Zumiez Inc (ZUMZ) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Fourth Quarter and Full Year 2017 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. business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez' filings with the SEC.

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

Hello, and thank you, everyone, for joining us on the call. With me today is Chris Work, our Chief Financial Officer.

I'll begin today's call with a few brief remarks regarding our fourth quarter and full year performance. Then I'll share some thoughts about the future before handling -- handing the call over to Chris, who will take you through the numbers. After that, we'll open up the call to your questions.

We ended 2017 with strong fourth quarter comparable sales performance, which comes on top of a successful holiday selling period in 2016 and represents our sixth consecutive quarter of meaningful positive comparable sales. Our top line results were stronger during the second half of the year despite tougher comparisons as the work we've done to position the company for sustained growth continues to gain traction.

For the quarter, comparable sales increased 7.5%. And while we're excited about our top line performance, there are a number of moving parts in our bottom line results that weren't contemplated when we established our guidance. Chris will walk you through those shortly. Our annual comps were up 5.9%, and operating profit increased 23% for the full year.

These continued strong operating results reflect the significant efforts of our teams to listen to our customer and provide them with a product experience -- and experience that they are looking for. Looking forward, we believe we can continue to expand our market share, accelerate earnings growth and return greater value to shareholders in the years ahead.

Before I hand the call over to Chris, let me outline some of our beliefs about the future of retail. To start with, we believe in a global consumer world. Today's empowered consumers have immense transparency and are driven by trends, brands, price and availability of products around the world. To date, we've established a strategic physical presence in 6 countries across 3 continents, with a digital presence that extends well beyond those boundaries.

In addition, in order to succeed, retailers need to evolve to serve empowered consumers globally and continuously innovate to meet their ever-changing needs. At the same time, we believe in a channel-less consumer world, where consumers do not see themselves as shopping online or in a physical store, but rather with a retailer that they trust, identify and engage with across multiple touch points. To this end, we have made investments over the past several years in our technology platforms to create a seamless shopping experience for our customers, allowing them to purchase what they want where they want and how they want, all with a tailored hyper-localized approach and significantly improve speed through our localized fulfillment initiative, delivering substantially all digital orders through our local stores. With this solid foundation in place, we are well positioned to add new innovation on top of our current platforms.

We believe our consumers want and demand new brands, expecting us to lead on the emergence of new brands and fashion trends as part of their lifestyle community. We have retooled our processes, measures and capabilities in service of our customer who wants to be more self-expressive than their peers. In 2017, we launched over 150 new brands, more than ever before, and are constantly driving for further improvement on this critical front.

We believe that we're entering into a new phase in servicing our customer, moving beyond omnichannel into a new consumer environment with yet higher expectations. While we're not sure what to call this new consumer phase, the new world will be characterized by key themes and words such as trade area, localization, optimization, speed, intimacy, engagement, connection, innovation and community. We have now established a new set of initiatives that will move us into this new consumer phase, which we'll begin executing in 2018 and evolve as we test and learn over the next 3 to 5 years.

One thing that's remained constant among all this change in the consumer world is that underlying every aspect of what we do at Zumiez is our belief in the power of our culture and our brand position. Our brand guides us in all that we do to serve our customer, and our cultural values guide us in how we execute in service of our customer and in alignment with our brand. These beliefs are the primary reason that we're excited about what the future holds for Zumiez. As the consumer world continues to rapidly evolve, we believe we are well positioned to extend our lead in our lifestyle niche by creating unique customer experiences on a global scale. We look forward to capitalizing on the opportunities created by these changes we discuss today to further separate ourselves from the competition and create value for our customers, our employees, our brand partners and our shareholders. It's an exciting time in retail, and we are confident that what we have done for the last 40 years in building our brand and culture will be a significant tailwind for 2018 results and beyond.

With that, I'll hand the call over to Chris for his review of the financials. Chris?

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our fourth quarter and full year 2017 results. I'll then provide a brief update on February before discussing our first quarter guidance and some high-level perspective on how we're thinking about the full year.

Fourth quarter net sales increased $44.6 million or 16.9% to $308.2 million from $263.6 million in the fourth quarter of 2016. Contributing to this increase were positive comparable sales growth of 7.5%, the net addition of 13 stores since the end of last year's fourth quarter, the 53rd week in 2017 worth $10.3 million and the positive impact of foreign exchange worth $5.3 million. Also benefiting fourth quarter 2017 net sales is an adjustment to deferred revenue related to our STASH loyalty program worth $3.8 million.

During the 2017 fourth quarter, we saw an increase in transaction volume, partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction resulted from lower units per transaction, partially offset by an increase in average unit retail. This quarter represented our sixth consecutive quarter of transaction gains.

During the quarter, our men's category was the largest positive comping category, followed by women's and footwear. Accessories was the largest negative comping category, followed by hardgoods.

From a regional perspective, North America net sales increased $37 million or 16.2% to $265.6 million. Other international net sales, which consists of Europe and Australia, increased $7.6 million or 21.7% to $42.6 million. Excluding the impact of foreign currency translation, North American net sales grew 15.8% and other international net sales grew 9.2% for the quarter.

Fourth quarter gross profit was $114.7 million, an increase of $20.6 million or 22% compared to the fourth quarter of 2016. Gross margin was 37.2% in the quarter, an increase of 150 basis points compared to 35.7% a year ago. The increase was primarily driven by 120 basis points of leverage in occupancy, 80 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program estimated redemption rate and 70 basis points of improvement in product margin. These increases were partially offset by a 70 basis point increase in inventory shrinkage and a 20 basis point increase in incentive compensation.

Inventory shrinkage has been difficult for us in 2017. We remain focused on solving this problem, which requires assessing the root causes at the store level. This is an area where we believe we will show leverage in 2018 as we make the necessary improvements needed to drive value.

SG&A expense was $77.7 million in the fourth quarter compared to $66.1 million a year ago. SG&A as a percentage of net sales was 25.2% compared to 25% in the prior year. The 20 basis point increase was primarily driven by a 100 basis point increase related to our annual incentive compensation, partially offset by 40 basis points of leverage in our store operating costs and 30 basis points of leverage across other corporate costs.

Operating income in the fourth quarter of 2017 was $36.9 million or 12% of net sales, an increase of 32.4% compared with the prior year operating income of $27.9 million or 10.7% of net sales for the fourth quarter 2016.

Net income for the fourth quarter was $19.9 million or $0.80 per share compared to net income of $18.2 million or $0.74 per share in the fourth quarter of 2016. In addition to our improved operating performance, there were several factors that shaped our bottom line results compared with last year, which were unanticipated when we last updated guidance. I've already touched on the positive impact of the deferred revenue adjustment related to our STASH program, which was worth $3.8 million or $0.10 per share. On top of this, recently enacted U.S. tax reform benefited this year's results by $0.5 million or $0.02 per share. Offsetting the combined $0.12 per share tailwind from these 2 items was a $0.22 per share of headwinds including a valuation allowance booked against certain deferred tax assets in Europe worth $3.4 million or $0.14 per share, adjustments to inventory valuation and expense accruals in Europe worth $0.05 per share and a $1.2 million of expense impact or $0.03 per share related to asset impairments.

Our effective tax rate for the fourth quarter of 2017 was 46.3% compared with 35.3% in the year ago period. The increase was driven by the valuation allowance booked against certain deferred tax assets in Europe, partially offset by the benefit related to U.S. tax reform.

Turning to the full year results. Net sales for the fiscal year 2017 were $927.4 million, an increase of $91.1 million or 10.9% from $836.3 million for fiscal year 2016. Contributing to the increase were the positive comparable sales growth of 5.9%, the net addition of 13 stores in fiscal 2017, the 53rd week in 2017 worth $10.3 million and the positive impact of foreign exchange worth $6.3 million. The STASH loyalty program deferred revenue adjustment of $3.8 million was also a benefit to the year.

By region, North America net sales increased $73.9 million or 9.8% to $827.8 million. Other international net sales, which consist of Europe and Australia, increased $17.2 million or 20.8% to $99.6 million. Excluding the impact of foreign currency translation, North America net sales grew 9.6% and other international net sales grew 14.9% for the year.

2017 gross margin was 33.4%, an increased 50 basis points compared to the prior year gross margin of 32.9%. The increase was driven by leveraging of occupancy costs worth 80 basis points, 30 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program estimated redemption rate and a 20 basis point increase in product margin. These improvements were partially offset by 60 basis points in higher inventory shrinkage and 10 basis points related to higher incentive compensation.

Annual SG&A expense was $261.1 million or 28.2% of net sales compared to $235.3 million or 28.1% of net sales in 2016. The increase as a percentage of net sales was driven by a 60 basis point increase related to annual incentive compensation, offset by 50 basis points of leverage in store operating costs.

Operating margin for fiscal 2017 was 5.2% compared to 4.8% in 2016. Our 2017 operating profit was $48.8 million, an increase of 22.7% from operating profit of $39.7 million in 2016.

Full year net income was $26.8 million or $1.08 per share compared to 2016 net income of $25.9 million or $1.04 per share. Net income for 2017 was negatively impacted by a valuation allowance booked against certain deferred tax assets in Europe, partially offset by the deferred revenue adjustment related to our STASH program and U.S. tax reform, all previously discussed.

Turning to the balance sheet. Cash and current marketable securities increased 54.7% to $121.9 million as of February 3, 2018, up from $78.8 million as of January 28, 2017. The increase was primarily driven by $65.5 million in cash flow from operations, partially offset by $24.1 million of capital expenditures, primarily related to new store growth and remodels.

During 2017, we added 19 store locations including 12 in North America, 5 in Europe and 2 in Australia. As we have discussed, we are continually evaluating our physical store presence to ensure that we have the right number of stores in the right locations within each trade area. As a result, in 2017, we closed 6 stores, bringing our net store openings to 13 for the year. We ended the year with 698 locations including 657 in North America, 34 in Europe and 7 in Australia.

We ended fiscal 2017 with $125.8 million in inventory, up 17.7% from $106.9 million at the end of fiscal 2017. This increase is driven primarily by the shift in the retail calendar in 2017 and timing of spring merchandise receipts with the 53rd week. When comparing inventory to the same calendar week last year, the week ending February 4, 2017, compared to the week ending February 3, 2018, inventory growth was 8.5%. Other factors contributing to the inventory increase include strong sales trends, 380 basis points impact of foreign currency exchange and increased global store count. We continue to feel confident in the general quality of our inventory. Our aged inventory, defined as inventory older than 4 months, has decreased as a percentage of total inventory from the prior year.

Now to our February sales results. Total net sales for the 4-week period ended March 3, 2018, increased 23.2% to $63.4 million compared to $51.5 million for the 4-week period ended February 25, 2017. Our comparable sales increased 9.2% during the 4-week period ended March 3, 2018, compared to comparable sales decrease of 3.1% for the 4-week period ended February 25, 2017. The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction. Dollars per transaction increased for the 4-week period due to an increase in average unit retail, partially offset by a decrease in units per transaction. During the 4-week period, the men's category was our highest positive comping category, followed by women's, hardgoods and footwear. Accessories was our only negative comping category for the period.

Looking at guidance for 2018, once again, I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin and earnings growth given the variety of internal and external factors that impact our performance. With that in mind, we currently expect that comparable sales will increase between 4% and 6% for the first quarter of 2018, with total sales in the range of $198 million to $202 million. Please note that our monthly sales gains during the quarter will be impacted by the shift in the Easter holiday. We expect the shift to positively impact our March sales and be a detriment to April sales compared with the prior year.

Consolidated operating margins are expected to be between a negative 2.6% and a negative 1.7%. At the high end of our guidance, operating loss would decline approximately 46% from the first quarter of fiscal 2017.

We anticipate our loss per share to be between $0.18 and $0.13 compared to an $0.18 loss per share in the prior year first quarter. The earnings per share guidance is negatively impacted by approximately $0.03 per share related to our inability to recognize a tax benefit on losses in certain jurisdictions within Europe. We expect that the second and third quarter per share will also be negatively impacted. During the fourth quarter, we expect this to be a benefit to our results as we generate earnings in Europe.

Before I wrap up, I'd like to give you a few thoughts on how we're looking at 2018. As we mentioned above, we continue to experience positive top line momentum and believe we're well positioned to grow operating margins and leverage the business in 2018 and beyond. We have now had 6 consecutive quarters of solid positive comparable sales growth, including strong comparable sales growth of 7.5% in the fourth quarter of 2017 on top of comparable sales growth of 5.1% in the fourth quarter of 2016. We have started strong in 2018 with 9.2% comparable sales growth in February and continue to feel that we have some positive momentum in our product offering.

As we look to 2018 and beyond, we continue to believe that the investments we've made in our infrastructure, creating a seamless sales experience for our customers, our unique approach to merchandising as well as those investments we continue to make in the Zumiez team will drive long-term top and bottom line growth. With that in mind, we anticipate that we will grow comparable sales in fiscal 2018 in the low single-digit range.

It is important to point out that the extra week in fiscal 2017 will be a detriment to sales and earnings growth rates in fiscal 2018. The extra week in 2017 is worth approximately $9.1 million or $0.05 per share when comparing to 2018.

2018 represented record product margins in both North America and on a consolidated basis. With that in mind, we are planning product margins to be flat to slightly accretive for 2018.

From an operating profit perspective, we are planning growth in the high single-digit range, despite the headwind of the 53rd week in 2017 previously mentioned.

SG&A is planned to grow at significantly slower rate in 2018 than we experienced in 2017 as we are planning strong expense management across all of our entities and are not expected to have the year-over-year increase in incentive compensation we had in 2017.

From an earnings perspective, we expect to see significant benefits from our planned pretax earnings growth just mentioned and from U.S. tax reform. We are planning our business assuming an annual effective tax rate of approximately 27% for the year, inclusive of the valuation allowance impact.

We are planning to open approximately 13 new stores, including 6 in the U.S., 5 in Europe and 2 in Australia, with roughly half of the openings occurring ahead of the back-to-school season. We expect capital expenditures for the full 2018 fiscal year to be between $21 million and $23 million compared to $24 million in 2017. The majority of the capital spend will be dedicated to new store openings and planned remodels. While our store count growth rate is decreasing in 2018, the related decrease in capital will be offset by an increase in remodels for the year.

We expect that depreciation and amortization will be approximately $26.5 million, in line with the prior year. And lastly, we are currently projecting our share count for the full year to be approximately 25.3 million shares.

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

(Operator Instructions) Our first question comes from the line of Jeff Van Sinderen with B. Riley.

First, let me say congratulations to all your team on the strong results in Q4. Maybe you could just touch a little bit more on Europe, how you're looking at that business, I guess, what you're really most focused on for Europe this year, any new key initiatives, and then overall, what your expectations are for that segment this year.

All right, Jeff. Let me ask -- I'll ask Chris to start with a little bit of background, and then I'll follow up from there. Chris?

Sure. Clearly, Jeff, as we laid out, right, we have had some losses in Europe that have led us to the valuation allowance we disclosed today. I think to grow Europe to what it is today has taken a meaningful investment. And we believe this investment has really put us in a place to capitalize on the European marketplace, including a strong retail network of both stores and web in 3 distinct countries as well as a web platform that we talked about before that is operating across Europe and even beyond and is a pretty sophisticated platform. That said, to date, we have not had the results from investment we're hoping. And we drove this business, with the investments, to breakeven in 2015. But we've retreated backwards the last 2 years, really due to some top line headwinds that have not met our expectation and increased costs to the business. So even as we have -- we've driven positive comps there, we have not gotten to the spot we need to be. But we believe we've got a good path forward in this region. I think we have the team in a good spot to deliver, and we've taken care of some of the challenges that we've had there. 2017 has had -- we had an old-age impact of inventory that we feel like we've gotten a really good spot. As we mentioned in our prepared remarks, inventory consolidated is in a good spot. But that also speaks to where we are in Europe. We're much, much more current than we were 12 months ago. And we've had a couple of impairments there that we've taken as well that have kind of, I think, helped us with some of our underperforming stores. So from a go-forward perspective, the team feels good in their strategies of driving value here over the years to come.

All right. Thank you, Chris. And I guess, Jeff, I'd just add that -- a little bit of even greater clarity around the sales challenges. I think in '15, we talked about the amazing results, which was driven, I think, as many of you know about, a really huge long board trend. And then in '16, it went basically completely reversed. And of course, we were still planning, as Chris said, investing and building the business at that point when sales actually went -- got considerably more difficult relative to what we assumed to be an appropriate pace of growth at that point. So that's kind of led us to where we are today. Now I guess, I'd conclude by saying I believe in our team over there. I believe in our strategies. We're going to execute a lot of the omnichannel initiatives you've seen us do here in the U.S. and Canada. And we know that new markets take serious investment and that we need to give them the time to mature into those investments. And I can tell you that -- Canada is running a few years ahead of Europe in their pattern. And we feel that we've reached a point in Canada where we really have a sustained, profitable platform. And that's my expectations for what we're going to do in Europe. And I know the leadership team over there is committed to doing exactly that.

Okay, that's really helpful. And then can you talk a little more about your latest thoughts on the evolution of brands that have been leading for you? I know you introduced more than 100 new brands in 2017. Just wondering if you anticipate a changing of the guards, so to speak, on which brands will lead the charge for you this year versus last year. And then if you could update us on your thinking about your footwear segment, which I know historically was a larger segment for you, and that one has started to turn positive. Maybe you can just touch on recent improvement there and the prior penetration, remind us of that, and what the current penetration is in footwear.

All right. Great, Jeff. Glad to do so. And again, I'll just remind everyone that our brand pipeline, like we've talked about the 150 new brands in our comments about -- that we've launched this past year, which was an all-time high for us, in that I think that the team is very excited about it. But these are the brands that we expect will be important to us in 3 years from now. And so this is why I think it's -- with our business, it's important to understand the stage of brand development as we work through it. And so really great news, right, that we've got such a big pipeline. There's certainly not a lack of brands that are being started and emerging into the marketplace. And so that's a really exciting thing because I think, as I said, our customer expects us to deliver newness, unique assortments and new product to them. And I think we're in a great spot for that with this whole idea of individuation and everyone having their own personal, customized kind of point of view. But -- so let me -- with that as an intro, let's -- I'll turn it over to Chris, and he'll give you some of the stats around how we've been thinking -- some of our traditional stats, Jeff, that we kind of share on an annual basis with the investment community. Chris, you want to take it from there?

Sure. Yes. As we look at 2017 as compared to 2016 and just how our brand portfolio's performed, one of the things we've shared with you guys is kind of how the top 10 and the top 20 brands have looked. And overall, we have seen some consolidation in the top 20 external brands here at Zumiez. But we continue to see that turnover that we actually think is probably appropriate for the business of 10% to 20% here of the top 10 and 20 brands turning over each year. So we seem to have kind of some healthy rhythm within the brands. We've talked really since June of 2016 about 3 brands that were kind of coming on and how they still had growth. Those 3 brands individually -- those 3 brands collectively represent 10% of our total sales, which is actually I think a good stat when we think of kind of the peak brands reaching between 6% to 9% individually. So we still feel good about those 3 core brands we've talked about, plus some of the more heritage brands that have filled in around it. And I think the overall brand structure is pretty healthy. As we mentioned in our prepared remarks, this was all-time highs for us from a product margin perspective, too, which is worthy of a call out, specifically in light of the fact that we're truly in a branded cycle and have seen our overall private label penetration decrease as a percentage of overall sales over 300 basis points. And that's not -- and I think our private label teams are still doing a fantastic job. I just think it's a -- it speaks to where we are in the cycle. And then obviously, being able to still drive product margins to all-time highs is a testament to our product team. So we feel pretty -- that the brand mix is still pretty healthy for where we're at today.

Yes. And again, that's one of our calling cards, Jeff, is this broad diversity in the mix. And that's why, again, as I talked about in my intro comments the new measures we put in place, the fact that we're being, I think, very disciplined about talking about the brand pipeline now more than ever in this process. And as Chris said, we're always about doing what's right for the customer in terms of sales and what they want. And that's why it's a pretty dramatic shift in private label. And I'm really proud of our product teams that we're at this point where we still got peak product margins even with a decline in that -- a significant shift in our -- a decline in our private label volume as an overall part of our mix. So suffice to say, I think we're feeling good about where we're at on the brand cycle, the brand pipeline. Let's talk about footwear a moment, and I'll ask Chris to share some of the percentages with you here in a moment, Jeff. But footwear, what I would tell you is yes, we're very excited that it's positive here over the last couple of months because, obviously, we've had a long struggle with footwear for a number of years. But I guess, I'd still characterize it -- I don't -- as we're kind of bouncing off the bottom. And we're happy about it. Don't get me wrong. We're happy to be -- we're always happy to be positive. But I'm still not sure where footwear is going from a trend perspective, and I don't think that's clear in the marketplace yet. I think that's still being sorted out. So while we're running positive at this point, we're also testing a lot of different ideas in footwear, from working on things that we believe are trends that we can play in the footwear world to looking at new brands to size, how we think about how we carry the depth in various sizes by brand, by location, the mix of women's and men's. We're experimenting with all these things in all these fronts because we would like to see footwear keep going. But again to me, it's still -- I don't -- I'm not sure this is a clear pattern yet. And I'm happy it's up, but I'm still -- don't -- I'm still not as confident, Jeff, that I'd say we have a clear pattern to move forward. Chris, you want to share some penetration numbers?

Sure. Yes. This is our first quarter of positive in men's -- or in footwear overall since Q4 of 2012. And in 2012, footwear as a percent of total business represented 22% of the business. And now as we've closed out '17, it represents 16% of the business. And I'd just add to Rick's point, despite what we've seen happen in footwear, we still been able to run positive comps here, and I think that also speaks to the model, too. And so we definitely are happy that it's up, but I think we're more happy in the overall number of running up 6%.

Yes. I'm happy to help customers, Jeff, any way they want to be helped. If they want to spend all their apparel dollars with us, I'm pretty thrilled to help them do that. And again, as Chris said, I think this is the strength of our model: the broad category selection across multiple departments and, of course, the broad diversity of brand presentations. And it's a strength of our model. It's a strength of where I think the modern consumer world is. And so it's -- we've managed through a tough footwear cycle. I think of -- particularly, we're seeing that we can come out around the other end when footwear cycle becomes less clear for everyone, I think we win in some of those dollars.

Okay, that's really helpful. You guys have done a terrific job managing brands. And at some point here, I'm sure we'll see the next trend in footwear.

And our next question comes from the line of Sharon Zackfia with William Blair.

So a couple of quick questions. I guess, Rick, what you had talked about at the beginning was very helpful in terms of how you're kind of evolving the thinking of the business. I guess, I'm trying to think about that more quantifiably on our end. So if you think about the different growth trajectories of the business, is there any way you can bucket where the growth comes from primarily in the next 2 to 3 years versus the next 3 to 5 years, and then kind of translate that into any kind of revenue or bottom line targets over that time frame?

Awesome. Thank you for the question, Sharon. I don't think I'd be willing to do that on phone calls, Sharon, just so -- I say that because, obviously, you know we're modeling over our 5-year windows and we're looking at all these patterns. And so I'm not ready to go into that far out depth outside of the guidance, I think, we've given for 2018. But maybe I can share a little bit more about my thinking. Maybe that will help us as we think about kind of some of these directions that I kind of gave you at the top. So I talked about a group of things, the kind of beliefs we have and where the growth is going to come from, Sharon. So it's definitely this belief that there's this global consumer world, that we have a channel-less consumer, that we're serving that consumer who wants to be more self-expressive than their peers. And I think that is, again, what an empowered -- being an empowered consumer is about for our particular customer. And then this new phase, I think, that we may be moving in. So what I'd tell you is there's probably not much new in terms of -- there's not news about the global consumer or the channel-less consumer or our unique position around how special our assortments have to be in this world to serve this -- our unique target customer. But I think I can share with you -- maybe this will help you some as you think about it. I think in each of those I can share with you a bit, where we actually have evidence that what we've been doing has been working. So in the case of the global consumer, our belief that our consumers -- that all consumers today are global consumers, we have brands as well as trends that are already flowing, Sharon, across the oceans for us and working on multiple continents. That includes growth brands, it includes fashion trending brands and it includes, again, brands and trends flowing in multiple position -- multiple direction. This is not just new brands going from North America, Europe and Australia. It's European brands flowing into our North American stores and Australian brands flowing into our North American stores. So I think this -- we -- is -- and these are not insignificant numbers that we've been talking about going in this direction. So this is part of, I think, how we have to think about serving this customer. They expect us to be this. It's the power social media and their desire to choose what's unique for their own thinking. So this positioning long term is really important. The second thing, I guess, I'd talk about this idea of the seamless, channel-less consumer experience. And as you know, we spend a lot of time innovating around how we have executed in the omnichannel world. And I would tell you that our business model today is an integrated channel-neutral platform. And giving you an example of this -- a few examples of this is when our web business grows digital sales today, we're now able to lever physical store -- our physical store cost structure. And I'm not sure a lot of retailers can say that. But to me, this is one of the measures of what do you mean when you say you have an integrated, seamless experience, right? You have to integrate it into everything you do just in the service of customers. And of course, our store teams and digital sales teams, they all work as an integrated unit now, looking at all the touch points and how we can best drive consumers to whatever channel the empowered consumer prefers. Probably the easiest example, Sharon, I can give you of evidence here about this idea of how we've created this kind of new integrated business model is localized fulfillment. So through localized fulfillment, and in particular our order-routing algorithms, we now levered store payroll and our other store cost structures in 2 successive holiday seasons. And when I hear a lot of retailers talk, they talk about how a significant growth in web revenues is deleveraging their business. We've got an integrated model that allows us to -- where we can lever that idea of web revenue over our fixed store cost basis. So this is really what we're trying to get at when we do this. And some of the evidence is -- I think that's one of the easiest way to see the evidence. There are others, too. So we're able to leverage that store cost basis. And even more importantly, I think we're dramatically improving our speed to customer because, again, I think speed is one of these key things customers want. I've already talked about uniqueness of brands. We've talked about all those brands in the brand pipeline. I feel great about that. And again, there are some of that I would tell you that's a cyclical process, like when people wanted to spend all their money on footwear and it was all on athletic performance footwear, that was tough for us. Now we're cycled back to the areas, I think, we can have longer-term runs on. And so some of it is cyclical. But again, a large part of this, Sharon, is this retooling of our processes and measures and new capabilities that our product teams developed to put more uniqueness within our localized assortments. And they've done that over the last 3 years. So to a large extent, the success is due to the fact that our customers expect this from us, and we are delivering on that. And that's also, I think really great for emerging brands. And that's why we're attracting emerging brands because our -- we have that customer that needs them. It's also why emerging brands are attracted to Zumiez because we're serving our mutual customer here, too. So I feel good about that. And all areas I still think we have a lot of room to improve, Sharon, in those first 3. I think one of the most -- the last thing I talked about was this idea that a belief we have that we're entering a new phase of consumer world. And I guess, what I'm really saying is, I think, it's now time to move beyond this omnichannel mantra that -- omnichannel is like 2010 talk at this stage of the game. If you haven't got there now, I think you have a big problem. And I'm telling you, we've got there and built a whole different kind of business model at this point of where we're at. So I think this new phase is going to be really a fun and challenging phase. I don't think there's many players that can play at it, and I think we're one of the few that can. And then we shared some of those words, we think, that will kind of guide us, like trade area, localization, optimization, speed, intimacy, engagement those kind of words, innovation community, I think, that we'll guide us on this. But it's now time, as you know us, we're not -- we just don't want to talk about, we're going to start doing. So we've got these new initiatives, Sharon, that we're going to start developing and testing some of these ideas we have about this new consumer phase. I'm not going to share with you exactly what each of those initiatives are. But I will give you a little bit of just -- a little bit of context about them. One of them is involved -- involves targeting specific processes, I believe, that we have to reengineer to serve this -- a different kind of consumer experience. And that will be -- that will actually touch on multiple levels of the business. Another one is going to involve a detailed assessment of -- another one of the initiatives will involve a detailed assessment of all of our consumer experience at each consumer touch point. And the last initiative is really focused on improving speed and lowering costs, again, across multiple fronts on the business. So I guess, what I would tell you is if you buy what I'm seeing in the marketplace, I think we have -- I think we already have a unique product position. I think trends are moving our direction. And I think we can move further ahead of our competitors now as we begin -- I think a lot of our competitors are still working on omnichannel. We're going to start working on what we believe is a whole new engagement -- level of consumer engagement. And yes, we'll certainly do some omnichannel things. We know we have some things we can do there in terms of improvement yet, but we're going to move on to, I think, some even bigger ideas about how we can drive sales consistently over the next few years. And I guess, the last thing I'd say that it's very important to me that everyone puts the context of -- when we make these comments, they put it in the context of just how important our culture is and our brand is in driving these things. Everything we're going to do is going to be done through the guiding lens of our brand positioning. And everything we do will be -- the how we do it will be guided by our cultural values. And those are the 2 things that in a rapidly changing consumer world that just are never going to change. So I guess, those would be -- while I'm not willing to get down to specifics, Sharon, I think that's something that Chris and I would actually like to do at some point over the next couple of years in working through this with the investment community. But these are the reasons, I think, we feel pretty excited about where we're at. These are the reasons, I think, that we can have a tailwind behind us as we look into '18 and into the next couple of years.

Okay, that's helpful. I look forward to hearing more about how that kind of all come together. Because I think people struggle a little bit with 600 stores now in the U.S., kind of what the next 5 to 10 years look like for Zumiez and what the growth path is. So when you're comfortable kind of specifying that, I think that would be helpful.

And again, I'd just put it in the context of, your last comments there, Sharon, the concept of trade area. And we want to capture all the volume in a trade area. As we've said many times, I don't care what the number of stores is. I just want to get it all. And I think one -- this is one of the new ways of thinking about in consumer engagement is how do we do that, that will both maximize the top line and optimize the business. So you see some of the words start to come alive, I think, in terms of how we think about what we're going to do in service of customers.

And our next question comes from the line of Janine Stichter with Jefferies.

We just wanted to follow up a little bit on some of the gross margin puts and takes. You're assuming a low single-digit comp for the year. So would that assume some deleverage on occupancy? I think in the past, you've been leveraging at about 3%. And how do you think about that sitting with kind of some the other gross margin inputs, such as merch margins and then including shrink and also fulfillment costs? It just sounds like it should continue to be a source of leverage.

So yes, just to clarify, you're speaking to 2018, correct?

Correct.

Yes. I'll just kind of high-level talk about how we're thinking about 2018. To your question, yes, we said we think we can grow sales in the low single digit and grow operating profit in the high single-digit range. So inherently, we're going to see some leverage throughout the P&L. From a gross margin perspective, we're planning product margins -- again, we ended 2018 at an all-time high. So we're kind of planning those flat to slightly accretive for the year. In relation to occupancy and some of the other areas there, I think that's an area we can probably get leverage on in a low single digit or at least whole ground on a low single-digit comp today -- in today's environment, so that item specifically. But we're really trying to push the business up and down the P&L to make the right investments that we believe we need to make for the customer experience, but while also really trying to hold costs in other areas. And we have split this business really into kind of our mature market, which is our North America markets here in U.S. and Canada where the focus is really on how do we localize our sales efforts and really optimize the cost structure. And then we have our maturing markets that are in growth mode in Europe and Australia that take some investment to still build out the customer platform. But we need to do it in a smart way while we grow the business. So we did mention in our prepared remarks that we expect SG&A is going to grow significantly lower than the prior year. And as you know, 2017, we had to -- we were able to, based on our results, fully fund our incentive programs. And we laid that out in the impact on 2017, which is worth $5.5 million. We don't expect that at this time, based on these results, to be funding that at a further level as we move into '18, obviously unless we significantly exceed what we've laid out here today from a concept. So I think, overall, this is kind of our next stage as we believe of really building, growing the top line and being really responsible about how we build expenses. And so we are expecting leverage over a variety of different categories, which inherently get you to the -- at the low single-digit comp on the top line with a high single-digit operating.

And our next question comes from the line of Jonathan Komp with Baird.

Okay, great. I want to follow up first on the comps guidance for 2018 up low single digit. It doesn't sound like there's any specific reason to expect a material slowdown from what you're running, and I understand kind of planning the business appropriately. So I just wanted to maybe clarify the different areas of thinking behind projecting low single digits for the year.

Sure. Jonathan, how I would look at this is as you look at the cadence of 2017, we had more opportunity in the first half of the year than second half in regards to just current trends. And I would tell you, our visibility for the next 3 months is always going to be clearer than the next 12. So at this point in time, as we're looking at the business, we feel good about how we started the year. We feel good obviously -- we've given guidance here 4 to 6 comp for the first quarter. And our goal is always to going to be to drive past that, but we will come up on tougher trends as we move through the year. And so as we've provided some color on the year, we're planning the business a little more conservatively as we move to the back half and come up across what is now multiyear trends. Now our goal will be to beat that. And over our 40-year history, we've had a good history of doing that year over year over year driving comps. So that's what we're focused on. But as we think about the year and planning purposes, we're targeting kind of that low single digit at this point.

Okay, great. And then to the extent you were to overdeliver on the sales, are there incremental investment areas that you might overinvest and kind of reinvest some of the upside? Or how would we think about the flow-through in that scenario?

Well, I mean, I think kind of tying back to the prior conversation, I mean, one of the challenges we had in 2017 on a strong sales performance is funding things like the incentive. And then clearly, we've had our challenges, as we've disclosed here, with things like shrinkage and items like that. So our target as we move into 2018 is to make gains on some of the areas where we've had challenges like shrinkage. And we don't have planned in the increases in incentives by any means that we did in 2017. So I would expect us to have good, solid flow-through on any exceeding of the low single digit, just like we have historically. We don't see any significant headwinds that would cause us to not get the flow-through on increased sales performance.

Okay, great. So then my last question, really a bigger picture margin question. I know you were discussing the fact that the incremental sale if it comes -- regardless of what channel it comes, it's not necessarily deleveraging your fixed costs. And I'm curious now if the sales have come back because, certainly, the operating margin back in time has been a lot higher. I think you're in the mid-single digits now. And it's been even in some years double that, looking back historically. So I'm just curious how you think about the longer-term margin structure of this business and kind of how much you should be recapturing.

Yes, yes, it's a great question. And what I have told people, obviously, I think a lot of retailers had a little bit of a reset here. There is -- retail has become more challenging. There's a lot more price transparency across retail. And it is just a more challenging environment, which has taken some of that operating profit out for pretty much everybody across retail. So now as we look at kind of coming back from really what was our biggest challenge years of 2015 and 2016, we're really focused on growing the top line and growing the bottom line and really focused on growing the bottom line faster than the top line, as indicated today in our guidance. So we used to say that we thought this would be a business we could get operating margins to the low teens. I don't think we believe that in today's environment. Things could obviously change in the future. But this is a business that we're driving to get operating margins into the high single digits. That's really our focus and our path here as we roll forward. And I hope what you're able to see from us is that we can continue on with this pattern of growing sales and growing earnings faster than sales. And if we're able to do that over the years to come, I think that's what you should expect from us.

And I don't think, Jonathan, it would necessarily a straight line. We all worry about a recessionary period, and I still think there's a lot of consolidation to go within our niche. And -- but as you span that over a long period of time, I think those things are all things that will benefit us over our long-term planning. So I would love to have greater consolidation in the marketplace. I love them rationalize the market. And to where we can do it, we really do well, like peak product margins, full-price selling, full-margin selling. And so this is -- I agree with Chris. I think we have confidence that, over a period of years, we can get to a high single-digit operating margin, which would be great from where we're at today. And I'm hoping that -- and when we do that, we will own more dollars in the marketplace through consolidation and rationalization in the marketplace.

And I'm showing no further questions at this time. So with that, I'd like to turn the conference back over to CEO, Mr. Rick Brooks, for closing remarks.

Thank you, Andrew. And I guess, I just -- a quick thanks is what I'd like to offer here. Thanks to all of our shareholders and investors who have been patient with us. And I'm hoping we're going to have a great year here in 2018. Thanks to all of our Zumiez staff members across the country for their great work and, of course, thanks to our brand partners for their support in what we do and all of our loyal customers out there. We really always appreciate your support, and we're looking forward to a great 2018. Thank you, everybody.

Ladies and gentlemen. Thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.