Zumiez Inc (ZUMZ) 2019 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Third Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) Before we begin, I'd 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 will now turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead.

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 third quarter and holiday performance to date. Then I'll share some thoughts about the future before handing the call to Chris, who will take you through the numbers. After that, we'll open up the call to your questions.

The third quarter represents our fourth consecutive strong back-to-school season and the 13th quarter of positive comparable sales gains. We drove solid full price selling in each of our geographies, resulting in a comparable sales increase of 5.5% versus our guidance of 2% to 4%. This comes on top of a 4.8% gain a year ago and 7.9% gain the year before that. We're very pleased with our performance and our team's meticulous focus on providing high-quality service to the customer through every touchpoint. It is this focus that allowed us to convert mid-single-digit top line growth into a significant improvement in profitability.

The sales gains, coupled with growth -- gross margin expansion and the benefits from numerous expense saving initiatives we've implemented throughout our organization, drove a 37.1% increase in earnings per share to $0.75, which is $0.14 above the high end of our guidance range. Our relentless attention to serving our customers, combined with the powerful operating model we built around a single cost structure, has fueled our strong track record of performance and has Zumiez well positioned for continued success. This includes the fourth quarter, which has started well, with quarter-to-date comparable sales measured through Tuesday, December 3, 2019, increasing 3.3% compared to the same period last year ending Tuesday, December 4, 2018.

As we reflect upon the strong results in the first 9 months and full year outlook, we're reminded that our short-term results are directly attributed to the execution of our long-term strategies. For Zumiez, our long-term focus remains squarely on continuing to execute the customer-centric growth strategy that the company has been building and evolving over its 40-year history. Many of the key elements of our strategy haven't changed over the decades where others have been refined to reflect the impact of technology on consumer purchasing behavior.

Before I hand the call over to Chris for a review of the numbers, let me expand on the key elements of our long-term strategy. It starts with having the right product and brands that our customers are looking for with an engaging customer experience. Our product selection made up a distinct mix of leading and emerging brands that are not broadly distributed. All the years, we've been able to consistently achieve this balance through strong relationships we forge with our brand partners, and more recently, our global reach that allows us to serve both our customers and brand partners at heightened levels.

This includes clearly articulating our culture-driven lifestyle brand position and showcasing our ability to connect with the target audience in authentic, engaging environment that is uniquely curated by our people all the way down to the local level. Over the years we spent significant time and resources improving our localized merchandise assortments through investments in our people and technology that enhance the customer experience at each touchpoint.

Our teams across organization put a significant amount of effort into understanding our customers not only today but how they continue to evolve and what will be important to future generations. This thinking is embedded in our culture and is reflected in who we hire and how we operate. These teams are in tune with the local and national trends, are important to our customers and can speak to them across all of our channels. This approach allows us to serve the customer in an authentic way, bringing all the touchpoints together through the customer journey.

The next factor critical to our success is speed. With the proliferation of digital capabilities, the speed of commerce has changed dramatically in recent years. We're already faster than most of our competitors as we have the ability to deliver all-digital orders out of our stores. This concept allows us to get product into the customer's hands faster by cutting down the shipping distance and also providing a stronger and more relevant product offering in stores. Looking ahead, we're going to get faster in every aspect of serving and meeting customers' needs than we are today through enhancing localized assortments and our ability to get to know the customer more intimately through improved digital interactions and enhanced in-store experiences.

Finally, growing internationally has allowed us to identify consumer trends that emerge locally and grow globally and to achieve the scale necessary to work together with our brand partners in serving our customers around the world. Our expansion has established a strategic physical presence in 8 countries across 3 continents, with a digital platform that allows us to reach even further. We're applying learnings and best practices from each of our markets to ensure that we are on top of the latest fashion trends and brand cycles, which can now launch from anywhere in the world and quickly spread globally due to the proliferation of smart devices and social media.

Our international business is primed for future growth and through exporting our operating model. We are taking our processes and tools from the more mature U.S. operations and seeing good results internationally. In the third quarter, our businesses in Europe and Australia again performed ahead of the consolidated comparable sales growth. With the strong comparable sales, margin growth and overall store growth year-to-date, we have seen improved operating performance as well. We're excited about the progress being made by the Blue Tomato and Fast Times teams and continue to build upon the benefits of a globally integrated business. We are the only retailer in our lifestyle niche that can offer our brand partners global reach in major markets that meets consumer demand.

With regard to our financial model, we believe 2 key factors have contributed and will continue to contribute to our ability to drive improved results over the long term. First, as a lifestyle retailer, we have built our business to be exceptionally nimble, continuously evolving with customer trends and preferences. The capabilities we've built continue to provide us with a defensible strategy in maintaining and growing share with our segment of the lifestyle market that seeks to be unique and different. The first 9 months of 2019 is a great example of this as we saw a category shift in our business globally, with footwear and hardgoods leading the comparable sales trends, while men's and women's apparel have posted softer results. This is a meaningful change from 1 year ago when we saw the apparel categories driving our positive comparable sales.

Overall, the goal continues to be selling at full price and full margin while listening to the customer with regards to the categories and brands they want to see at Zumiez. This focus has resulted in growth of comparable sales in 34 of our 40 years and is something that we believe will continue to be an advantage into the future.

Secondly, as we transitioned into the digital age, we have done a tremendous amount of work, creating an operating model that positions Zumiez to win with today's empowered consumer by combining our digital and physical sales channels to work seamlessly in service of the customer. With one inventory that is accessible from all customer touchpoints, localized fulfillment, integrated sales teams aligned goals and our strong cultural values, we are well positioned to scale the business in today's integrated world. This strategy directly contributed to our 2018 results as we increased operating profit by 25.3% on a 5.5% growth in revenue for the year. And we've continued that trend into 2019, delivering operating profit growth of 58% through the first 9 months of 2019 on sales growth of 4.6%.

I'll leave you with this. By staying true to our customer, culture and brand with an intense focus on long-term results, we've consistently outperformed the competition and strengthened our market position. It is these thoughts that drive our long-term planning and feed the blueprint for our current year success. We've established a platform for growth based upon a strong culture and brand that we are confident will support continued growth and increase shareholder value well into the future.

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

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our third quarter 2019 results. I'll then provide a brief update on the quarter-to-date sales trends before discussing our fourth quarter guidance and our updated perspective on the full year.

Third quarter net sales increased $15.2 million or 6.1% to $264 million from $248.8 million in the third quarter of 2018. Contributing to this increase were positive comparable sales growth of 5.5% and the net addition of 15 stores since the end of last year's third quarter, partially offset by a decrease of $1.4 million due to changes in foreign currency rates. During the 2019 third quarter, our comparable sales were driven by an increase in transaction volume as well as an increase in dollars per transaction. The increase in dollars per transaction resulted from higher units per transaction, partially offset by a decrease in average unit retail.

During the quarter, the hardgoods category was our largest positive comping category, followed by accessories, footwear and men's. Women's was our only negative comping category. From a regional perspective, North America net sales increased $11.9 million or 5.3% to $238.5 million. Other international net sales, which consist of Europe and Australia, increased $3.3 million or 14.8% to $25.6 million. Excluding the impact of foreign currency translation, North America net sales grew 5.4% and other international net sales grew 19.8% for the quarter.

Third quarter gross profit was $94.6 million, an increase of $7.7 million or 8.9% compared to the third quarter of 2018. Gross margin was 35.8% in the quarter, an increase of 90 basis points compared to 34.9% a year ago. The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, 30 basis point improvement in web fulfillment, distribution and shipping costs and 20 basis point improvement in the write-off of excess or slow-moving inventory. Product margins were flat during the quarter despite unfavorable mix shift across categories and geographies.

SG&A expense was $70.3 million in the third quarter compared to $68.5 million a year ago. SG&A as a percent of net sales was 26.6% compared to 27.5% in the prior year. The decrease was primarily driven by 100 basis points of leverage in our store costs, including 30 basis points of depreciation. Operating income in the third quarter 2019 increased 32.2% to $24.3 million or 9.2% of net sales compared with the prior year third quarter operating income of $18.4 million or 7.4% of net sales.

Net income for the third quarter was up 38.7% to $19.2 million or $0.75 per share compared to net income of $13.8 million or $0.55 per share for the third quarter of 2018. Our effective tax rate for the third quarter of 2019 was 25% compared with 26.5% in the year ago period. The decrease was primarily due to a reduction in net losses in certain jurisdictions, which are excluded from our estimated annual effective tax rate due to the uncertainty of the realization of deferred tax assets and the proportion of earnings or loss before income taxes across each of our jurisdictions.

Turning to the balance sheet. Cash and current marketable securities increased 39.7% to $178.6 million as of November 2, 2019, up from $127.9 million as of November 3, 2018. This increase was primarily driven by $77.6 million in cash flow from operation, partially offset by $19.2 million of capital expenditures primarily related to new store growth and remodels. We ended third quarter 2019 with $183.4 million in inventory, down 1.9% from last year. Excluding the year-over-year impact of foreign currency translation, inventory declined 1.4% from the prior year.

Now to our recent sales results. Our comparable sales increased 3.3% quarter-to-date through December 3, 2019, compared with the prior year quarter-to-date sales results through December 4, 2018. We have provided this comparison for 2019 due to the timing of the Thanksgiving holiday shift. The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction. Quarter-to-date, dollars per transaction increased due to an increase in units per transaction and an increase in average unit retail. Quarter-to-date, the hardgoods category is our highest positive comping category, followed by accessories and men's. Women's is our largest negative comping category followed by footwear.

Looking at the guidance for the fourth quarter of 2019. 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. With that in mind, we currently expect that comparable sales will increase between 2% and 4% for the fourth quarter of 2019, with total sales in the range of $314 million to $320 million. Consolidated operating margins are expected to be between 12.5% and 13%, and we anticipate earnings per share will be between $1.26 and $1.32 compared with last year's earnings of $1.18.

Now I want to give you a few updated thoughts around 2019, given our performance year-to-date. We are now building on 13 consecutive quarters of positive comparable sales. As we look to the fourth quarter of 2019 and beyond, we continue to believe that we've made -- 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're updating our annual expectation for consolidated comparable sales growth to be approximately 4% compared to our previous guidance for comparable sales growth to be between 2% and 4% for fiscal 2019. In fiscal 2018, we achieved peak product margins, improving from the previous high point in 2017 despite a heavily branded cycle, resulting in reduction of private label share of 370 basis points. In fiscal 2019 to date, we have also experienced mix shifts that have impacted margin. These mix shifts include our category sales trending towards hardgoods and footwear, which have lower product margins in the apparel categories, as well as higher top line growth in our international businesses.

While international product margins continue to grow and have additional opportunity, they are currently lower than our U.S. operations based upon where those businesses are in their life cycle. For 2019, we expect product margin to be down between 10 and 20 basis points from the prior year, consistent with our Q2 earnings call update.

We continue to manage costs across the business, with the more mature concepts in North America focused on leveraging at a low single-digit comparable sales growth. Internationally, we're focused on managing costs well within the current sales and unit growth rates and driving our concepts closer to breakeven, reducing the impact of the losses on the overall business. We currently anticipate year-over-year operating profit growth of approximately 25% to 30% for fiscal 2019. We are currently planning our business assuming an annual effective tax rate of approximately 26% compared to our prior year rate of 27.5%. And diluted earnings per share for the full year are now expected to be between $2.38 and $2.46, up from our previous guidance of $2.10 to $2.20, representing year-over-year growth between 33% and 37%.

We have opened 15 new stores in 2019, including 5 stores in North America, 7 stores in Europe and 3 stores in Australia. There are no further store openings planned during fiscal 2019. We expect capital expenditures for the full 2019 fiscal year to be between $19 million and $21 million compared to $21 million in 2018. The majority of the capital spend is dedicated to new store openings and planned remodels. We expect that depreciation and amortization, excluding noncash lease expense, will be approximately $25 million for the year, down approximately $1.6 million from the prior year. We are currently projecting our share count for the full year to be approximately 25.5 million shares. Any share repurchases during the year will reduce our share count from this estimate.

And lastly, on December 4, 2019, the Zumiez' Board of Directors approved the repurchase of up to $100 million of our common stock. This repurchase authorization replaces the previously approved $75 million repurchase program and is expected to continue through January 30, 2021, unless this time period is extended or shortened by our Board of Directors.

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

(Operator Instructions)

Our first question is from Sharon Zackfia from William Blair.

A couple of questions on well, I guess, most obviously, on the rate of SG&A growth, which has been really, really low in terms of dollar growth through the first 3 quarters but you're driving kind of the mid-single-digit sales gains. And I know, Rick, you alluded to this some in the prepared commentary. But how do we think about SG&A going forward? I mean is this kind of the new normal where you can grow SG&A at a low single-digit percentage rate? Or is there something unusual this year that you're really harvesting and then it will tick up again in future years?

Sure, Sharon. I'll go ahead and take that. So thank you for your compliments on our SG&A growth, we're pretty happy about it as well. This has been a big effort of ours as we've been thinking about the business over the last couple of years and setting goals really by entity and how we're planning the business. And as we think about 2019 and how we've exited the last couple of years, I think that the one benefit we've had in growth rates, last year, we performed pretty well. The year before that in 2017, we did as well. Throughout that time, we were growing the incentive pool and we've got that kind of to that targeted level and beyond.

And so there is a benefit in incentives to a modest amount in how we're planning 2019 right now. So that's 1 area. But beyond that, it's really strong expense management across all of our entities. This is something, again, we kind of talked about in our long-term planning of how do we think about SG&A and really all costs to really try to optimize the business. And it starts with some of the things Rick talked about, as we've talked about localization and how we're thinking about 1 sales channel. And we've really tried to break the business apart and say the customer only sees us as 1 sales channel. We don't need to see our cost structure as 2. And so fulfilling from stores and the way we've been able to ship closer to the consumer, all of those things have been benefits to our overall business.

That being said, we've had many other areas within SG&A, just in our management of store wages, how we've looked at store operations and the management of store costs. We've really kind of gone back and looked at our web businesses across all of our entities to say where can we optimize some of the cost there, and of course, attack some of the areas of corporate SG&A as well. So all of those are contributing to what we're seeing on the store growth.

From a store growth rate, I think -- I'm sorry, from an SG&A growth rate, I think what you should expect from us going forward is we're going to really work diligently to plan it at a rate below sales. And domestically here, we're looking at low single-digit comp plans and trying to plan SG&A to grow below that. And internationally, obviously, the growth rate from stores and top line is going to be higher based on the opportunities there. But again, we're trying to manage SG&A very, very tightly to keep that SG&A rate pretty meaningfully below the sales rate of growth to really drop through that profit to the bottom line.

So really happy with where the rates stand for 2019. I don't think it's a direct straight line into 2020 and going forward. We'll probably see a little higher rate of growth but plan that rate below sales.

And Sharon, I could add to that, that I don't want you to think that this is a cost-saving push. We're making investments in our business too about things that we think are going to drive long-term results simultaneously, as Chris has laid out, our ability to think about this concept of trade area, optimization of trade areas, the importance of refined localized assortments, as we mentioned in the comments, and how we are able to lever labor in new ways in a single cost structure world.

There are a lot of initiatives how we're going to react with our consumer over the next few years in all sorts of different ways, being more highly relevant to them. I think that will continue to drive this. So I don't want you to think that this is really about cost savings on one side. This is really about optimization of the business, why we're investing for the future at the same time.

Okay, that's helpful. And then on merchandise margin or product margin, I know you've kind of had that slightly negative guidance all year, but it's been kind of slightly positive through the first 3 quarters. So I guess that means we're going to have all of that happen in the current quarter. Is that really more geographic because of the kickup in international in the fourth quarter? Or is it more the category mix?

Yes, it's definitely -- as it relates to the fourth quarter -- and we have been up and down. We were a little bit up in product margin in Q1, down in Q2 and relatively flat in Q3 here. So as we think about Q4, international is just a larger portion of the business. So that is going -- the mix shift to international is going to have a bigger impact into the fourth quarter. But the growth is, as we've really reported all year, in skate hardgoods predominantly but also footwear has been pretty phenomenal. And so that mix within categories is impactful as well. But to your question, international will have a larger impact in the fourth quarter than the category mix, but both will have an impact in the fourth quarter and what our plans are today.

Our next question comes from the line of Jeff Van Sinderen from B. Riley FBR.

This is Richard Magnusen in for Jeff Van Sinderen. Historically, during a strong skate hardgoods cycle, what have you experienced in the snow hardgoods or related apparel business with the snow conditions being equal? We're just wondering if there's a correlation you can point to.

No, there's no correlation as a simple answer, Richard. Snow is a function of weather, to a large degree, when you were talking about snow hardgoods and the outerwear that goes with it. So it's really a function of where does it snow and how much does it snow? And does it snow in our larger markets where we do business versus the smaller markets where we might operate around the country or around the world? So it's a function of snow. I don't view it as -- I don't see any correlation relative to the trend skate cycle.

Okay. And then regarding the various brands that you carry, understanding that the leadership of the brand is constantly evolving, can you speak to any emerging trends that you're seeing develop? And what is your latest thinking on where you are in the branded cycle in the apparel business? And then maybe you can touch on the trends in your footwear business as well and the outlook there.

I'll let Chris talk a little bit more deeply about the trends relative to mix of our business and things like that. But let me start off, Richard, by just saying that I think that we feel good about the pipeline for new brands. I believe we're on target for hitting our launch this year of how many new brands we target to launch on an annual basis. So we're not seeing a lack of new brands coming forward into the marketplace from that perspective. Now it doesn't mean that they become an all store buy, right? These -- many of them work as local brands as we start working with them and beginning to help them build their business.

So I'll just remind you that from my perspective, you have to think about our business as a portfolio of brands, a portfolio of departments and categories, and that at different times, different things will drive the business. And again, as we talked about in our comments, that can change rapidly as you've seen from last year, with apparel being the driver of this year, with skate hardgoods and accessories being the driver. And so our view of this, both from a brand perspective, emerging brands, is that we're always going to see something happen. This is a wallet share drive and we believe we're pretty good at capturing our share of the wallet. So just keep that in mind, our models about this portfolio approach to brands and the lifestyle representing entire lifestyle through departments and category combinations. So I'll let Chris add some comments.

Yes. I'd just say from a trends perspective, as we've talked about it over our history, we really try to look at kind of our top 20 brands and how they represent. And we've said in the past that 20% to 30% turnover over an annual period is pretty common. We are actually just trending slightly ahead of that through the third quarter year-to-date. So we'll come back and report that after a full year, which is probably the best read to kind of give an idea of what's happening.

But to Rick's point, I think we continue to see the pipeline look good. A couple of the brands that have moved into our top 20 weren't even in our ecosystem a year ago, which is kind of, I think, a really cool sign and again highlights what we've talked about over the years of just the speed of trends and how fast things move. So overall, the top 20 brands, in regards to kind of where we are in this brand cycle, our top 20 brands are actually, through the first 9 months, a little higher total penetration than they were a year ago, which has historically been an indication for us. It's kind of still the strength of the cycle and where our top 20 consolidating, taking more of a share. So again, overall, feeling good about the makeup.

In regards to footwear, footwear has been a driver all year long. We've talked about that. We did call out that it was just down -- it was down through quarter to date. But I will reiterate, it was down very, very slightly, so almost to the flat level. So we're feeling fine about where footwear stands. And the forward trends have been good. We still have 1 vendor that's been a bigger driver there but we are seeing growth in other areas of footwear, too. So it's not just all growth in 1 area, and that's the diversity that Rick talks about, both across departments as well as within departments. So we obviously feel very pleased with the trends of the business and where our brand situation sits.

Our next question is from Janine Stichter from Jefferies.

Congrats on the great results. Just wanted to ask about the women's apparel business. I guess, that's the one piece that you could maybe say is a little bit weaker right now, everything else seems to be working really well. So what's going on there? Can you give us some context? It's just the fact that we've been in a stronger branded cycle, and I think that the women's apparel tends to skew a little bit more towards private label. Or how should we think about it? And is there some outlook where you can give us the time line for that piece of the business to turn positive?

Sure. Glad to help out a little bit there, Janine, in terms of thinking about the women's business. I think women's is -- tends to be a bit faster from a trend perspective than our men's side of the business. So some of that, I think, we tend to see more volatility around women's, both on the upside and the downside traditionally. I'd also remind you that I think that our women's consumer is, in many respects, buys a men's product to a large degree. And so some of the new and emerging brands we have are brands that I think where we're not offering women's products, so that we're probably seeing some of that women's from just a trend perspective buying the smalls and men's, for example, in T-shirts and things like that.

So when we talk about women's, to be clear, what we're talking about is -- the number we're talking about there is women's apparel. It doesn't include accessories or women's footwear, so it's a broader mix when we look at overall women's. And then again, I think there is this push to -- for -- in our business that women don't see gender lines, because clearly they're just as happy to buy men's sizes and men's brands and, in certain subsets, women like the fit better, frankly, on the men's side of the business. So it's not as clear as just women's apparel has been a negative. But I do add that it tends to be more volatile than the men's side traditionally because trend cycles move even faster on the women's side of the business.

And I'd just add one thing with women's just to remember, we have been down for the first 3 quarters of this year but we were up 10 quarters prior to that and up pretty strong. So even when I look at like the 2-year stack through the year, it's still positive. So we ran some really strong results in women's. And yes, we've been running down but still pretty good results overall, specifically in light of where the overall business is set.

Great. That's helpful perspective. And then just anything you can give on tariffs, what you're hearing from your branded partners, any update there?

Yes, absolutely. From a tariff perspective, obviously, we're, just like all other retailers here, monitoring this very closely. One of the things we've talked about over the last few quarters is just where our exposure lands. And we still are probably just over -- since 9/1, which is the last time that -- the last update we've had of kind of the rates going into effect, we're still probably just over 40%, 41%, 42% of product coming from China.

I try to remind people when we talk about this because that number can seem bigger, but such a large portion of our business is screenable, and much of that is blanks that come from China. And so as we start to break that down, the imported value of a blank is obviously much less than the completed value so -- but yes, we continue to work with our vendors here to date. What you're seeing through the third quarter and what's planned in the fourth quarter, there are -- there's not a material impact.

There are areas where we have seen the increased tariff and a few areas where we've seen some pass-through from our brands. And -- but at the end of the day, it's not material to this year. It's something we'll continue to monitor and manage as we move into 2020. We're going to really try to take a balanced approach here of working with our vendors, continuing to try to move production where possible, finding other potential offsets on price here, and then in the last case scenario, potentially having to raise our prices to customers. So it's an ongoing situation we're monitoring and we'll kind of keep tabs on it here.

Our next question comes from Mitch Kummetz from Pivotal Research.

Congrats on the quarter. I've got a few questions. I just want to circle back on footwear, which was -- it sounds like barely negative quarter-to-date. I know that's a very small sample size. It doesn't sound like it's anything you guys are concerned with. I just wanted to drill down on that. I mean is there -- I know that these categories sort of ebb and flow, and it doesn't sound like you feel like footwear is now something that is going to hit a downward trajectory like maybe apparel has for the last few quarters. And I'm just kind of wondering why you think that is, if this is just a blip or too small of a sample or...

I think, Mitch, the way I think about it, and obviously, we've looked at this different ways, it's been trending really well for us all year long. We've looked at this over the last 2 Q4s and have actually seen November softer than December. So December typically has gotten stronger in footwear sales, which I think makes sense in regards to the gift-giving and the need around Christmas time for people wanting footwear.

So we don't have any indications at this point. I would kind of classify more to your question of the smaller sample size in November. Obviously, a good portion of our volume here is still to come, and we expect footwear to still be a strong part of our Q4 sales.

Got it. From a perspective...

Historically, I'd just add that, again, I think footwear really booms in the post-holiday period when our consumer, our young consumer's back in the store as opposed to the gift giver. So that's what we've really seen historically footwear doing even better.

Okay. And then on EBIT margin, you guys are closing in on 8%, it looks like. Based on what the Q3 guide is, you're sort of inching towards that. Chris, I know that in the past, when people have asked you about EBIT margin targets, you sort of talked about, I think, 8%, something lower than prior peak. I'm just wondering, now that we're kind of getting close to that number, where do you think you could go from here? What's the low-hanging fruit at this point on the margin side to get it above that 8% level that I think you've kind of referred to in the past?

Yes. Thanks, Mitch, and I'll kind of tie this in with even Sharon's question earlier on SG&A because we're super happy with where the results are coming in for this year, obviously, on top of very strong results in 2018. To your point, the top end of our Q4 guidance would indicate operating profit or EBIT close to 8% there. It's about 7.7% in operating profit compared to 6.2% a year ago, so very, very happy with the growth there.

And I think where we've pushed in the past is to say high single digits. And so that, to us, means we could probably get closer to 10%. And it's going to take some work to do that. We're working on ways always to kind of optimize and maximize the potential of our North America business that's here that's very mature. Obviously, you guys know we have a good opportunity to grow internationally and turn that profitably, which will help us a lot.

But in addition to the comments I made around Sharon's question earlier, there's other areas that have contributed to this operating profit or EBIT margin, depending on how you want to look at it, in regards to we continue to make some traction on shrink. Now we're seeing our shrink rate come down. We called out the amount of excess and obsolete inventory management that we've been able to benefit from, which is really our teams coming together and maximizing some of our clearance and damaged product to bring more value to that. We talked about occupancy leverage and opportunity there and working on that line item. And there's a lot of kind of DC optimization and shipping optimization projects that we've reaped some benefits from and have benefits to come in the future. So for us, I think it's really trying to push it to get back to that around 10%, and we kind of -- that's where we're pushing toward.

And then last question, just you kind of touched upon it briefly in your response to that question. But profitability update on Europe, especially given what you've seen on the international business the last couple of quarters, I would imagine that, that's been pretty impactful on the profitability of international business. But it's still losing money, if I'm not mistaken. I think you kind of talked about getting closer to breakeven this year. When can you get breakeven, just kind of based on what you've seen over the last couple of quarters in particular?

Yes. Thanks, Mitch. It definitely is part of the mix, right? When we're growing here operating profit between 25% to 30%, a big portion of that is North America, just because it's the lion's share of our business, but there's a great contribution from our international teams here as well. We've talked about losing millions of dollars over the last couple of years. We are getting that down quite a bit. We'll make substantial -- our forecast, we're going to make substantial improvement here in 2019.

We'll try to give a little more color on that in Q4. I think it is important, just based on the seasonality of that business, that we see how the Q4 comes in. But our current estimates would mean -- would show we're going to be making major traction there in 2019.

As we look towards 2020, our current focus, based on how we're planning the rest of this year and into 2020, is that we'll continue to make substantial progress. And this would be a business that within the next year or 2, we would be looking on the profitability side of it. So I think that we're getting very close. We're really excited about our current results, as Rick talked about on the call. We continue to see Europe perform very strong, specifically in some of the important markets outside of Austria, which was the home country for the business. We've seen Germany be really strong. We opened in Finland here in the last quarter, which will be our fifth market here in Europe, which would be -- started in Austria, we added Germany, Swiss, the Netherlands and now Finland. And we've seen some really good early indications from that market. So really happy with that.

And as Rick pointed out in his comments, international is super important to our global footprint, and really meeting the expectations of the customer, right, and how trends emerge around the world, and then obviously, serving our brand partners as well. So happy with how that's moving forward, and we'll look forward to giving you guys more of an update here on our Q4 call.

And Mitch, I would just add, just for flavor to this comment about international is when we talk about needing to invest in the current business, thinking about the long-term nature of driving profitability, and all these international markets take investment because for us to roll out then our omni tools, practice processes and the tools themselves require scale in the marketplace.

So when we launched in Canada, our first international market, we had to make those investments. We lost money in our initial years in Canada. And then as we're able to gain the scale that we have in Canada today, we're able to turn on our omni tools, serve the customers at all new levels. And actually, we have a pretty strong business in Canada these days, and that's what you're seeing us do globally as we think about the business here.

Europe is a really big market, so it requires that we make those investments or we'll be making investments as we go along while delivering good long-term results as we execute and develop new tools and new ways to serve customers in our most mature markets, while investing in growth in those markets to gain scale, then allowing us to implement our omni tools, which we're now going to be able to do in parts of Europe, where we're building out models and seeing the benefits of the omni tools play out. So again, this year, I want for all of us to think about this as a continuum of what making investments today, they're going to pay off in the future.

Our next question comes from the line of Jonathan Komp from Baird.

I just wanted to follow up on some of the category performance. And I guess, just wondering, when you look at the current mix, hardgoods, accessories, footwear, to a lesser extent, can you maybe just comment more on maybe the duration of that mix of drivers? And is there a point in the future where you think you need to get apparel back working better to sustain the comps performance? Or how are you thinking about that?

Sure, Jon. Again, as we think about this as a portfolio approach, we've always been -- we've got to own the wallet share for our consumers. And there's not many years that we don't. Not -- in fact, not many years that we not only don't own our share but I think we're gaining more share of their wallet as we move forward.

So I would tell you that in peaks, we've seen better performance in the men's apparel already. And as Chris said, I think where we've found some new brands move into the play, that's been very impactful on the men's apparel line and probably again indirectly on women's, too, because I believe that, to some extent, it's women buying the smaller sizes of some of these new men's brands. But that being said, again, we listen to the consumer. We follow what the consumer says. I think some trend cycles move at different speeds. The fastest trend cycles have to do with just fashion trend versus a brand cycle, which tends to be longer in duration.

And I would tell you that I think a skate cycle like we're in here, can -- those historically for us have been long cycles, both on the upside and the downside. As you recollect, I think our last peak in skate was in 2015 approximately, had a tough '16 and then we had tough years in skate. In fact, we're running down skate a year ago.

All through '18, yes.

So they tend to be a multiyear cycle is what we've seen, tended to see when it's a department-driven cycle like that. Now that doesn't mean we're going to run up in skate as big as we are this year and next year, to be clear. But I think if you thought about it in terms of recapturing percentage mix of the business in skate, that you could expect over a period of time or over a period of years, we would achieve that penetration again that we've historically achieved in skate hardgoods.

So each of the different kinds of trend cycles move at different speeds. And I would expect because the fashion transactions move faster, we'll see some things trend down over the next 18 months and we'll see all new things being introduced. And brand cycles, I think as we said earlier, we feel good about the pipeline where we're at. We've had some good success with new brands this year in the business. So I think I don't have any major negative for you there.

And then on the category type of -- department category kind of combination, those tend to be longer lasting, has been our history, multiyear cycles. And again -- so I think we've got somewhere in skate to go. And I think the right way to think about it is do we get back at the peak penetration we hit in prior cycles?

That's where I wanted to follow up actually on skate. I guess, 2 questions. Is skate -- first, is skate the item that's gifted for holiday? Or is that a business that kicks back in next spring? And then just any color or commentary, what you observed in terms of the competitive set following the last down cycle. Would that be a case where you could maybe go deeper, capture more of the share in an upcycle if the competitive set has changed?

Yes, good questions. And I would tell you that I think that skate cycle, there are fewer competitors today in the skate hardgoods world than there were in the last cycle. And so I think that we've talked about whether or not we achieved a greater, deeper penetration. I think the evidence, we're going to have to wait to see that play out to see if that is going to be true. But I think that the rate the skate is growing for us is pretty phenomenal, and it would tend to indicate to me that we own a bigger share. I think this is a good example of that, Jonathan, where we do, I believe, own a bigger share than -- I believe our skate business is growing faster than most of the rest of the marketplace.

And I think we -- just on scale, I don't know who -- when you come to actual lifestyle skateboard retailing, where you're assembling components and boards, I don't know of anyone bigger than us in the world doing it today. So this is an area that's definitely a strength of ours. We'll see. We've had some conversations earlier, we might reach a new peak here. I think we just have to have the evidence play that out.

Okay. And just on the holiday, is that something that's gifted or is it -- [should we think about it next spring, I guess?]

No, it is definitely a gift item, so I think now also t-shirts run bigger in the holiday season. It's a good -- obviously, a good gift item now to accessory groupings. But no, skate has always been a good gift item. It may not run up as high as it does in the spring just relative to mix because other categories like t-shirts and accessories run higher but it is a good gifting item.

Our next question is from John Morris from D.A. Davidson.

Chris and Rick, so really nice work here. And I'm thinking the inventory levels, it's really great that you guys were able to put up these kinds of numbers with lower inventory actually at the end of the quarter. So any more added color there? Is that where you're getting a lot of the efficiency that we're talking about? And where -- what should we be thinking about how inventories look at the end of the year?

And just kind of turning it around, do you feel like you could drive more sales if you decide to release more inventory into the pipeline? I'm thinking from the perspective of not so much Q4 now, but how you might manage the business differently into next year, so sort of all of that inventory discussion. Nice work.

Sure. I appreciate it, John. And I'll jump in here and then let Rick add anything at the end, if he like. I think from -- let's say, if we just step back and kind of talk long term, obviously, going to localized fulfillment was a big benefit in inventory to us overall. Now that's not going to directly attribute to the year-over-year here, but I do want to just focus on -- when we closed our fulfillment center and we pushed a portion of that inventory out to stores, it's really allowed us to optimize and think about inventory differently over the last couple of years. And Rick even talked about it in his prepared comments of the -- it's benefited the experience of the physical stores because your online demand is effectively carried in the local stores, which makes -- as you match those together from a planning and allocation perspective, it just brings a better in-store experience overall.

So we're really happy with the inventory management. I think our buying teams and our store teams and our web teams and everybody working together has really, really optimized inventory. And we have ways to go. We have a ton of opportunities as well. So we're very pleased with the inventory management. I think as you look at growth rates, I would just say, let's look at it over a multi-year period. Last year at this point, we saw inventory increase 19.1% at the same quarter. So over a couple of year period, our 2-year stack, this is still a pretty good increase for us. But really, that's just a factor of doing, I think, what you're asking in the latter part of your question of if you had more inventory, could you do more?

And what we got to last year was that by increasing more inventory, bringing in more Q3 receipts and getting that inventory in a better balanced position heading into holiday, we did think we could do more. And I think it showed good results last year. And as we manage this year, we thought we could take it down a little bit and we did that. But overall, we feel like inventory's in a really good spot. We're about -- we're more current than we were a year ago across all of our entities. So the health of the inventory is in a good spot, and we're excited to see how this fourth quarter plays out.

And the only thing I'd add, John, to Chris' comments is, again, I just want to reemphasize that the quality of inventory is really strong. Again, we're more current, as Chris said, across all of our entities, so we really feel good about that. The teams have worked hard, again, by keeping things in good current positions, which, of course, is going to be -- helps us to offset some of the margin challenges relative to mix and shift in the business.

The other thing I would tell you that is a positive for us in a cycle like this, and although it's a small -- still overall small percentage of our business relative to men's or women's apparel, for example, skate hardgoods is a quick-turning business. So if you actually looked at our inventory there, we're running down actually significantly there in inventory relative to a significant gain. It just -- we have a program that work closely with our brand partners. We're a very important retailer for our brand partners. And so we're able to turn -- that's actually a faster turn category for us because we land -- we can land deck every week and we literally build plans with our partners as to what we're going to need and when we're going to need it. And so we work really well together with our partners, and that tends to be a faster-turning business. It's a small part of our overall inventory position.

We are, I can tell you -- have larger -- we're down more in skate inventory while running up a huge amount. So it's just a quick turn. The fact that, that's a trending business for us helps us a little bit just because it's a quick-turn business.

Yes. And we can see that better inventory in the stores. They look great. One other quick question. Chris, on the tax rate for the fourth quarter, can you just true it up for us for Q4? Because it looks like the full year, I think you said would be at 25%, so that would imply Q4 would be down quite a bit, too. And I just want to check that number with you.

That's correct. Yes, we would expect Q4 to be down even significantly to our Q3 rate, which was 25%. And I think that the big challenge here and actually, the benefit we've had throughout the year is really most closely tied to our international business. As you guys know, we do have a valuation allowance on the losses that we've sustained in Europe, which means we cannot recognize any tax benefit and the losses to operating profit flow straight to the bottom line.

So that has an inverse impact in the fourth quarter, where this is the quarter that our operations there make money. It's their largest quarter. And so we're going to see a positive benefit to the bottom line of being able to see operating profit drop straight down to net income and offset some of the net operating losses we have in the entity. So you'll see that benefit, which is obviously driving the lower tax rate in the fourth quarter and then to our annual guide that we gave in our script.

Should we be thinking about next year around 25% would be our working tax number?

I think where we land here for 2019 will be a good draft for where we'll be long term. Obviously, the more profitable that we can make our international operations, the more benefit we should have there. And so yes, I think that this is probably a good benchmark to start with for 2020, and we'll try to provide some more color as we get to our Q4 call.

(Operator Instructions) At this time, I'm showing no further questions. I would like to turn the call back over to Rick Brooks for closing remarks.

All right. Thank you very much, and we appreciate everyone's interest in Zumiez, and thanks for all your questions today. And of course, we wish you all the best in the holiday season, and we look forward to talking to you again with our fourth quarter results in March. Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.