive long-term profitable growth. During the third quarter, we opened 10 stores, including seven in North America and three in Europe and acquired five stores in Australia, bringing our total store growth for the year to 31.

We continue to see our physical store expansion as an important piece of the customer omni-channel experience, with the digital platform both enhancing our in-store experience and driving further optimization of our store network. Our goal with all of these investments, whether physical or digital, is to strike a balance between market presence and demand such that we open the right number of stores in any given trade area and not one more than needed to serve our customers.

In North America, while we still see room for physical expansion, we anticipate that our new store openings will further slow in 2017 as we continue to focus on maximizing the impact of each of our stores in its own geographic trade area. In Europe, we continue to see the highly fragmented nature of this market creating the opportunity for continued expansion. While Europe is facing its own macroeconomic headwinds, we remain optimistic that our highly differentiated concept and omni-channel platform has us well position to further consolidate market share.

Meanwhile, our recent acquisition of Fast Times that closed in the third quarter provides us with further opportunity to expand our global presence by extending our reach to Australia. While it is still early in this new endeavor, we are excited about the opportunity to combine best practices between our teams and successfully capture additional demand on the Australian continent in the years ahead.

In wrapping up, we are obviously very pleased with the top-line and bottom-line momentum we are seeing as we head into our strongest revenue and earnings quarter. We believe these trends are a direct result of the continuous investments in our brand, our people and our omni-channel capabilities, combined with our continued localization efforts.

Looking ahead, we will continue to manage our business in the near-term with the prudence and cost consciousness needed to weather the unpredictability in the current environment. At the same time, our focus remains where it has been all along: on making the investments in our business that we believe will propel us forward and return real shareholder value over the long-term. With that, I will hand the call over to Chris for a review of our financials. Chris.

Thanks, Rick. Good afternoon, everyone. I'm going to start with a review of our third-quarter results and then I will provide some thoughts about the remainder of the year. After that, we will open the call up for your questions. Third-quarter net sales increased $17.1 million or 8.4% to $221.4 million from $204.3 million a year ago, driven by positive comparable sales growth of 4% and the net addition of 35 new stores since the end of the last year's third quarter, including the five stores added in the acquisition of Fast Times in Australia.

During the year's third quarter, we saw increases in transaction volume, partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction was the result of lower units per transaction and a decline in average unit retail. Our third-quarter net sales were driven by gains in our men's, accessories, and juniors' categories, while hard goods and footwear comped down for the quarter.

From a regional perspective, North America net sales increased $14.7 million or 7.8% to $202.9 million and other international net sales, which now consist of Europe and Australia, increased $2.4 million or 14.6% to $18.5 million. Third-quarter gross profit was $76.2 million up $6.1 million or 8.7% compared to the third-quarter 2015.

Gross margin was up 10 basis points from the prior year coming in at 34.4% in the 2016 third quarter. The increase in gross margin was primarily driven by an increase in product margin during the quarter.

SG&A expense was $59.3 million in the 2016 third quarter compared to $54.8 million in the third-quarter of 2015. During the third-quarter of 2016, SG&A as a percentage of net sales 26.8%, flat to the year-ago third quarter as we saw 40 basis points of leverage across our store expenses offset by 40 basis points in corporate investment. We generated an operating profit of $16.9 million or 7.6% of sales in the third-quarter of 2016, up from $15.2 million or 7.5% of sales in the third-quarter of 2015.

Net income for the third-quarter of 2016 was $10.7 million or $0.43 per diluted share compared to net income of $9.7 million or $0.36 per diluted share in the third quarter a year ago. Looking at balance sheet, cash and current marketable securities totaled $49.2 million as of October 29, 2016, down from $75.6 million as of January 30, 2016 and $51.1 million as of October 31, 2015.

Year-to-date capital expenditures totaled $16.8 million. During the third quarter, we repurchased approximately 136,000 shares on the open market for a total of $2.3 million, bringing our total stock repurchases for FY16 to $20.5 million or 1.2 million shares. As of October 29, 2016, we had $33.9 million remaining under our share repurchase authorization.

As of October 29, 2016, we had $150.6 million in inventory, up from $133.6 million at the end of 2015 third quarter, driven primarily by an increase in inventory per square foot and our increased global store count. Through inventory has grown in excess of our square footage growth, we feel confident in the general quality of the inventory and have seen our aged inventory, defined as inventory older than four months, decrease as a percent of total inventory year over year.

Now to our November sales results. Total net sales for the four-week period ended November 26, 2016 increased 10.3% to $69.3 million compared to $62.8 million for the four-week period ended November 28, 2015. Our comparable sales increased 5.7% during the four-week period ending November 26, 2016 compared to a comparable sales decrease of 13.8% for the four-week period ending November 28, 2015.

Higher transaction volume drove these year-over-year increases offset by a decrease in dollars per transaction. Dollars per transaction in the period were down due to a decrease in units per transaction, while average unit retail was flat to the prior year. During the four weeks ending November 26, 2016, mens and juniors posted positive comps, while hard goods, accessories and footwear posted negative comps. Year-to-date, through November 26, 2016, comparable sales have decreased 1.7%.

Turning to our guidance for the balance of 2016. Once again, I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimated sales, product margin, and earnings growth, given the variety of internal and external factors that impact our performance. While our third-quarter top-line results were encouraging, we are cognizant that the headwinds affecting the industry persist and are planning our business accordingly.

Keeping that in mind, we are currently planning fourth-quarter comparable sales results in the range of positive 3% to positive 5%, with total sales in the range of $258 million to $263 million. We estimate gross margins to increase 50 to 100 basis points compared to the fourth quarter of 2015. As a reminder, last year's fourth-quarter gross profit was impacted by lower product margins to clear inventory and the $1.2 million charge related to the closure of our Kansas fulfillment center.

Consolidated operating margins are expected to be between 9% and 10% with diluted earnings per share between $0.60 and $0.66. A few other thoughts regarding the balance of the year. Through November 26, 2016, we had opened or acquired 32 new stores including: 6 in Canada, 5 in Europe, and 5 stores through the Fast Times acquisition completed in August.

This brings our total store count as of November 26, 2016, to 689, including 656 in North America, 28 in Europe, and 5 in Australia. We plan to open one more store for the balance of FY16.

Full-year capital expenditures are expected to be between $21 million and $23 million. We anticipate depreciation and amortization will be approximately $28 million or 6% to 7% below the prior year.

We are planning our business assuming an annual effective tax rate of approximately 37.5%. And lastly, we are currently projecting our weighted average shares used in the calculation of diluted earnings per share for the full year to be approximately 25 million shares, excluding the effect of any additional share repurchases made during the fourth quarter, 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. Good afternoon and really congratulations on a job really well done and well executed. So, Chris, if you could, or Rick, give us a little bit more on the gross margin? You said positive product margins, but if we kind of peel back that onion a little bit more, is that on the IMU side, on mix, or is it just kind of the reduction in unplanned markdowns and clearance activity? And then how would those different layers kind of look as we look into Q4? Thanks.

Yes, I'll start and let Chris add, Neely. I think is a combination of all those things. Mix is included in the aspects of the business, obviously, as we move more towards an apparel driven side of our business, the margins tend to be higher. But, as you know, private-label mix changes in that. Private label has a higher initial mark-up, so it's a combination of all those factors and then, as Chris said in the guidance, I'll let Chris take it from there in terms of, again, the thinking relative to fourth quarter and the guidance.

Yes, absolutely. What I would tell you is we have kind of put in our comments throughout the year that we thought we had margin opportunity, and specifically in the fourth quarter. And as Rick mentioned, our business is always impacted by mix and the transfer of private label to brands depending on what's trending in the cycles that we are in. But we also knew as we came to Q3 and Q4 that we had some opportunity based on the prior year. As you know, our comps got more challenging as we move through 2015.

And our philosophy has always been to try to move on from inventory versus carrying it into the next season, so the team got very aggressive in Q4 last year as we saw results decline and move through quite a bit of inventory and we've always known we had a little bit of opportunity here in the fourth quarter to try to get back some of that margin. So it's a mix of everything, but we're definitely, we saw good product margin gains here in the third quarter and we are projecting, within the fourth-quarter guidance, some additional product margin increases.

And lastly, Neely, I'd just like to tie back to Chris's comments there to is, the comments in our prepared material in the script, which goes back to the currency of inventory, and we feel very strongly we're entering into the fourth quarter with some of our highest level of current inventory that we've had in a long time. So I think we're well prepared for the quarter and that's also obviously going to reflect upon the potential for markdowns in the quarter itself, yes.

I appreciate that. And if I just may, one more technical, I guess, almost accounting type question. Chris, when you guys, obviously, you're doing much better, which is fabulous, and that means people get paid bonuses. I'm going to make some assumptions maybe, in and around that. Do you reaccrue for that? Does your guidance for Q4 reflect kind of the season reaccrual for those bonus payments or performance incentives? Or did you actually take some of that also in Q3 as well as Q4? Thank you.

Yes, I mean, there's, as I look at the cadence of 2015 compared to 2016, there's a little bit of variability quarter-to-quarter in how we look at those incentives. Obviously, in 2015, going the opposite direction that our 2016 has appeared, we started to take bonus off the table as moved through the year. This year, we were a little more, we didn't take as much bonus off in the first part of year because we were expecting to continue to be able to turn results around.

So we've been a little more of an even playing field as we've moved through 2016. Our guidance today for Q4 factors in where we think the incentives will land with Q4, with the Q4 results we put out there today. In the event we were to exceed them, we would have the potential to increase incentive, but that would be factored in as paying for itself, right?

As the results go up, we would expect pretty meaningful flow-through on where we are today. So the guidance encapsulates the bonus that we've got out there and we'll see how we wind up. But I wouldn't expect to see a major additional flow-through unless we really exceeded the guidance ranges out there.

That's fabulous. Thanks. And we wish you all the happiest of holidays and best wishes this holiday season. Thank you.

Thank you, Neely.

Sharon Zackfia, William Blair.

Hello, good afternoon. Chris, just had a quick follow-up on that. Did you have any incentive comp kind of true-ups in the third quarter given the performance?

We didn't have any true-ups. What we had was more, as we relate to last year, last year at this time, the third quarter was a pretty bad performance overall, so we took the incentives down, where this year, we were a little more level as we move through the quarter so we saw those be more where would have expected them for the third quarter.

Okay and then on November, obviously, the Black Friday weekend being of course, the most important part of it. Did you see any kind of change in the trend in your business between the earlier part of the month towards the holiday part of the end of the month?

Yes, sure. Let me try to break down November. As we stated in our release, we ended Q3 kind of each month getting better, and October being very strong. As we moved into November, we definitely took a step back in the first couple weeks and saw the first two weeks of November be much softer than the last two weeks, while I should mention, all weeks were positive comps for the consolidated entity, definitely much softer in the first couple weeks, perhaps tied to some of the noise around the election and weather and some of those things that are out there.

As we moved into week before Thanksgiving, things got much stronger and the week of Thanksgiving was good as well. As for black Friday, I'd start off saying we're not a highly promotional retailer, so that's not a big piece of what we've done. I'm sure you, like others, have read a lot about the percentage, the high percentages, of discounted product that people are buying out there and that's just not a place where we play as much. But overall, I should say, secondly for the weekend, it's not much of international event.

So for North America, we were up 6.3%, which is obviously ahead of our monthly comp there and so we had a good weekend, we were happy with the results, and especially happy with results in light of we did see meaningful hours decreases in our comparable stores in the mid-teems, I should say, hours decreases on Thursday and Friday. And that was really coupled with two things: first off, we made the election here to give back to our people and their families and we did not open on Thanksgiving across the country until 9:00 PM, which our historical practice has been to open when the mall opens.

But we decided to wait until 9:00 PM to open, and secondly, we did see some reduction in hours across the country from malls not opening and see even some of the bigger malls across the country that elected not to open at the same hours they did in 2015. So we were happy overall with the results and in an online perspective, continued strong into cyber Monday and our teams did a great job of working through the volume throughout the weekend.

And I guess I would just add, Sharon, that, again, we really look at the US as a driver of our business. The first two weeks, as Chris said, were significantly weaker. We think there was some noise around the election. The last two weeks were significantly stronger, including week four overall was actually stronger than our Black Friday comp itself.

So to add to Chris's comment, I think part of what we are seeing is that Black Friday weekend is really becoming more like Black November in terms of the promotions being spread out over time and I think we may see over the next few years potentially some decentralizing of sales in the month of November as opportunities to buy things persist throughout the month at a promotional basis.

So the week, week four for us, was actually stronger than the weekend itself and then the first two weeks were by far the weakest in the US and I think there was some noise around the election.

Okay and then just lastly, on expansion, I think everyone appreciates the desire to monetize or improve the current store base to the best you can. But I also know in the past, Rick, you've talked about growth as a cultural imperative at Zumiez, so I'm just kind of trying to balance in my head how you think about continued slowing unit expansion and that culture you guys have spent so much time building up and how you think about that.

That's a really fantastic question, Sharon, to ask and you might imagine, we're talking about that a lot over the last few years in our business because we obviously can see the maturing of the US business. So I think we're looking at this from a number of different perspectives, including, I think, some of the issues, or some of the opportunities, that you've heard us talk about around localization initiatives in our business.

I think that we expect that we're going to be able to provide growth opportunities for our people through basically increasing the challenge that we believe is going to exist in the new kind of, a new level of retail that moves forward. We're going to, where a store manager's job in our world are actually going to become more empowering. They're going to have more responsibilities. I think we're going to capture more share as we do more and more of these localization initiatives, like localized fulfillment.

And I think we're going to be able to offer new kinds of growth opportunities for our teams as well as we're going to have an opportunity over time to, I think, do some sharing across geographic locations for our team members. We're certainly in the process, as we always are, trying to hire always, so when we hire here at the home office, we're always hiring from our store team first and their capabilities.

So I think you're going to see us challenge our teams and challenge them to grow as leaders and as retailers and as business people in that opportunity. And I think, in this, as we reinvent kind of what retail is going to be like, and we're on this mission, I think, over the last five years and probably the next five years, to reinvent what the nature of, especially retail, is going to be like. We're going to be able to offer to our people some really interesting challenges and hopefully, as we consolidate share, and I do believe this continues to be a share consolidation game, we're going to be able to afford to pay our people to take on those additional responsibilities and opportunities.

Okay. Great. Thank you.

Jeff Van Sinderen, B. Riley.

Good afternoon. And I know you guys have great people at the Company, but I guess I'm wondering how much of your recent success do you think is from your having awesome product content versus your target demographic maybe favoring sort of the broader genre of merchandise that you have a bit more.

Just trying to get a sense of whether you feel maybe there's been somewhat of a tide change that plays more to your strengths. And then also, if you could update us on what you're learning from filling e-com orders from your stores.

Great, Jeff. I'm glad to do, take, tackle both of those for you. So, as you know, right, in retail, it's not about one thing, it's about how all the things work together. So, you have to have what they want from a product perspective to give the tools, product being the primary tool that we put, that we give our salespeople to unleash their capabilities in working with customers, so they go hand-in-hand.

And likewise, if you had no, if you didn't have good salespeople, you would have lower sales results and if you don't have the right product, you're going to have lower sales results. And as you know from, I think, our comments last year, we believe that trend cycles have accelerated in such a way that, I think, periodically in this world, where there are fashion cycles on our case, we really have three things that drive the business: fashion cycles, brand cycles and item-driven cycles.

And I think 2015, whether or not, was a very unusual year for us in that we had peaked a couple of brands. We didn't have those emerging brands yet coming up to offset that volume. We had a fashion cycle that had carried over, that was strong in 2014 that weakened in 2015 and we didn't have any new, whether it be fashion cycle, brand cycle in 2015, I'm talking about 2015 now, or a hot item to really drive business forward.

And I think because of the speed of cycles in the modern world, I think each retailer, uniquely to their position, every so many years is going to find a hole potentially in their business. It might be a step back and then a chance to step back in as trend cycles return back into your favor and what you do uniquely special for your customers. So I think, hopefully, we're back in a track now where we're going to be able to see, particularly, as you know, we've been talking over the last year about the importance of how we have some emerging brands that have now become growth brands in our business.

Typical those are multi-year runs, has been our historical experience with that, and so, and I think we feel good about our brand pipeline. We're working very hard in terms of thinking about new ways that we can work to make our brand partners more successful; and one of the most obvious ways I can point out to you in terms our initiative to last year's has been to build a global retail network, high-quality global regional network, so we can help young brands grow around the world. Because clearly, I think the one thing [people] learned is that brands become global much more quickly than they used to by the nature of consumer technology and the internet and social media.

So, we have a number of initiatives like that, Jeff, that we are working on, on the brand front and we launch a lot of new brands every year and I think, as I said, I think we feel very good about our pipeline for where we are at. And I'm hoping that we're going to be able to arm our sales teams and arm our marketers with a lot of interesting product to help serve our customers.

I view that, when I say that, our mutual customers between our brand partners and, of course, Zumiez and how we serve those customers. So I think you got to have all of it and it's got to be great at every touch point. It's all part of the brand experience that we're trying to bring together collectively for our brand partners and for our customers that takes place at every touch point along the customer journey whether that be digital or physical touches.

So that's the first part of the question and then your second part relative to local fulfillment, this is, I mean, I have to tell you how proud I am of our teams. We're now in, obviously, in through Cyber Monday, we had excellent performance relative to our local fulfillment initiatives. Very impressed and encouraged by our teams. What we said in the last few quarters is we are much faster than we've ever been and I think it's surprising our customers.

We've heard that from our customers, how fast we are in terms of getting the product to them through localized fulfillment. And I guess I just say this is, this actually ties back to, as we said in our prepared comments, to much broader initiatives we have around the ideas of localization, and the most obvious example that we've talk about for decades now has been localizing of assortments, of product assortments. And now you hear us talking about how we're going to hyper localize trade areas in marketplaces.

So we have a lot of localization initiatives like this, Jeff, that we continue to work on, including enhancing and improving the idea of hyper localizing assortments for trade areas and that includes optimization capabilities within that for how we think about optimizing performance of the business within a trade area, trade area being defined as all sales whether they are digital or physical in a marketplace.

And so we have many more initiatives like this to come. We think we have tremendous room to improve what we do around hyper localizing assortments. We have yet tremendous room to improve and opportunities around localized fulfillment and we have a whole series of additional localized initiatives that we're going to be putting into play over the next three years that we have identified, we're timing out when we're going them. And we're going to continue to push this forward because we think it creates the right brand experience for our customers.

So I guess I'd sum all that up by saying, super encouraged by where we are at. It's working and we're faster than we've ever been and I think there's going to be many ancillary benefits from localized fulfillment for us. Now I'll ask Chris to comment on the cost side again, just to make sure we're communicating clearly on that, too. Chris.

Absolutely. Yes, I mean, as Rick mentioned, this is just, it's an important next step. And when we made this decision, this difficult decision, to close Kansas in Q4 last year, we knew at the time that this was not a P&L benefit, this with more of a breakeven proposition. And I think, overall, we've been pretty close to that mark from a standpoint of we've taken the cost out of the business that were associated with the web fulfillment center in Kansas and we've had to sort of, we've had an increase cost of shipping as there are more splits when you do it this type of way.

And then we've had to surgically insert payroll where it needs to be inserted like this important Black Friday weekend, just to keep up with the demand. So overall, we're seeing this kind of come out as we had planned. We're not significantly above or behind the expectation. And, as Rick mentioned, I think the exciting part for us is it such a better customer experience and we have a lot of room to still work to harvest the efficiency of this model, right?

Whether it's the assortment planning or the algorithm or our store labor planning, and ultimately, hopefully, some increased margin benefit from this from being able to really be out there and harvest inventory in some of your slower volume locations. So overall on track with good room to move forward and we're excited about the change we've made.

Yes, and I would just add to that finally in closing this topic, Jeff, that again, all these, we're learning so much every day, that there is this reinforcing loop of information that comes back into the cycle that allows us to do the things Chris just described about further enhancement, further improvement of this process, because, obviously, hyper localizing assortments depends upon understanding how we do with fulfilling and how close we are to filling demand in trade areas.

And so we're putting all sorts of new measures in place, we have all sorts of new capabilities from a reporting perspective, new incentive programs around to line these topics; and all of them are informing better decisions moving forward around our order routing algorithms around how are how we might local assortments for a trade area. So it's a reinforcing positive virtuous loop that we're in right now and I'm relatively optimistic that we'll be able to ring out the benefits, the optimization benefits from what we're doing here.

All right. Good to hear. Thanks very much and best of luck for holiday.

Thank you, Jeff.

Jonathan Komp, Robert W Baird.

Yes, hello, thank you. If I could follow-up on the comps for a minute, and just looking at the guidance for the fourth quarter, I'd like to understand. It sounds like you're exiting the month of November probably trending up in the high single-digits and guiding to 3% to 5% for the fourth quarter, which I think at the low-end would be, in the low, fairly low single-digit range, for the next two months. So could you maybe talk about how you're thinking about the outlook for the fourth quarter?

Yes, sure. We ended November at a 5.7% comp, which is about 30% of the quarter. So the lion's share of what we have here is in December. As we mentioned in our remarks earlier on the call, the last couple weeks were stronger, so you're right, we are running at a higher level here to exit November than what our guidance would indicate. But there is a lull here and we've seen this over the last few years between Thanksgiving and Christmas and we are continuing to monitor the business and see how it goes.

And right now, our current run rate would have us kind of just above where we set the comp and so we are kind of monitoring to that and we'll see how this plays out. November was our biggest opportunity last year, from where we were in Q4 and the comps got a little bit better, although still pretty bad in December and January. So we set it kind of about where our run rate's been and we'll see how this plays out into the important December month.

And I want to ask, a little more broadly, the last two months, the strongly positive comps that you've seen, could you maybe help parse out how much, if any, you think has been any changes in the competitive, the direct competitive set versus maybe a little more color on some of the merchandising initiatives in product that might be trending fairly well right now?

Yes, certainly, Jonathan. And I would tell you that I think it continues to be as competitive as ever in the marketplace. I don't think, so from a relative positioning across this year and last year, I don't think much has changed from that perspective. It's just super competitive in retail, period. And I even think that this Black Friday weekend was even slightly more price sensitive. And as Chris said, that's, we're actually not playing that game is what we try to do in the marketplace. We're trying to be a full-price, full-margin retailer.

So, for us, I don't see a lot of change from a, I think it's still just super competitive aspects across retail. So that would tell you then, that what's driving our business is what we're doing uniquely and I think that is relative to this idea of emergence of brands. I think we've also played fashion cycles very well. I don't think we've been on top of the trends from a fashion perspective, whether that be long tees or what's going on with denim. I think our teams have been there, both in the branded side as well as our private label side of the business.

And I think we haven't missed on those fronts. I think we've been right there and appropriately for our customer with our own twist on that business. Our private labels performed well during this cycle, and then as we've said, we've had these, what we believe, we've had some brands go from emerging to growth brands.

So I think what's made us stand out on a relative basis is our unique positioning in the marketplace and I'm hoping that, again, as I said, that particularly with brand cycles, that's something that's going have a bit of legs to it here as we can run that out for a period of time.

So I think our differentiation has been how we've executed, our unique position and how we support young brands, and then again, as we put them into, get them, as they get to the point where they can grow more broadly, we have the people that know what to do with them have to serve customers.

And then you combine that with the omni-channel capabilities we've established, I think we're one of the leaders there, it allows us, omni-channel allows us to maximize those sales in each window. So again, and then of course, we're trying to improve brand positioning through a lot of our own Zumiez brand positioning through a lot of the localization efforts. So I hope you see how it's all coming together and I think a lot of what we're doing is working on the product front, but it's also working in all these other aspects of what we're doing.

And maybe just one follow-up to that. Rick, when you talk about the growth brands having potential to have sometimes a multi-year track, is that, maybe could you comment on the ability to maintain some exclusivity around those trends or the brands or any key perspective on how unique some of those drivers are to Zumiez?

I think that the brands that we're talking about are very unique to Zumiez, particularly in the mall setting. I know we are by far the biggest partner for these brands by a large margin. I think that we, again, are trying to position ourselves so that we can provide the brands growth opportunities within the network because brands today can quickly, very quickly, look to be over distributed because of the power of everyone's multiple retailers and distribution channels and media and social media outlets.

So I think brands are very smart today about how they think about distribution, about how they want to play it out, and of course, they're thinking about their own longevity as a brand. I can tell you some of our, in brands that we had been very successful, we have had to cut back distribution over the last year too because they felt it was the right thing to do.

I think we're at a new point in understanding this cycle from a brand perspective with our brands, I think, probably more clearly than ever, understanding that control distribution allows them to control pricing and margins more effectively as a brand, which, of course, controls how their brand is perceived.

So I think we're at kind of a new state there and, again, I've said, we've had a significant brand for us that in the last year significantly cut back our distribution, but cut back everyone's distribution with their business because they wanted to grow more slowly.

So these are new ways I think brands are thinking about the business and I think a lot of our emerging brands or becoming growth brands are learning from those other brands and their experience over the last few years. And I think we're going to see over the next years that there is going to be very, very controlled limited broadening of distribution for a lot of these brand partners.

Great. That's helpful perspective. Thank you

Richard Jaffe, Stifel.

Thanks very much, guys. Just a question about footwear. It seems to have been on the mend or on the upswing and then, obviously, not so hot for the quarter. Can you sort of talk us through what happened in the quarter and what your holiday outlook is?

Sure. I'd be glad to do that, Richard. I think about footwear, and you're right, we've had a couple periods where footwear has been positive in Q3 and it wasn't in November. And so it has been variable and I think that's been true this year, where we've seen some flickers in footwear and then it tends to go negative. So for me, I think what we're seeing here partly is that, in November, my experience here at Zumiez has been that footwear in November always diminishes as a function of percentage of your business.

Because it tends to be not a top gift giving item and where we really see footwear in this quarter really expand and become a bigger part of our business as part of the mix is in, is post-holiday, post-Christmas, when the kids come in with gift cards and are ready to buy at that point. So I think some of this may be transitional within the quarter as we see, as we think and see about it, what's going on in footwear. I think there are just differences between a November and a December in that regard.

On a longer-term basis, and I think as you know, we had a very positive footwear cycle and footwear cycles, again, tend to be longer cycles in my view, between 2009 and 2012. And then we move into a cycle that has not been good for us, and really, it's been driven by the idea of performance athletic and basketball footwear and that's not a cycle that our customer, that the customers come to us for in terms of product.

So, now that's been a long cycle and I think partly what you are seeing in our business is there's an interest, I think, by our consumer, at having some newness in footwear. And I think that the performance athletic cycle is getting a bit old. Now it's still really strong, clearly, in terms of results, so I'm not sure the timing of how fast it's going to move, but I know that, from our perspective, we're trying, as you know, in our business, we're to try new things all the time in footwear.

We're trying new brands, we're, of course, trying to do unique things with our brand partners in footwear to try to differentiate our presentation and we've had some success in that regard, I think, over the last few months. So I'm hopeful that this aging of the current cycle is going to lead to some emergence of new cycle. Can I tell you what that is or can I tell you if it's a brown shoe cycle, it probably doesn't favor us very well.

I can't tell you where it's going to go, but I'm encouraged that I think at least we're going to see some change at some point over the next 12 to 24 months, maybe, in this footwear cycle. And after, of course, my inclination is to say that, that's probably going to benefit us relative to the, because it certainly hasn't been so great the last four years.

So I'm hoping that we're going to see some confidence and I'm hoping that what we're seeing here over the last months with footwear being, having some positive trends to it is that some of the things we're doing have been working. And then I'm hopeful and optimistic we're going to some interesting new things happening in footwear over the next 12 to 18 months relative to fashion and relative to brands.

Well, change would certainly be good and gives us all room for hope or more sales.

More sales. That's right.

Thanks very much.

Thank you.

Adrienne Yih, Wolfe Research.

Hello, guys. It's Doug Drummond on for Adrienne. Could you give me an update on the hard goods category as to where we are in that cycle and what opportunities are you seeing there dropping in? And also, switching to Europe, can you spend a moment elaborating on what you're seeing in that environment? I think it sounds like you have a slight pick-up since 2Q sequentially. And I guess what categories were helping to drive the mix there versus the rest of the chain? Thanks a lot.

Certainly. I'll take the first and then ask Chris to chime in. For me, our business has always been cyclical, so again, done this a long time, have the chance to think about it over long periods of time. So we had a terrific run in [skate] hard goods in our business over the last few years and now we're seeing that step back a bit in the US. And again, we'll have some good months, good weeks. You'll see it bounce around a bit, but generally, after a good three-year run I think in positive results in skate hard goods here in the US, that's tended to step back a little now and for, I think, a number of reasons.

But, again, for me, these tend to be cyclical cycles and customers go where newness exists. And so now you are seeing their dollars rotate into like apparel categories, both in men's and women's, where there's a lot of newness, I think, and excitement in the product.

So I think these tend to be typical trends and that's why we talk in our business about being diverse, both in brand presentation and in presenting everything within the lifestyles we represent from a category, from a department and category perspective. So for me, in the case of skate hard goods, this is just a cyclical cycle. We'll work our way through it. It's a very important part of our business.

If you're going to about snow hard goods in the business, we've had a tougher start in this season, mainly around weather to snow hard goods. Now, snow hard goods had been really kind of a down trending business for us a long time, so we always look at buying snow hard goods, I would tell you from a product perspective, very cautiously, and we know that it always isn't going to snow somewhere in the US and we know that we can move product around or, again, using our omni-channel model, we can manage our order algorithms to ship product from different parts based on where snow is selling and not selling.

So snow hard goods is, again, something we are committed to, Doug, in this, but it's also some that's been a tougher part of our business. It's a much smaller part of our business now than it was 10, 15 years ago. We are committed to doing it, though, because we think it's still part of our identity.

And then I think we're good at managing the inventory aspect of what we're doing and how we buy it and how much we buy of which brand. So I feel very confident in our merchant from that side of the business. Europe, and I'll actually let Chris talk about Europe and some of the trends there because they're very specific.

Absolutely. From a Europe perspective, as you know, Europe continues to be a tough place to do business. I'd tell you 2015, as we talked about Europe throughout the year, we mentioned it's significantly exceeding our results here in the US. They had a great 2015. As we've talked about Europe over the first couple quarters, it was definitely more challenged as it had to anniversary some of its own trends from 2015 and hard goods being the main, the specific one. They had a great run in the hard goods section, specifically around skate during the first quarter and second quarter.

And as we anniversaried that in 2016, we did come up against some challenge. You're right in your assumption that it looks that the trend looked better in Q3. Europe was positive in the third quarter. In fact, I can tell you that all categories were positive in Europe with the exception of the skate hard goods, which continued to be up against some of its 2015 comps.

But overall, as I've said in the last couple of quarters, if I look at this on a two-year stack, the results are pretty good. The business continues to grow very well, we'll continue to add stores there, and from a top-line perspective, the business is really pushing it. So we're really excited about what the team's doing there and their important quarter here is coming up in Q4. They definitely have a much bigger snow presence than we do here in the states and we're excited to see what that leads to here in the fourth quarter.

Okay, that's helpful. I guess, quickly, and you give an update on the integration of Fast Times and do you have a longer-term brick and mortar goal in Australia? Thanks a lot.

Yes, I'll take that question, and overall, I can tell you that this is a great team. Again, we think we found the best operator here in the very, very core to what they are doing, shop here in Australia. We're really excited about partnering with them and seeing where they can take this business. The integration's going great. We closed transaction on August 31. Again, just working really closely with them to make sure that we're, we're connected and doing the right thing.

What we've learned from our own growth here in US and our growth in Europe is this business is about people and it's about really growing at the right pace over the long-term. So at this point, we're not going to talk about growth plans beyond 2016 and into 2017, other than we do think there's good opportunity there and we're excited about where this can go in the market.

This is an incredibly small acquisition and very small in relation to our overall business, so it won't have a big impact on results in the short-term here. But we think over the long-term, it can be a nice little business in Australia and perhaps beyond. So we're excited about the opportunity there and the integration has gone very well.

Okay, understood. Best of luck in December.

Thank you.

Betty Chen, Mizuho Securities.

Thank you. Good afternoon. Congrats on a nice quarter in a tough environment. I was wondering, Rick, I think earlier you mentioned that you're going to kind of pause in terms of the US store openings and really focus on a lot of the initiatives you outlined. Also thinking kind of related to that, does it give you additional thoughts on sort of what is the right suite size in the US given the omni-channel initiatives and some of the localized fulfillment that is tracking really well, in terms of meeting the customer service?

And then my second question was regarding what you said about some of the year's meeting different cycles. And with 2016 getting some emerging brands becoming growth brands, any kind of insight into what you're thinking about 2017 as we look forward. Thanks.

Great. Thank you, Betty. Glad to spend a bit of time on that data. I think we'll probably spend more time on actually these questions on our March call. But let me just say that I think that as you framed your question, I think you're exactly right that we are like, I think, any retailer, looking at what is the exact right size for the fleet of stores in every mature, and particularly in maturing markets, where we operate.

So I think this is a key question that all retailers are wrestling with. I think the answer is going to be different by retailer because I think each, if you're really doing something unique and special for a group of customers, I think your business and your answer to this will be uniquely different to your needs of your customers.

So we're thinking the same thing. That is why, fundamentally, we're not, I'll tell you, we're not exactly sure what the right size of the fleet is in a mature market at this point. And so that's part of why we say we're going slow down a bit because we really want to spend some time thinking about optimizing in a trade area the right mix between the digital and physical activities that we have in place along the customer journey to capture market share.

So, and I think we are just, we're five or six years in, Betty, to this cycle. I think we have another five years here of a lot of change to take place and I think there are going to continue to be a lot of consolidation that's going to take place. So it's not even that it's just our understanding of the cycle and the things we have to change and that we have to, I think, continually reinvent and we have done a lot of that in our business.

We are doing things completely differently, I would tell you, today than we were doing them six, seven years ago in terms of how the business operates. You're going to see us continue to change all those things going forward, but it's not just what we're going to change internally. It's what the customer is going to demand and it's how consolidation is going take place and shake out over time.

And I continue to think there's going to be fewer retailers in the marketplace as share consolidation continues over the next five years. I think winning retailers who own a larger share clearly have the marketplace and you're going to have to be able to serve customers in all new ways than we are today.

And those are the things that we're working on that we know we can control, that we, like we've talked about are at hyper localized assortments and in-store fulfillment where we're just flat-out faster to the consumer. That's important when you're selling things that a customer really wants and they want it as soon as you get it. They want to be the first to wear it, right -- that item, that brand.

Those things are really important and so those things are the things that we can control, but that we also know that we have to be constantly looking at the marketplace, constantly addressing things that are going to happen. And we have to fine-tune these ideas uniquely to our own business model and the US will lead the way here, but as we mature in Canada, we'll look at, we're going to continue to think about how we would apply that.

And then, of course, in Europe, we have to look at it almost on a country-by-country basis. So I think you're going to see us focus on building out countries. That allows us to build out the omni-channel integrated model with their very strong web business in Europe at Blue Tomato. And so you'll see us roll in things at different times in Europe than we will, than I think we would in more mature markets where we have a good coverage physically in the US today.

So your question is right on the money and I think you're going to see us, that's why we say we're going to pause a bit on unit growth in 2017 because we think there's opportunity and a lot to be learned to optimize the business and to experiment with what is the right thing in each market around the country. And I might even say that, I think we're going to find that there are going to be different answers in different markets around the US as to what the right fleet and the right mix of digital and physical capacities are going to be.

And, Betty, the only thing I would add to that is this is also, we are approaching the range of where we thought we would be, at that 600 to 700 stores when we -- and we continue to assess that with our Board. We do think there's more opportunity for sure, but we're kind of also getting towards the end of what we had mapped out originally.

So we're feeling good about that and I think the last piece I would say is we continue to look at the portfolio of where we can reposition as well. Because there are opportunities, but there's lower performing stores that we'd be able to reposition in markets and see benefits there.

Yes. And then your last question, Betty, relative to 2017, we're actually not going to address that today. We'll hold for that until March. Again outside the comments already made that I tend to think that brands that go from merchant to growth tend to have a longer cycle. Maybe not as long as they did 10 years ago, but they're still multi-year cycles has been our experience.

And again, each brand is unique. Every brand has to do their job too in terms of continuing from the creative aspects of proving their product from that, from the creative point of view and continue to build their brand and their marketing that goes with it. So it's not just what we do together, it's what the brand does on its own to further its position too to maintain its growth profile. So I do believe those tend to be multi-year cycles even in the modern world. So more to come on as we get into 2017.

Okay. A follow-up to, Chris, what you said earlier about even repositioning the stores. Does that also include perhaps change in the type of mall, whether it's A, B or C that you are currently in and moving it to a different trade area that's maybe seeing more of a demographic shift or demand or maybe where you can maximize the rent as well. Like, how should we think about that?

All of the above, really. I mean I think what it comes down to is that when we talk about maximizing any given trade area, there are going to the markets where there is one store in the trade area and that's it. There's going to be markets where there's five or six potential opportunities in the trade area and we've got to pick the best two or three.

So I think it's a combination of both and it's also, it's looking at your portfolio and managing your portfolio on risk as well. Your best centers and your highest performing centers, we're going to be comfortable locking up for 10 years and probably even investing in them if they're great assets to the brand.

And then some of the lower performing stores, we might do shorter leases as we kind of monitoring and see what's happening in each trade area. So it's a combination of managing both and I think there will be opportunities to reposition over the long term and there will be markets where maybe we'll just determine there's too many stores and I think it's going to, we'll take that on a trade area by trade area perspective.

Okay, great. Thank you so much. Best of luck for the holidays.

Thank you, Betty.

John Morris, BMO Capital Markets.

Thanks. Hey, my congratulations too, guys. Really good results in a tough environment. Rick, I don't know that you guys break out the private label mix. You talked a little bit about how margins tend to help. I think you guys have done a great job with private label. Has that mix shifted very much and can you give us a directional feel for where that is and where it might be going in terms of apparel? And to the extent you could give us any color around men's and women's. Thanks.

I'll let Chris answer that here in the numbers, but I'll caution you on our initial answer is again, you have to look at private label on a full 12-month base, John, because of the seasonality and the importance of the holiday season. But we can give you, I think, some directional perspective

Yes and I was thinking about from the annual perspective, yes.

Yes, typically, John, we do come out with this annually. So we will update this obviously at the end of Q4. At the end of 2015, we were about 21% penetration and that was a step up from 14% by about 140 basis points as a percent of our consolidated sales. We've had periods, we went through a cycle in 2012 where it was just a branded cycle and we actually saw private label go backwards as a percent of total sales and so we're going to see that change over time. We may see a pickup in private label over the short-term here based on our international businesses.

Currently, our international businesses have a much lower penetration than private label and that's an offering that we've given to them and they are using what's in what they're selling today and so we expect to see some growth there. But I think it's important. We're a branded retailer and the vast majority of what we do is brands and we've got some great branded partners that we work with and we're really using private label to supplement what we do.

And so I think we will see cycles where that goes up and we will see cycles where that gets a little bit smaller as a percentage of the business. But we've got great brands leading the charge. And I think I would also add to that, you're going to see a different category-by-category.

There are certain categories that have very little, if no, penetration of private label and another places where it just is a bigger piece of what we do. So I think we don't set a mark on where that goes. We just kind of report on what it is and we will see what the customer really wants over the long-term.

Great, thanks. Good luck for the rest of holiday.

Thanks, John.

I'm showing no further questions in queue at time. I'd like to turn the call back to Mr. Brooks for closing remarks.

Thank you, Liz, and again, thank you all for joining us today and for your interest in Zumiez and the great questions. We always enjoy the dialog that we get to have with the analysts in the investor community. So thank all of you. We want to wish everyone a great holiday season personally and individually. And we're going to look forward over the next few months of getting a chance to talk with you about our fourth-quarter results when we talk again in March. So thank you, everybody. Have a great holiday season and hope to talk soon.

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