Rick Brooks - CEO Chris Work - CFO

Dorothy Lakner - Topeka Capital Markets Neely Tamminga - Piper Jaffray Richard Jaffe - Stifel Paul Alexander - BB&T Capital Markets Ed Yruma - KeyBanc Jonathan Komp - Robert W. Baird Pam Quintiliano - Suntrust Adrienne Yih - Wolfe Research

Good afternoon, ladies and gentlemen, and welcome to Zumiez Incorporation’s Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. Before we begin, I would like to remind everyone of the company’s Safe Harbor language. Today’s conference call includes comments concerning Zumiez Incorporation’s business outlook and contains forward-looking statements. These particular 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. Additionally, information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available on Zumiez’s filings with the SEC. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome everyone. Joining me on the call today is Chris Work, our Chief Financial Officer. I will start by making a few brief remarks about the business trends, then discuss some of the main drivers of results for the second quarter and start of the third quarter. Then I will spend some time talking about our strategy and how we plan to deliver increased shareholder value over the long term. After my remarks, Chris will take you through our key financial and operating metrics, and then we'll open the call to your questions. As you've seen today in our release, in our second quarter earnings -- our second quarter earnings performance was below expectation. On top of this, the start to our third quarter has been disappointing. We are working hard to find ways to navigate through this cycle. In a moment I'll outline what we believe to be the root causes of our recent challenges, but before I do that let me first touch on some high-level business and industry trends. With the evolving nature of the empowered consumer through the use of technology, the business is subject more than ever to trend cycles that develop faster and end faster. Our business has always been driven by a combination of trend-right items, fashion cycles and our deep vendor base of emerging and growing brands to provide unique product that resonates with our consumers. And all of these cycles are moving faster in response to the need of today's technology empowered consumer. We believe our core lifestyle customers strive to differentiate themselves from their peers and our brand positioning continues to resonate with them. While we serve our customer through a lens of skateboarding, street wear, art, music, and fashion, and other lifestyle aspects as directed by our consumer, we believe we are serving a fundamental need that allows our customers develop their own unique identity. And as we talked about for a number of years, we continue to believe the industry is going through an immense share consolidation cycle with the winners and losers separating themselves by who can provide a unique brand experience that gives the consumers what they want, whenever they want, however they want it. We believe this is an opportune time to continue to invest in the business and enhance our core brand positioning to better serve our customer as trends evolve. For the second quarter and back-to-school season reported today, we believe our results were heavily impacted by four key factors; a lackluster consumer traffic driven by the absence of a clear fashion trend that we can capitalize on; weakness in our spring and summer seasonal product; the impact of foreign exchange, particularly in our border and more tourism-oriented locations; and the shift of the Labor Day holiday back one week from the prior year. During these periods of unevenness, we are particularly cognizant of the need to stay vigilant in managing our business day-to-day, while still focused on the long term growth that we believe will continue to drive the business forward. Our historic results give us confidence in our authentic lifestyle positioning that works in tandem with our commitment to providing a great Zumiez brand experience. To that end, we continue to make progress on our initiatives and believe our investment in these areas will leave us well positioned to capitalize on future trends. Before I hand the call over to Chris, let me take a moment to update you on these initiatives. We opened 24 new stores in North America in the second quarter. We remain on track to open 51 new stores during the 2015 fiscal year. While we continue to see untapped potential in our North American markets, our focus here remains on optimizing the long term productivity of the entire portfolio. To that end, we are diligently working to maximize the impact of our physical store presence and omnichannel platform to serve each trade area in which we operate. We ended the quarter with 618 stores in North America, including 40 in Canada. In Europe, we remain on track to open six stores as projected in 2015. While this business remains a small portion of our overall portfolio, it has been gaining momentum and we are encouraged by the recent results. We believe that the strong performance in this market is a result of the investments we've made towards enhancing our overall presence in Europe and extending our highly differentiated culture and lifestyle approach to a wider audience. Accordingly, we will continue to invest behind the momentum here to further capitalize on these trends for the remainder of this year and beyond. Underlying our growth strategy is the integrated and increasingly seamless brand experience we’ve created between our brick-and-mortar stores and our digital presence. The investments we’ve made and continue to make behind the expansion and enhancement of our digital infrastructure are made in tandem with the expansion of our physical store base in a way that is both complimentary and that gives our consumers convenient access to the products they want, however they want, anytime time they want, in a manner consistent with the great experience they’ve come to expect. In business there will always be short term bumps in the road. Our focus is on weathering the storm by strategically investing behind those things that will bring long term value to the business and our shareholders. The linchpins of our success to-date have been our authentic lifestyle positioning, our unique approach to product, our commitment to driving world-class customer experiences, all anchored by the deeply engrained Zumiez cultural values. We believe these business fundamentals will continue to drive our success over the long term and that our organization’s values, commitment to serving the customer and our financial stability including the strong balance sheet will allow us to build on our industry-leading position in the years ahead. With all this in mind I remain very confident in our long-term outlook. With that, I will hand the call over to Chris for a review of our financials. Chris?

Thank you, Rick. Good afternoon, everyone. Let me take a moment to briefly review our second quarter results and our August sales results. Then I will provide some commentary regarding how we're thinking about the third quarter and the balance of the year. Second quarter net sales increased to $179.8 million from $176.7 million in the second quarter of last year, an increase of $3.1 million or 1.8%. Breaking revenue down by region, North American sales decreased $0.9 million or 0.5% to $166.3 million and European sales were up $4.0 million or 41.7% to $13.5 million. These comparisons include the negative impact of foreign currency translation in the quarter of approximately $4.4 million. Consolidated comparable sales inclusive of our e-commerce business decreased 4.5% this quarter as a result of a decline in transaction volume, but partially offset by an increase in dollars per transaction. Dollars per transaction in the period were driven by an increase in average unit retail and to a lesser extent an increase in units per transaction. In terms of category performance, men's, accessories, footwear and juniors posted negative comps while hardgoods had a positive comp. We finished the quarter with a total store count of 640 stores consisting of 578 stores in the US, 40 in Canada and 22 in Europe. Second quarter gross profit came in at $57.8 million, a decrease of $3.1 million or 5.2% over the same period last year. Gross margin declined 240 basis points to 32.1% compared to 34.5% a year-ago, reflecting deleverage in our occupancy cost from negative comps as well as downward pressure on product margins as a result of the increased promotional activity to clear out seasonal inventory. SG&A expenses were $52.5 million or 29.2% of net sales during our 2015 second quarter compared to $49.3 million or 27.9% of net sales during our 2014 second quarter. The increase as a percent of sales was primarily driven by deleveraging of our store operating expenses. Blue Tomato acquisition charges included in SG&A for the quarter were $0.4 million compared to $0.6 million in the year-ago quarter. These charges will not have material impact on our financial results in future quarters. Second quarter 2015 operating profit was $5.3 million or 2.9% of net sales down from $11.6 million or 6.6% of net sales a year ago. Net income for the 2015 second quarter was $3.2 million or $0.11 per diluted share, and includes $0.01 per diluted share of Blue Tomato acquisition related charges. This compares with net income of $7.5 million or $0.26 per diluted share in the second quarter of 2014, inclusive of $0.01 per diluted share of charges associated with the acquisition of Blue Tomato. Turning to the balance sheet, cash and current marketable securities at August 1, 2015 were $80.8 million, down from $113.4 million as of August 2, 2014. This decline was primarily driven by greater stock repurchase activity and capital expenditures for new store growth and remodels, partially offset by cash flow from operations. During the quarter, we repurchased 2.3 million shares on the open market for a total of $61 million and subsequent to the end of the second quarter, we completed the $50 million repurchase program authorized by our Board in June earlier this year. Year-to-date, through August, we have purchased 3.0 million shares on the open market for a total $77.7 million. We ended the quarter with a $122.1 million in inventory, up $2.2 million or 1.9% compared to the end of our 2014 second quarter, primarily as a result of our increased store footprint compared to this time last year. Now to our August sales results. Total net sales for the four-week period ended August 29, 2015 decreased 7.2% to $87.3 million compared to $94.0 million for the four-week period ended August 30, 2014. Our comparable sales decreased 10.7% during the four-week period ended August 29, 2015 compared to comparable sales increase of 2% for the four-week period ended August 30, 2014. The year-over-year comparable sales decrease was driven by a decrease in comparable transactions, partially offset by an increase in dollars per transaction. Dollars per transaction in the period were up, driven by an increase in average unit retail and an increase in units per transaction. During the four weeks ended August 29, 2015, men's, footwear, accessories, juniors and hardgoods posted negative comps. Looking at our quarter-to-date results, our North American results remain challenged, while our European results continued above plan. As we expected, trends improved as we moved into September due to the later Labor Day. However, our overall performance quarter-to-date has been below plan. Our quarter-to-date comparable sales through this past Monday were down 7.4%. Year-to-date through August 29, 2015 comparable sales have decreased 3.1%. Turning to the third quarter 2015 guidance. I'll start off by reminding everyone that formulating our guidance involve 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're currently planning third quarter comparable sales results in the range of negative 7% to negative 9% with total sales in the range of $202 million to $206 million. Our sales guidance contemplates the shift of 2015 Labor Day holiday to one week later in September, which we believe had a negative impact on August and will have a positive impact on our September volume. We anticipate gross margins will decrease 250 to 300 basis points due primarily to deleveraging of our store occupancy costs and to a lesser extent deleverage of our distribution costs and decline in product margin. Consolidated operating margins are expected to be between 5.5% and 6.5% with diluted earnings per share of between $0.27 and $0.31. This guidance contemplates no additional Blue Tomato acquisition charges on our 2015 third quarter as compared to $0.6 million or $0.02 per diluted share for the third quarter in 2014. In addition to our quarterly guidance, I’ll once again share general thoughts for the full year. As mentioned earlier, our third quarter guidance contemplates negative comparable sales. While we are not prepared to give specific full year sales guidance at this time, we do expect our annual comparable sales to decline from the prior year based on the expectation that we will continue to face headwinds through the end of 2015. We also expect foreign currency to continue to negatively impact sales growth throughout the year based on the translation of our international sales as well as the decline in our cross-border business. That said, the impact on earnings for a translation should not be significant as contribution margins for our international operations are lower than our mature US business. However, the decline in our cross-border business is expected to have an impact on earnings. Turning to gross margin, with the majority of our year-over-year product margin opportunity behind us in the first quarter and with greater than expected margin pressure in the second and third quarter, we believe 2015 product margins will come in below our 2014 results. Our third quarter guidance contemplates a moderate decline in product margins. However, to the extent sales stabilize in the fourth quarter, it will be our goal to maintain product margins at prior year levels. We are planning SG&A growth below 2014 growth rates, excluding the charges associated with the Blue Tomato acquisition previously discussed. We are planning to open approximately 57 new stores with a similar cadence to what we have done historically with two-thirds of the openings already behind us as we wrap up the back-to-school season. We are currently projecting capital expenditures for the full 2015 fiscal year to be between $39 million and $41 million driven by new store openings and planned remodels. We anticipate depreciation and amortization of $31 million for the year. Our full-year 2015 plan assumes an annual effective tax rate of approximately 38%. We now expect our diluted outstanding share count for the full year to be approximately 27.8 million shares. And with that operator, we would like to open up the call for Q&A.

[Operator Instructions] Our first question comes from the line of Dorothy Lakner from Topeka Capital Markets.

Thanks, and good afternoon everyone. Just a question on trends. I mean, I know Rick, you don't like to talk about specifics, but just providing as much color as you can. Granted the weakness in seasonal product is not something that others haven't talked about. So that's pretty well-known. But I believe you talked about some good trends in longer bottoms, longer sleeved tops, et cetera. So just wondering as you've moved into the September period, August and September, has that still proved to be true and are there things that you think are working, or specific challenges that you face? And just related to that, talk a little about perhaps the denim business and the kind of resurgence that some have talked about in denim.

All right. Thank you, Dorothy for the question. And I guess, when you have any kind of performance we are having in Q3, I don’t have a lot of positive things to say about trends in the business, to be honest with you. And clearly what we thought about denim and what we said was obviously what we told was the case in denim in early part of Q2 has not played out for us in Q3. And while maybe a relative number, it doesn’t matter frankly at this point when you have the kind of performance we are having. So maybe what I’d like to do Dorothy, the question is to talk a little bit more about what do we now in terms of where we are at in the market and so let me take it there, and then feel free to follow-up with me on questions. But we of course are trying to look at every aspect of our business at this point and take a look at what practical things we can do over the back half of this year. So let me just share a little bit about thinking on that front. So first, now that back-to-school is basically almost fully complete, we are going just tear the business apart and we’re going to do deep analysis on every aspect of our business across brands, across geography, we are going to look at all the product test we conducted through back-to-school and look at every aspect of the business, and I expect that this analysis is going to allow us to develop opportunities to impact our assortments on an individual store level micro-assortment basis. We are going to continue to launch new brands here in the back half of this year and we are going to work very closely with our brand partners and when it’s right, we are going to push them forward into the market across more stores in our network. We are going to look at pulling forward unique seasonal product and reconsider the timing of our fall and snow floor sets, particularly where we believe we really have some differentiated product assortments relative to the broader market. We are going to review our coordinated marketing and product plans here in the back half of the year and again take whatever actions that are appropriate from that review. We’re going to push forward trending items. We do have some items I think that we can look forward and say, we’re going to push them forward and put them in more storage here as we move to the back half of the year. We’re going to revisit our promotional strategies and our strategic use of private label. That would be another component of our business as we re-evaluate the back half of ‘15 and we’re going to continue to test and test and test. We’re going to test new brands, new items and more fashioned items across our business and when we find they resonate, we’ll move very quickly on trying to roll them out more broadly in the company. So we’re going to do many more things in that and it gives you a sense, I think Dorothy, of what we’re trying to do in to the marketplace now and as we said in our prepared remarks, we’ve always thrived on a combination of emerging brands, of hot items and of fashion cycles and I guess what’s really clear and I think we said this on our comments is that, we’re in a very -- we’re in a lull right now across all three of those things and we don’t have a driver, a strong driver in any one of those three groupings. While we’re up against a year ago in Q3, two of those, I mean two of the three items, two or three of those groupings working on our behalf a year ago. So these trends I guess, it goes earlier to our comments, are just moving faster than ever and I will remind everyone, we comped up 8% in Q4 of last year. So all things in retail cycle and as thing cycle down, I guess the one thing I’m confident of, Dorothy, is that things are going to cycle up and that what we have to be prepared for and I think we’re preparing for in terms of actions we’re taking now will be in a position to disproportioning benefit when the cycles move in our favor.

Yeah. Just a follow-up to that, I know there are couple of areas, footwear is something that has not been -- the trend has not been your friend when you’ve been trying a lot of things to work on that. Is there anything you’re seeing there that gives you any greater level of confidence? And then on the hard goods side, it seemed like you had some really good skate trends going on. Is the weakness there just a factor of traffic not being where you wanted to be or something else?

Yeah. I think there is a general traffic issue out there for us and again partly driven by without having those kinds of broad trends that are driving more than our core consumer for example, Dorothy. So let me give you a couple of data points for you to think about here and our dollars per trans as we come through Q2 and in to August, are at a high point for us and again, those have been driven by both unit per trans being up and particularly in August, unit per trans being up and in AUR gain. So when I look at this, first, as you know, we have great sales people in our stores that reflects the quality of our sales teams, but it also reflects that when our core customers come in the store, we’re getting our wallet share from its core customer. And so it tends to be that from my perspective, we’re seeing a traffic impact in that, we’re not getting the broader consumer relative to fashion cycles, hot items, those things that we’re bringing the broader consumer base. Those are things again that moved the change. I expect we’ll see cycle changes around those. So I do think fundamentally there is a traffic challenge for us and again related to, again our unique position in the marketplace and as you’re saying like in footwear, I mean what’s working in footwear is basketball and performance athletic, that’s not what we do. And that’s not what our customer comes to buy from us. So these are the kinds of cycles that we have to ride our way through on these and the one thing I know, and I think you know too from being in this business a long time is that everything cycles and we’re going to see those cycles play and I don’t think anything has changed about our position and about our ability to be at the leading edge of cycles. We have a good trend record on that and one that rolls in our favor. We are pretty good at maximizing the result and for me, when you have a great brand like we do, you have a really strong culture like we do, the omni-channel positioning that we do, it allows us really to maximize and amplify, omni-channel allows us to amplify the great brand and cultural position that we hold. So again, I know things are going to cycle, I know we’re going to be well positioned when they do.

Great. Thanks so much for the color.

Thank you.

Our next question comes from the line of Neely Tamminga from Piper Jaffray.

Great. Good afternoon. Just wanted to ask a little bit further, Rick, on the points on trend, I mean when we look back at your financials, you guys absolutely can power through prior denim cycles, so if we really are going in to this broader denim cycle, it’s not something that you could go back historically and say, Zumiez didn’t perform well during that last cycle, you guys have. So I guess what we’re just trying to figure out is how and looking forward maybe, just kind of what Dorothy is getting it, how does Zumiez do Denim with the Zumiez authenticity, I guess maybe would be one part of the question? And then secondly, to the extent that it’s more about reworking with vendors and kind of getting the right content and I think you guys are living to this in your release, in to your assortment, do you have the pricing architecture to expedite that through more air shipping to kind of get there for holiday or how should we be thinking about the timeline dynamics there?

Sure. Thank you, Neely. Well, first, I’ll remind you that denim for us isn’t nearly as big a business as it is to most of our competitors and it never has been in our world. And we tend to do a broader bottoms business I think than most of our competitors and we have a much bigger top business than most of our competitors. And likewise, we also have a much bigger -- we’re also having the lifestyle. So denim for us tends to be on a relative basis, much smaller business for us. That would be the first thing I’d make to make sure we all understand. Now, denim would be the one area too that I would tell you that our teams are going through very, very closely. We sell a lot of branded denim in addition to we selling even a larger amount of private label denim, and I shouldn’t just say denim, all bottoms. So part of what we’re doing an analysis, Neely, we would go back and really rip that apart, what worked, what didn’t work across the entire bottoms category and then we have, I think, the ability to react relatively quickly. We produce a lot of our private label denim in Mexico as we have relatively quick turn times as compared to producing it in Asia and so I think if we see things that are different, that are trending always at the width of the leg, all these things like that are different, we can move pretty quickly and that’s the types of things that our buying team would be working on.

Our next question comes from the line of Richard Jaffe from Stifel.

Hi, it’s Richard Jaffe. Just I guess a follow-on question with the sort of everything going wrong at once it seems, all categories are underperforming. We hear from others that there are trends, but I guess the keyword here is that the trends aren’t right for you, we know the 70s, the boho look, the things like that are performing well. And so wondering, do you see, in your crystal ball or in trends that you’ve followed that there are things percolating for your customer that the individual is too historically the Zumiez shopper, is this finding elsewhere that you can include or seeing in trends, whether it’s I guess Japan or streets of Paris or whatever. And any glimmers of hope you could share with us or things you guys see that’s working in retail or is that just like you said, just a lull and we have to get through the cycle and wait for something else to percolate?

I think there are clearly, it is pretty broad, an do I think you’ve got that right, Richard, and yeah, there are things that are working for us, just not on a big enough scale to offset the things that we had relative to a year ago. And that’s the position we’re in. So we’re going to need those things to mature, those things that are working for us become a bigger part of our business and as Chris said, we have a number of -- I want to be clear, the biggest issue is around trend cycles and the way you characterize it is correct that our trend cycles out there just not that ones that align with our business and our consumer relative to our position in the market. And there is a big trend cycle there about value and low price points in fashion. That’s not our game. That’s not what we do. And but we’ve talked about footwear earlier. So we do see things that are working for us out there, we have brands we’re running games, and maybe I’ll ask Chris to comment a little bit on brand concentrations, what we’re seeing here through the first half of the year. So we’re seeing things out there, it’s just not big enough to offset the trends we had a year ago. And so I will say that when we talk about the things that have been big drivers for us over the years, hot items, fashion trends and that will work for our customer and emerging and growing brands, it’s been rare that we don’t have one of -- at least one of those three working, if not multiple of them working. As we said, we had two of those three working a year ago and so part of it is again the relative strength of what is working today to what was working a year ago is I think that we have to put it in context. So we need to see those things emerge and then we have to keep pushing hard on our side to keep looking at what’s next in a way that we believe it’s right for our consumer, in a way that we can translate and what’s right for our consumer. So let me ask Chris to talk a little bit about brand concentration to give you a sense of that aspect of our business.

Just to add on to what Rick said, at the end of 2014, when we did our Q4 earnings call, we talked about 2014 brand concentration and what we told you that time was that when we look at our top 10 or top 20 brands, what we had seen was we had seen decentralized in our top -- more centralized in our top 20 brands but is decentralizing the top 10 and the 10 to 20 was becoming a bigger piece of the mix. So, we thought that as a good thing again to Rick’s comments we had some things working, you’re seeing brands come on and represent a bigger piece of the total mix. As we look at the six months to-date this year what you’re actually seeing is not only decentralization in the top 10, you’re seeing decentralization in the top 20 meaning that our top 20 brands represent less of the mix this year than they did a year ago. So, this gets to what Rick has pointed out as the lack of trend cycle, that lack of that hot brand means, more brands are contributing to make up the total mix. This is where as we look at what’s happening there, we’re still seeing 20% to 30% turnover in our top 10 and our top 20 brands, and again these brands are turning into that mix are the ones that have the potential to be the next bigger brand, it’s just based on where we’re at in the cycle, they’re not there yet, so we’ll continue to monitor them and if history repeats itself they’ll be there in some time.

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

Hi, this is Austin on for Jeff. I know you have evolved your footwear assortment and just wondering where you feel you stand on footwear merchandise content now and what your latest outlook is for that category. Thank you.

Again, we’re not going to get into talking about individual brand performance Austin, or broad category performance again. Footwear has not been as I said earlier, this is not a category that’s been strong for us for a while now, for actually multi-year period. And so, it’s all about again, how this trend and how long this trend goes is driven towards basketball and performance athletic footwear that’s not the area we play and that trend cycle is going to move and it will move to something else. To be clear, I’m not suggesting it might well move to something weak, and it may move to brown shoe or something like that that has not traditionally been our strength as opposed to lifestyle driven footwear. So, I don’t have a lot to add beyond that, I don’t know Chris you do either.

No, I mean, I think as you guys know footwear has given up about 5% of the business over the last four years and it’s really been taken from the junior business and the hardgoods business, as those that gained traction as the percent of the total business. And this continues to be a challenge for us and something that from a trend perspective it compares to be a way from what our core competencies are.

I guess one think I want to add, again I can clarify about that is, it’s down as Chris said 5 percentage points over the last few years but that we were measuring against what was a peak in our footwear concentration because we had a run up for about four years, as we peaked in it, so these are those examples of cycles, we had awesome footwear business over about a four year, five year window and now we’re seeing that cycle down and we’re in the rare condition that we don’t something across our business that’s cycling up.

Our next question comes from the line of Paul Alexander from BB&T Capital Markets.

Hi, thanks for the question. Rick, clearly the trend cycle is not helpful to you right now but do you also think you have some self-inflicted misses and I’m not looking for you to fall on the sword and say, yes we screwed up, I’m sorry, I’m sorry. I’m just wondering how much do you think we need to wait for trend cycles to change before things can get better versus do you think you’ll find enough things where maybe you could execute better when you tear the business apart and hindsight everything and work and test and whatnot or maybe you can turn those things around and drive better results yourself?

Paul, always some portion of this is self-inflicted, but I don’t think it’s outside of any normal business level for the things we miss on. For example, again as I said in the comments or said in comments earlier that, in Q4 last year, we comped up 8% and we miss things then on the upside just like we miss things now, so those are the things we’ll work out but clearly when you have this kind of magnitude of movement between like Q4 and we’re up 3% in Q1 to where we’re at today over the last few months, this has to be bigger than our misses, these are big crossing all things and it’s primarily driven by traffic in our stores. I mean, we are converting or we are closing far fewer transactions that we did a year ago. So, yes there is some self-inflicted things here but not at the scale that we tried this kind of reduction in our business.

Our next question comes from the line of Ed Yruma from KeyBanc.

Hey good afternoon, thanks for taking my question. So Rick, you’ve been a student of this for a long time, I guess given the lack of trend that fits within your wheelhouse, do you from a forward perspective start to reduce inventory or reduce buys until you see that trend, and I guess how long until kind of you think you can get the inventory levels more on line with the sales trend? Thanks.

Yeah, thank you for that question Ed. This is something I think we are traditionally very, very good at, as Chris said, we are actually pretty almost dead on aligned at the end of Q2 between from where sales were and where inventory was. We are going to work very, very hard internally to make sure that we try to stir those two things as closely aligned, we do have flexibility in terms of our open device structure to push things out, move things around, cancel orders as we need to, we will do all those things and we are and again, I think we have a good track record of keeping inventory current and clean as we need to. And so, I expected our buyers are going to do their normal good job here Ed, and that will respond well to this cycle and that’s again, we have a good track record of doing, I think we will, I don’t know Chris you have any additional comments?

The only thing I would add is, I don’t know, obviously this is part of the reason that we had some margin pressure in the second quarter because we are not a retailer that gets married to our inventory, if we got to move on it, we’re going to move on it, again, it factors into our guidance for the third quarter. And I’d add to what Rick said is also because our buyers have been nimble about this and working with our vendors, we also have the ability to chase up to, so as thinks do click here on the back half, we feel comfortable on that ability too. So we’ll continue to manage it very diligently at something that we keep a close eye on and our buyers have done really well with. So there is no concern on inventory in the second quarter and we’ll keep our eye on it and move forward.

In fact, we age inventory at and look at it in very short term buckets and we were more current at the end of this second quarter than we were a year ago on our inventory.

Our next question comes from the line of Jonathan Komp.

Hi, thanks maybe just a follow-up on that question first, just a little bit more on the markdown strategy, I know you typically are able to move some of the seasonal items that don’t sell pretty quickly but just been in the stores over the last few months, some of the markdowns appeared fairly aggressive and across most of the categories. So, do you see any risk that you’ve trained the core customer to look for those types of markdowns or how are you viewing that strategy overall as it relates to the markdowns.

You know, our strategy is to sell at full price. So, I think what the challenge on looking at our markdown strategy over the last few years is, as we all went through the recession we learned a great deal and one of the things that we learned in that is that there definitely is a value consumer and it’s a consumer that we don’t want to walk away from. So, our strategies over the last couple of years have really centered on focusing brands that you can sell at a full price but also having a value strategy and value strategy’s goal is to work with brands and intermix our own private label to still give a value message at a full price. So from an overall markdown component, you’re seeing mix shifts between the private label components [Technical Difficulty] training our consumer any other way, I think what it is, it’s providing a value message coupled with great brands that you can sell at full price and when we go into great trend cycles, we’ll sell more of the full priced stuff and in cycles where we’re away from trends, there might be a higher penetration of our private label or other value message.

And I just add to that Jonathan, that on these brands that we’re -- all the brand we’re selling, we’re adjusting inventory levels so we don’t have to markdown the brands that have – our brands that we are selling there have equity. So what you’re seeing as Chris said, we all take markdown of the seasonal product to clear and then we will have a purposeful strategy to buy into our sale racks for the purpose of providing and serving that value consumer. So lot of the markdown pressure becomes around inventory positions particular in the seasonal areas which we are going to clear up. We do not plan to carryover seasonal product. We want to be as clean as we can be in those categories.

Our next question comes from the line of Pam Quint from Suntrust.

Hey guys, it’s Pam Quintiliano, thank you for taking my questions. I have a few of them. So, as far as -- and I know this is a tough one, but you keep on talking about the fashion cycle and the fashion cycle and just how long you’ve been doing it, how long do you think cycles typically last? How are you preparing for this, especially with apparel not even mentioning the footwear, because that’s been going on for a while? And then, just -- sorry if I miss this, but are you going to change your category or brand emphasis to take advantage of those classifications or brands that are working for you? And lastly, reflecting the recent trends, are you just changing at all your approach to messaging, communication, promotions, anything for holiday that we should be thinking about?

We will I think take a look at how we’re going to be communicating and what we’ll be communicating about, clearly Pam, as we work towards the back half of the year. As we said, we do have some brands that are working for us as a matter of scale on a relative basis through the prior year and we are launching new brands still. Watch for that in the stores, you will see us launch new brands on a -- some on selected stores, some on all doors, based upon where they’re at in their cycle and we’ll be partnering with people who do that well. That will clearly play into the communication strategies for us as we do that. And again, as I said in one of the earlier comments, again, we have always tried on a combination of hot items, hot fashion cycles that we can play in as well as emerging and growing brand positioning and so, this is a very unique position in my experience that we’re planning that. We don’t have one of those three and particularly when we’re looking at a quarter or a year ago in Q3 a year ago, where we had two of those three working for us. So, this is a pretty unusual situation now. Can I quantify for you the timing on those relative to will a brand really emerge and be able to offset the declining brands we have in those Top 10 and Top 20 groups? No, I can’t. That’s going to be a function of the market. That’s our job to work and push it but not push brands too hard either. We don’t want to put brands in a position where we’re marking their product down because that’s bad for our branded partners. So, we have to ride the cycle as where we’re at in all these areas. And we will look, again while pushing to try to find the next item, while pushing to make sure we’re on the right trend cycles in terms of fashion for our consumer, while pushing and working with our brands to make sure they’re properly positioned at the right scale in our stores. That said, I’m confident that, again, this is a rarity for us that we don’t have at least one, if not multiple, not all three at times of those areas working. So, we just have to work through the cycle. Again, I’m confident, this is retail. Things always cycle in retail. We just have to drive through the cycle and be prepared by our unique positioning of our brand and our culture and our omni-channel strategies to leverage the things as they emerge. And again, things move quickly, remember we were up 8 [ph] in Q4 a year ago, now we’re having this really tough quarter. Things can change quickly both on the downside and the upside in this world. So -- but we have to be patient, we have to be there with it, we’re not going to push things and again take inappropriate inventory risk for where we’re at. And I guess the last thing I’d say in this topic is, we’re not -- we’re not -- we’re not the only one who is suffering like this in the world. So, as we said, this is a share consolidation game. And we’re the best, we’re still the best positioned in our initiative to win share. And so, in some ways, I look at this and say, this is going to be a long-term benefit to us when we go through tough cycles like this that effect a whole subset of the retail market.

Our final question comes from Adrienne Yih from Wolfe Research.

Good afternoon. Rick, can you talk about the growth piece of the business, where that’s sitting at the percent of sales? Some of the emerging trends are in that female business. Can you distort that piece of the business temporarily or as we go into the fall season and if so, in what time frame? And then finally, with regard to, if you can help us out a little bit on 2016 store openings, how many of those have been committed to and would you sort of back off on committing to more of them as you go through this transition? Thank you.

Thanks, Adrienne. Let me talk the last part of your question first on store openings for 2016 and I’ll let Chris share the percentage of mix of our growth business where we can some just brief comments about that too. Well, first what I tell you is that, we’re not prepared to tell you what we’re thinking about for 2016 on store openings at this point. However, we have a strong balance sheet, we believe this is a share consolidation game in retail, we have markets that we’re not in in North America and therefore, we’re not serving the markets, we’re not leveraging our omni-channel strategy. We have opportunities to win more share and again -- and based on our as you heard us say in our prepared comments, you have -- these things work in tandem, both the digital and the physical spaces have to work in tandem to win share. So, you will see us opening a good number of stores next year. We’ll decide on where that number is and we’ll share that with you as we move into our March time frame, but we’re not prepared to talk about specifics today but we’re going to open stores and because it is a share consolidation game, our stores generally perform well and in tandem with our digital capabilities, we got to go out there and earn the share in the markets we’re not doing business today, and that’s just the last opportunity if we don’t. So, we’ll clarify over the next six months what we plan to do for next year, but you should plan for us to open a decent number of stores across North America and as we said, Europe, we’re having good success with the work done in Europe. You’re going to see us continue to push store openings in Europe in combination with the omni-channel strategies there. Our Blue Tomato team is doing an absolutely fantastic job of opening and building stores, building the omni-channel model what we’re doing and we have a huge opportunity in Europe to -- which is another highly developed marketplace, not growing as fast as the U.S., but clearly we’re winning share there because of the great brand position of Blue Tomato. The cultural strength and our ability for them to leverage our omni-channel strategies. Chris, you want to share girls’ business in terms of mix?

Absolutely. From a juniors’ perspective, I mean this is a business over the last four years has grown from 11% of the mix to 14% of the mix as of the end of 2014. We’ve seen this business perform really well since the fourth quarter of 2010 and as we indicated in our prepared remarks, this is the lowest of our category declines in the second quarter. So, I would tell you that we definitely have things that are still working here although we weren’t able to overcome some of the seasonal products and the foreign exchange issues that we had across the entire business in the second quarter. We still think really good about direction of our women’s business and its penetration over the last few years.

There are no other questions at this time.

All right. Thank you very much, Lauren. Let me just close the call today by saying, of course, we always appreciate one’s interest and questions in these calls. We realize these are challenging times for us in terms of our position in the market, but as I said at the end of my prepared comments, I’m very confident in our overall position, the strength of our brand, the unique cultural experience we provide and I know that trends will cycle and we’re going to have to be able to leverage those future trends. So, thank you for everyone’s time today and we’ll look forward to talking on our third quarter conference call for release on third quarter results. Thank you.

Ladies and gentlemen, thank you so much for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.