Zumiez Inc

NASDAQ:ZUMZ

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Zumiez Inc. First Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] Before we begin, I'd like to remind everyone of the company's safe harbor language. Today's conference includes comments concerning Zumiez Inc.'s business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning the numbers 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 turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

[Richard Brooks, executive]

Hello, everyone, and thank you 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 remarks about the first quarter before handing the call over to Chris, who will take you through the financials and some thoughts on this quarter and rest of the year. After that, we'll open the call to your questions.

As anticipated, the first quarter was challenging as we saw similar domestic trends to those experienced in the fourth quarter of last year. Our operating performance was in line with our outlook and reflects a significant change the broader U.S. economy and retail, in particular, has undergone over the past 12 months. The continued effects of inflation weighing on consumer discretionary spending combined with heightened promotional activity across the industry to clear excess inventory levels our full-price selling model has been under pressure. We're not pleased with our recent results. That said, we aren't discouraged either.

Our team has navigated economic down cycles before, and while each cycle has some unique characteristics. The one constant is that they eventually turned positive. And Zumiez has historically outperformed the market on the way up. We are confident that the connections we've forged with our customers through our distinct brand, culture and diverse and differentiated merchandise offering, [ pushing ] highly sought-after hard-to-find brands and world-class service are as strong as ever.

The year unfolding as we anticipated thus far, we're staying the course with the plan we outlined on our Q4 call in March. This includes being diligent with our spending, focusing on strategic investments that we believe will create significant long-term benefit for our customers, our business and our shareholders by managing carefully in the short term, what we can control.

Some of the long-term strategic investments we believe are important to push forward include: continued investment in our people through best-in-class training and mentoring. In 2022, we were able to execute all 3 of our in-person national events that are focused on intense training, connection and recognition. This has included the return of our January 100k event celebrating the best of our sales teams and connecting them with our key brands.

We've continued with this trend in 2023, executing our annual management [ treat ] just a few weeks ago, focused on development and leadership. Optimizing trade air performance by ensuring that we have the right number of stores to serve our customers in each market and getting the right product in the right places to best serve customers as quickly as possible. Continuing to work with brands to increase speed and flexibility while increasing margins. Investing in innovative approaches to generate human-human connections with our customers and engage with them in new ways that enhance the shopping experience and continue our international expansion with a focus on Europe and Australia.

We know that brands emerge locally and grow globally and our international presence provides us the opportunity to better serve both our customers and our brand partners while we continue to optimize these operations with many of the initiatives we have proven across North America. We feel good about the progress we made internationally in the first quarter with comparable sales in Europe and Australia, increasing 12.8% and 8.7%, respectively. It was a tough quarter, but I continue to be confident that we have the right team and necessary experience to weather these turbulent times and emerge well positioned to accelerate market share gains when conditions improve.

With that, I'll turn the call over to Chris, who will discuss the financials. Chris?

[Christopher Work, executive]

Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our first quarter results. I'll then provide an update on our May sales trends before providing some perspective on how we're thinking about the full year.

First quarter net sales were $182.9 million, down 17.1% from $220.7 million in the first quarter of 2022. Comparable sales were down 18.8% for the quarter. The decrease in sales was driven by the North America business, offset by more favorable fall results for Europe and Australia. During the quarter, we continued to see softer sales, primarily driven by ongoing inflationary pressures on the consumer. Growth was also negatively impacted by 87 basis points related to unfavorable changes in foreign currency.

From a regional perspective, North America net sales were $144 million, a decrease of 22.7% from 2022. Other international net sales, which consists of Europe and Australia, were $38.9 million, up 13.3% from last year. Excluding the impact of foreign currency translation, North America net sales decreased 22.4% and other international net sales increased 17.1% compared with 2022. Comparable sales for North America were down 24.2% and comparable sales for other international were up 12.2% for the quarter.

From a category perspective, all categories were down in comparable sales from the prior year during the quarter with men's being our most negative followed by footwear, accessories, hardgoods and women's. Total dollars per transaction were up for the quarter, driven by an increase in average unit retail, partially offset by a decrease in units per transaction. First quarter gross profit was $49.4 million compared to $72.4 million in the first quarter of last year. Gross profit as a percentage of sales was 27% for the quarter compared with 32.8% in the first quarter of 2022. The 580 basis point decrease in gross margin was primarily driven by lower sales in the quarter, driving deleverage on our fixed costs.

The key areas driving the change were as follows: store occupancy costs deleveraged by 290 basis points on lower sales volumes, product margins decreased by 70 basis points, web shipping costs increased by 60 basis points, distribution center costs deleveraged by 50 basis points, buying and private label costs deleveraged by 40 basis points and inventory shrinkage increased by 40 basis points. SG&A expense was $70.7 million or 38.7% net sales in the first quarter compared to $71.9 million or 32.6% of net sales in the year ago period.

The 610 basis point increase in SG&A expense as a percent of net sales resulted from the following: 270 basis point increase due to both deleverage of store wages on lower sales as well as increases in wage rates that could not be offset by hours reductions, 180 basis points due to a onetime German government subsidy received in the first quarter of fiscal 2022. The a 160 basis point increase due to deleverage of non-wage store operating costs, 90 basis point increase in non-store wages, 20 basis point increase in stock compensation expense, 20 basis point increase in annual incentive compensation and 20 basis point increase in other corporate costs. These increases were partially offset by a 150 basis point reduction due to the timing of our 100k event which was held in the first quarter of last year, but not in the first quarter of fiscal 2023.

Operating loss in the first quarter of 2023 was $21.4 million or 11.7% of net sales compared with operating profit of $0.5 million or 0.2% of net sales last year. Net loss for the first quarter was $18.4 million or $0.96 per share. This compares to a net loss of $0.4 million or $0.02 per share for the first quarter of 2022. Our effective tax rate for the first quarter of 2023 was 12.6% benefit compared with 134.2% provision for income taxes in the year ago period, which was inflated primarily due to the allocation of income across entities and the exclusion of net losses in certain jurisdictions.

Turning to the balance sheet. The business ended the quarter in a strong financial position. We had cash and current marketable securities of $155.3 million as of April 29, 2023. And compared to $173.0 million as of April 30, 2022. This $17.7 million decrease in cash and current marketable securities over the trailing 12 months was driven primarily by capital expenditures of $27.5 million, offset by $11.2 million in cash provided by operating activities. As of April 29, 2023, we have no debt on the balance sheet and continue to [ maintain ] our full unused credit facility.

We ended the quarter with $147.9 million in inventory, up 4.2% compared with $141.9 million last year to end the first quarter. The inventory growth was driven by store count increases in our international business, while the inventory in North America is down 3% from the prior year. On a constant currency basis, our inventory levels were up 3.7% from last year. And while more aged compared to the same quarter in 2022, we are more current than we were to end the fourth quarter of 2022.

Now to our fiscal May sales results. Net sales for the 4-week period ended May 27, 2023, decreased 12.8% compared to the 4-week period ended May 28, 2022. Comparable sales for the 4-week period ended May 27, 2023, were down 14.3% and from the comparable period in the prior year. From a regional perspective, net sales for our North America business for the 4 weeks ended May 27, 2023, decreased 17% over the comparable period last year. Meanwhile, our other international business decreased 12.7% versus last year. Excluding the impact of foreign currency translation, North American net sales for our 4 weeks ended May 27, 2023, decreased 16.7% from the prior year, while other international net sales increased 10.4% compared with 2022. Comparable sales for North America were down 17.5% and comparable sales for other international were up 4.2% for the same 4-week period compared to the prior year.

From a category perspective, in fiscal May 2023, all categories were down in comparable sales from the prior year. Footwear was our most negative category followed by hardgoods, accessories, men's and women's. Total dollars per transaction were up for fiscal May 2023, driven by an increase in average unit retail, partially offset by a decrease in units per transaction. With respect to our outlook for the second quarter of fiscal 2023, I want to remind everyone that formulating our guidance involves some inherent uncertainty, complexity in estimated sales, product margin and earnings growth given the variety of internal and external factors that impact our performance.

Our May sales results were slightly better than our first quarter trends, but still well below year ago levels as consumer demand remains under pressure from the continued impact of high inflation on discretionary spending. With that in mind, we are planning total sales in the second quarter to be between $187 million and $192 million. We expect that our second quarter 2023 product margins will be down between 50 basis points and 70 basis points from the second quarter of fiscal 2022 as we continue to work through a challenging sales environment.

Consolidated operating loss as a percent of sales for the second quarter is expected to be between negative 7.7% and negative 9.2%. We anticipate loss per share will be between negative $0.63 and negative $0.73.

Similar to the first quarter, the decline in earnings is largely due to deleverage in the cost structure on lower sales base coupled with margin pressure. Our biggest areas of deleverage continue to be tied to fixed costs such as occupancy expense, base hours in our stores that are driven by mall operating hours and other corporate costs. As Rick said, the year is unfolding as we expected and our view on the remainder of 2023 hasn't changed. As with our practice back in March, we are refraining from giving specific annual guidance due to the uncertainty and volatility in the macro environment but do want to provide some context around how we currently believe the business will trend throughout the year.

Sales results in fiscal 2022 became more challenged each quarter as the year progressed when compared to a more normalized historical sales trends. We believe we will continue to experience top line pressure, particularly as we wrap up the first half. The quarterly comparisons become easier throughout the year, suggesting more opportunity in the back half of the year when compared to fiscal 2022 results.

Product margins were down 50 basis points in fiscal 2022 after 6 consecutive years of growth. The majority of this year-over-year decrease was driven by our fourth quarter of 2022 product margins, which was impacted by increased discounting as we work to rightsize the inventory balance. For fiscal 2023, we believe that product margin will be tougher in the first half of the year as we work through aged inventory and the market remains promotional with retailers continuing to drive inventory in line with current sales trends. We believe that margins may stabilize and possibly expand in the back half of the year as inventories come online and comparisons get easier.

Our model is sensitive to sales fluctuations, and we have seen deleverage as sales declined in fiscal 2022 and also the first quarter of 2023. While the opposite was true in 2021 when we experienced record sales in operating margin driven by meaningful leverage. We continue to diligently manage expenses as we navigate the current environment and are positioned to take advantage when conditions approve.

We are currently planning our business assuming an annual effective tax rate of approximately 50%. It is important to note that we expect our tax rate to fluctuate significantly from quarter-to-quarter based on the pretax results and distribution of income between different jurisdictions throughout the year. We are planning to open up to 23 new stores during the year, including approximately 8 stores in North America, 10 stores in Europe and 5 stores in Australia. These openings are contingent on finding the right locations with complementary economics. While that is our normal practice, challenging circumstances, such as those we are currently experiencing may cause us to reduce our store openings if we are unable to negotiate deals that achieve our financial targets.

We expect capital expenditures for the full 2023 fiscal year to be between $20 million and $22 million compared to $26 million in 2022. We expect that depreciation and amortization, excluding noncash lease expense, will be approximately $23 million. We are currently projecting our share count for the full year to be approximately 19.5 million diluted shares.

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

[Operator]

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

[Richard Magnusen, analyst]

This is Richard Magnusen, in for Jeff Van Sinderen. Can you speak more about how you planned inventory for back-to-school this year? And if you could also speak to how you are evolving your approach to promotional or just kind of merchandise packages before back-to-school?

[Christopher Work, executive]

Sure. Yes, I'll try to give a little bit of color there. Obviously, Richard, as you can tell, we've really been trying to manage inventory and I give our buying teams a lot of credit here because this has been a really challenging environment. Obviously, with sales moving the way they are. So I think as we said on the call, we feel good about our inventory here leaving Q1. We talked about it being a little more aged than we were a year ago, but in a better spot than we were at the end of the year.

So if we look at that even deeper, and then I'll get to the heart of your question, and we were to bifurcate all the categories, I think we feel even better about our inventory when we look at just the trending areas and the things that are performing pretty well. If we were -- if we look at areas like footwear, they've been a little more challenged, a little more aged, which I think kind of makes sense with what you're hearing in the marketplace.

So as we think about back-to-school our job as it is every year at this time is to really make those bets and things that we think are trending. And so the teams are really focused on that. They're focused on it across our offering of men's and women's and accessories and footwear and really trying to find those things that are those hot next brands.

As you know, Richard, we talked about for a long time, we'll launch 100 to 150 brands every year. So the team is focused both on the newness as well as the brands that we've been partners with for quite some time. So we're really driving that direction. We're really focused on having lots of flexibility within our inventory buying, keeping it open to buy, so we have that ability to chase trending items and then managing seasonal inventory really closely to make sure that we can move quickly. But I think we're in an advantageous position. A lot of what we do is screenable, which is pretty quick turn. So we're in a good spot there, especially with back-to-school coming up, and we're doing our best to really drive the top performance we can during a real peak season.

[Richard Brooks, executive]

And Richard, in terms of promotional environment, I mean, of course, we're going to anticipate that we'll see some promotional environment during the back-to-school cycle. I think that's just a good common sense at this phase. I think we feel pretty good about our position outside of -- as Chris said, there's a few areas where I think there's a glut of product in a particular category like footwear that has to be worked through. But we're going to do promotions the way we do, which is greatly honoring our brands and those brands have equity. So you will not see us do the 40% of the store thing. That's not our model. That's not what we do. And we'll be targeted in it, and we'll look at the perspective of promotions about how we provide value for our customers. And I guess, to your comment then about the bundles.

We've also been experimenting with different ways over the last month, and we'll continue to experiment as we approach back-to-school with different ways to encourage and incent customers and employees around promoting and driving sales in the stores. So think about that from that perspective for us is we're going to honor the integrity of the quality of the brands we have, and we don't want to discount those brands that have that equity, but we'll try to work through those areas where there is an overstock and then provide value will be the perspective of us to how we provide value for our customers.

[Operator]

Our next question comes from the line of Mitch Kummetz with Seaport.

[Mitchel Kummetz, analyst]

Let's start with the consumer and the stress that they're seeing on their discretionary spend. Are you seeing that having any disproportionate impact on categories. I think the footwear as being a higher price point category also hardgoods, and those were two of the more challenged categories for May. I don't know if that's the issue like but where does it really -- just go back to the glut of inventory that's in the channel.

[Richard Brooks, executive]

I'll have -- I'll take a shot at that one, Mitch. And the high-level answer for me relative to consumers and stress by category and something like footwear is I don't believe that's actually the case. It's more trend driven. And we do have some footwear that's working. And those are areas that we'll buy, as Chris said, we'll be marketing instead going after it and buying it more deeply. And -- or we have bought it more deeply, I should say. And so I think it's a trend-driven issue as opposed to the consumer and price and inflation pressure there.

So I think the broader discretionary pressure is about the more macroeconomic issues for our consumer. And our job, as you know, is to provide the coolest stuff, the best stuff, the best from the best brands and that's trend right and in cycle right now. So I don't think that the price point is a reflection of the challenge of, for example, a footwear category relative to the consumer.

[Christopher Work, executive]

And with regard to some of this...

[Richard Brooks, executive]

Go ahead, Chris.

[Christopher Work, executive]

I was just going to -- the only thing I would add to that is just you asked kind of how their shopping patterns are. And I just continue -- we have seen a continued trend of what we saw across 2022 where we saw private label increase as a percent of the business, almost 600 basis points in total sales, which is really, really massive growth for us. We have seen private label in our past go over 20% and then drop down to 12% as the consumers kind of opted for branded product. And we are certainly in a cycle where that is reversing, and we're seeing kind of private label be much more sought after and I think that price conscious consumer is looking for that discount.

[Mitchel Kummetz, analyst]

Great. And then, Rick, just speaking to some of the trends, you mentioned buying into some things that are working. I mean just looking at your website, you're featuring the Adidas Samba, which is a hot shoe right now. It looks like a lot of it's sold out. You've got Chunky Skate, which is kind of -- I don't want to say unique to you guys, but that would potentially play well if there's a trend there, like even on the accessories side, you're deep in [indiscernible] sunglasses. It feels like there are a lot of little things that might be well positioned for you guys? I mean, how do you think about that?

[Richard Brooks, executive]

Again, there are definitely things working in our business, Mitch, that the question is getting them and building the momentum around those things. And long bottoms like Chris was talking about our private label have been a tremendous success for us. And not actually at a price point, we're driving full price, full margin business there. It's the bundles that are providing the value for the consumers in that set. So there are things that are working, Mitch. And of course, as Chris said, those are the areas that we look at inventory where we're going after it. We're buying more deeply based upon what we're seeing in the patterns in the business.

And we're -- but we just need more of those things, I think, is the answer. And relative to the drag on the business, like skate is still a drag on the business relative to the comp structure there in skate that, by the way, is a global issue, not just a North American issue. So we still have things that are dragging us backwards then when you need more of those things like you described, they're going to push us forward. And trust me, those things that you described, we're buying much more deeply. And as Chris said, anything is trending, we're going to be prepared, we'll be ready for back-to-school.

[Mitchel Kummetz, analyst]

Okay. And then my last question, you guys continue to see strong performance in other international. And I'm just trying to better understand that. Is that you're taking a lot of market share in those markets? Are you seeing a better macro in those markets than you are in the U.S.? And then, I guess, lastly, Chris, just in terms of profitability on Blue Tomato. I know that, that's a business that's been unprofitable for a while now. I'm just curious how that's trending these days.

[Richard Brooks, executive]

Let me start, Mitch, and then I'll let Chris jump in. All the markets, we're working on have some level of macro distress. And it's different in every market. And in some cases, it's different across countries in Europe relative to the -- what I would characterize as macro distress. And so there is in every market, but I think the difference that we have in our international markets, and again, talking about Europe and Australia is that we do, I believe, believe that we are gaining market share in these markets. And we are building units. We're opening new countries. We're seeing success as we open these new countries. So we're feeling good about that. Or in Australia, we're seeing success as we open in new states.

So I feel pretty solid about where we're at there. I think our teams are executing well. So some of the sales that we've talked about in the gains are being driven by those new units that were coming into play. But we're getting gains both on the -- in the store base as well as in on the web in both, in Australia and Europe in aggregate.

So I think we feel like we're winning share. I'd like to think we're executing well. And yes, we have challenges too, relative to the economic factors. If we didn't see the distress in the markets or war in Ukraine, we could be doing a lot better in those marketplaces.

[Christopher Work, executive]

Yes. Yes. And I just continue to add just a little bit of color to Q1 and then I'll talk a little bit more broadly about profitability. And just to remind everybody, we talked last year in 2022 about the business being up 8.8% from 2021, which was great to see gains in our business. But it was below our budgeted amount, which did cause some stress to the bottom line. And as you pointed out in your question, Mitch, we were not profitable. I think -- what was really nice to see here in Q1 is we have seen some acceleration of the business from a sales perspective, albeit we have had some challenges to margin as we tried to get inventory aligned.

But we're seeing some really good things within the business as we're really encouraged by some strong results in Germany and Austria, which are kind of our established markets within the region, but also really excited about some of our newer areas. We've seen Netherlands and Norway really performed quite well. and positive comparable sales in all categories in the quarter. So I think those are good things. We're operating in 8 countries now in Europe, and I think we're in a good position to grow the market as it relates to operating loss, obviously, like I said, being short of budget in 2022 created a little bit of a challenge. And we don't plan on commenting on what that's going to be this year, but we do expect, if we can stay on this current trajectory, we will definitely be ahead of where we were in 2022. And I think that sets up to the other piece of your question of just kind of long term, how we're looking at this.

And I think -- this is where I think we can gain some momentum here as we see these markets turn. And obviously, we have said at the end of last year, this is where there's millions of dollars, not tens of millions of dollars. So we believe we can be in a position here if we keep this trajectory to get it to breakeven and then obviously to turn it on the profitability side. So that's what we're very focused on. I think we're happy with the directory where we're at right now and for Europe. And then as it relates to Australia, this is a profitable market for us right now. We've done really well there. I think -- we have a really core position in Australia. The team has done a phenomenal job of executing, working with their brands, even establishing a private label program there. And so we're really encouraged by what we've seen in Australia. That has not been a marketplace where everybody has reported positive gains. And so we're excited about what the teams have created there. And I think we've got a real good runway to go there with growth.

[Operator]

Our next question comes from the line of Mantero Moreno-Cheek with Jefferies.

[Mantero Moreno-Cheek, analyst]

This is Mantero on for Corey Tarlowe. Can you discuss where you currently are with hardgoods penetration? And how should we think about the store opening cadence for the rest of the year?

[Christopher Work, executive]

Sure. Yes, I'll go ahead and talk about hardgoods and just kind of where we're at. And as we have said now for a couple of years, this has been a challenged category. We saw amazing results in 2019 and 2020. And then as we started to turn into 2021, it started to get a little bit tough. We went from 19% of sales, which was really our peak to the last couple of years, we have dropped down to 13% of sales. So we've seen pretty massive decline as a percent of the total. The first quarter here has continued to be tougher, and we've seen continued decline. And I think if that plays out, it's hard to tell where the rest of the year is going to go, but I think we would kind of be near historical lows as a percent of sales in 2023, would be what we would predict at this point based on what we know. Obviously, this is challenging to predict where the trough is because we never had a peak that high in regards to where the business grew to. So -- but that's kind of how we're trending at this point.

[Richard Brooks, executive]

Cadence of store opening...

[Christopher Work, executive]

And then cadence of store openings, yes. Thank you, Rick. Right now, we would expect to see a few more of those stores open in the back half. Typically, we would say that we would open kind of like a 60%, 40% cadence before back to school and after. And I would expect that to be a little more heavy on the back end.

[Operator]

And I'm showing no further questions, and I'd like to turn the conference back over to Rick Brooks for any further remarks.

[Richard Brooks, executive]

All right. Thank you. And again, as always, we always appreciate your interest in Zumiez. So thank you, everyone on the call with us today. And we look forward to talking with you in early September about where we're at for Q2 and the early back-to-school read. So thanks, everybody.

[Operator]

This concludes today's conference. Thank you for participating. You may now disconnect.