Rick Brooks - CEO Chris Work - CFO

Neely Tamminga - Piper Jaffray Jessica Schmidt - KeyBanc Capital Markets Randy Konik - Jefferies Richard Jaffe - Stifel Betty Chen - Mizuho Securities Pam Quintiliano - Suntrust Benjamin Bray - Robert W. Baird Jeff Van Sinderen - B. Riley Sharon Zackfia - William Blair Doug Drummond - Wolfe Research

Good afternoon, ladies and gentlemen and welcome to the Zumiez Incorporated Second Quarter 2016 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’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 regarding a number or factors that could cause actual results to differ materially from the information that will be discussed, is available in Zumiez’s filing with the SEC. At this time, I’ll turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Good afternoon. I’d like to thank everyone for joining us on the call today. With me I have Chris Work, our Chief Financial Officer. I’ll start today’s call with a few brief remarks regarding the second quarter and also provide an update on our broader strategy; I’ll then hand the call over to Chris, who will take you through the numbers, after which, we’ll open the call to your questions. Second quarter results came in ahead of our guidance, though we continue to be impacted by the macro level headwinds that are affecting the retail sector for the last 18 months. Net sales for the quarter were $178.3 million with comparable sales down 4.9% and a loss per diluted share of $0.03. All three metrics were above our guidance ranges, but well below the results we expect to deliver over time. That said, we are encouraged by improving monthly comps during the quarter and the continued execution by our team providing a great customer experience while managing expenses in light of this challenging retail environment. As we moved into August, our teams continued to execute well. And while August comparable sales declined 1.1%, we saw meaningfully better results in the last week of August through Labor Day weekend and into this week, turning the quarter-to-date comparable sales through Wednesday, September 7th to a positive 1.2%. This increase has been largely driven by transaction gains and centered around our apparel and accessories departments. Similar to prior years, we have seen the back to school season compress around the important weekends before and after the start of school in each region. As we head into the back half of the year, we remain focused on effectively balancing our strategic growth objectives while protecting our near-term profitability by remaining disciplined with our spending while focusing on the right investments to exceed our customers’ expectations. We believe our hyper-localized merchandised assortments combined with our expanding global presence has us well positioned for both the near and long-term. To that end, the investments we’re making in our omni-channel strategy remain key to staying in touch with our consumer on a personalized grassroots level to ensure that our brand continues to resonate in authentic manner. Underlying these investments is the same commitment we’ve always had to our brand and culture. Enhanced to making to product delivery and our world class customer service are first and foremost aimed at augmenting our positioning and relevancy to our core customer base. Our efforts to-date are giving significantly faster delivery times for our online orders to our localized store fulfillment program. As we implement our customer engagements within North America, we’ll gain additional touch points for our customer, a faster, more integrated commerce platform and enhanced omni-channel functionality. This allowed us to further interact with our customers to facilitate alignment between our customers’ desires, our brand offerings and positioning. We’re excited about the long-term potential of this new system and anticipate completing a full rollout across North America in 2017. In terms of physical store expansion, we anticipate opening 22 new stores in North America and seven new stores in Europe in 2016. Our strategy for new store openings remains the same. We’re committed to opening only those stores that are required to best serve our customers in any given trade area. Accordingly, and as we begin to approach our target for total mall store count in North America, our new store openings have slowed. Our focus has shifted towards optimization of the store base as we leverage our integrated structural and technological platform to maximize the impact each store has on its respective geographic region. In Europe, where the market remains highly fragmented, we are still in the early stages of expansion. We’re projecting a rate of new store openings in 2016 that is slightly higher than 2015. We believe that significant opportunities exist in Europe as well as other international regions, which provide additional growth vehicles as we move forward. To that end, we’re happy to announce that on August 31st, we completed acquisition of Fast Times, a Melbourne, Australia based lifestyle retailer. Fast Times was established in 2008 and currently operates five stores and a website in Australia. The acquisition of Fast Times connects our North American and European retail networks with another important market in Australia. We’re excited about the opportunity to establish a strong foothold in the market and join forces with a successful leading company that shares our core values and operating philosophy. We look forward to working with the Fast Times team and helping them grow in the Australian marketplace and beyond. In wrapping, I’ll underscore that with the current challenges in retail sector, our focus remains on making those decisions that best align our investments, expenses and growth strategy with our commitment to riding a unique approach to the market to an authentic brand experience for our customers. We’re confident that we’re making the right decisions now to sustain us in the long-term. And in doing so, we believe we’re well-positioned to capture global market share. With that, I’ll hand the call over to Chris for his review of the financials. Chris?

Thanks, Rick. Good afternoon, everyone. I’m going to start with a review of our results for the second quarter and then provide some thoughts on the third quarter and the remainder of fiscal 2016. After that we’ll open the call up for your questions. Second quarter sales declined $1.5 million to a $178.3 million from a $179.8 million a year ago, driven by lower comparable sales down 4.9% from the prior year, offset by the net addition of 33 new stores since the end of the second quarter last year. This decline was driven primarily by lower transaction volume, slightly offset by the increase in dollars per transaction. Dollars per transaction in the quarter was driven by an increase in units per transaction offset by a decrease in average unit retail. Comparable sales results improved as the quarter progressed with notable strength in the men’s category. Other major product classifications including hardgoods, juniors, footwear and accessories, all comped down for the quarter. In terms of regional results, North America sales increased $0.4 million or 0.2% to $165.9 million and European sales decreased $1.2 million or 8.5% to $12.3 million. During the second quarter, we added nine new stores in North America and one in Europe. Total store count as of August 27, 2016 was 674, including 649 in North America and 25 in Europe. Second quarter gross profit was $54.8 million, a decrease of $3 million or 5.1% compared to the second quarter of 2015. Gross margin for the second quarter was 30.8%, down a 130 basis points compared to 32.1% in the 2015 second quarter. The year-over-year margin decline was largely a result of deleveraging of our occupancy costs on lower sales worth a 140 basis points. Product margins were up 30 basis points for the quarter from the same quarter in the prior year. SG&A expenses for the 2016 second quarter totaled $56 million or 31.5% of net sales compared to $52.5 million or 29.2% net sales in the year ago second quarter. These changes are the result of deleveraging of our store operating expenses worth a 160 basis points and deleveraging our corporate costs worth 90 basis points. During 2016 second quarter, we generated operating loss of $1.1 million, compared with operating income of $5.3 million in the second quarter of 2015. Second quarter net loss was $0.8 million or $0.03 per diluted share compared to net income of $3.2 million or $0.11 per diluted share in the second quarter a year ago. Turning to the balance sheet, cash and current marketable securities totaled $52.3 million as of July 31, 2016, down from $75.6 million as of January 30, 2016 and $80.8 million as of August 1, 2015. Year-to-date stock repurchases totaled $18.3 million and capital expenditures totaled $11.9 million. During the 2016 second quarter, we repurchased approximately 447,000 shares on the open market for a total of $6.7 million. As of July 31, 2016, we had $36.1 million remaining under our share repurchase authorization. We ended the 2016 second quarter with $131.8 million in inventory, up 7.9% from the end of the second quarter of 2015, driven primarily by our increased global store count and to a lesser extent an increase on a per square foot basis. Turning to our August sales results, total net sales for the four-week period ended August 27, 2016 increased 2.6% to $89.5 million compared to $87.3 million for the four-week period ended August 29, 2015. Comparable sales decreased 1.1% during the four-week period ended August 27, 2016 compared to a comparable sales decrease of 10.7% for the four-week period ended August 29, 2015. The decrease in comparable sales was driven by decrease in dollars per transaction, partially offset by an increase in comparable transactions. Dollars per transaction were down due to a decrease in average unit retail, offset by an increase in units per transaction. During the four weeks ended August 27, 2016, footwear, juniors and hardgoods posted negative comps, partially offset by positive comps in men’s and accessories. As Rick mentioned earlier, sales were much stronger exiting August, and through the important Labor Day weekend turning our quarter-to-date comps positive through yesterday. Year-to-date, through August 27th, our comparable sales were down 5.2%. On August 31, 2016, we acquired 100% of the outstanding common stock of Fast Times, headquartered in Melbourne, Australia. The acquisition price was $6.9 million, consisting $5.5 million in cash, and $1.4 million in shares of common stock subject to certain pre-closing and post-closing adjustments. Fast Times revenue for the 12-month period ended June 30, 2016 was $9.2 million Australian, with approximately 10% pre-tax operating margins. Going forward, we do expect to make select investments to scale the business as well as incur certain purchase price accounting charges but expect the overall business to be a accretive to earnings in 2017 and beyond. Turning to guidance for the third quarter, once again, I’ll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margins, and earnings growth given the variety of internal and external factors that impact our performance. Keeping that in mind, we are currently planning third quarter comparable sales results in the range of negative 2% to flat, with total sales in the range of $209 million to $213 million. We estimate gross margins to decrease 75 basis points to 125 basis points compared to the third quarter 2015, due primarily to deleveraging of our store occupancy costs. Consolidated operating margins are expected to be between 4% and 5%, with diluted earnings per share between $0.21 and $0.26. In addition to our quarterly guidance, I want to again share some thoughts on the full fiscal year. Heading into the third quarter, we are encouraged by our most recent results during the peak selling of back to school, while remain cautious based on the same retail headwinds that have pressured sales over the last 18 months. While metrics have improved quarter-to-date, mall consumer traffic continues to be lighter than we like due to lack of compelling fashion trend. That said, with our results reported to back to school today and the important holiday period in Q4, we believe we are offering our customer a reason to come out and shop and are well-positioned to perform better in the fourth quarter. For the full year, we anticipate product margins will improve from 2015 with the largest year-over-year opportunity in Q4. As a reminder, 2015 product margins were pressured as we moved through the year as a result of the decline in top line performance. From a cost perspective, we are still planning SG&A to grow at a greater rate than in 2015 as we continue to absorb minimum wage increases across the country and make the right investments for the business over the long-term. We are on track to open our planned 29 new stores in 2016, including six in Canada and seven in Europe. New store openings will occur with a similar cadence to what we have done historically with the majority of these openings occurring ahead of the back to school season. Full year capital expenditures are still expected to be between $24 million and $26 million, the majority of our capital spend dedicated to new store openings and planned remodels. We anticipate depreciation and amortization to be approximately $29 million, slightly below the prior year. We are planning our business assuming an annual effective tax rate of approximately 37.5%. Lastly, we are clearly projecting our diluted outstanding share count for the full year to be approximately 25 million shares, excluding the effect of any additional share repurchases made during the year, which would further reduce our share count. And with that, operator, we’d like to open the call up for questions.

[Operator Instructions] Our first question comes from the line of Neely Tamminga from Piper Jaffray. Your line is open.

Great, thank you. Good afternoon. And it’s been really great to hear about clarification in trend during such a critical time in your business. So, congrats on that. Rick, I was just wondering if you could help us out a little bit on better understanding some of the things going on in the store. We actually in our store walks have seen an improvement in visual merchandising execution, some interesting new brands. Are the things specifically you’re seeing in the acceleration of trend that the consumer is responding to that avid, really confidence that they are something interesting, new and a trend change versus a blip? Just trying to understand that -- and I have a follow-up question.

Thanks Neely. I’ll be glad try to help you out a little bit with that. And as Chris said in particular, our managed business really has been doing well; it was up in Q2, continues to be stronger here quarter-to-date for us. It’s leading the way. And as you know that’s our largest proportion of our business. So, we’ve been talking all year going back to thinking the Q1 and through Q2 about our encouraging feelings about some of our emerging brands, partners; that is continuing to accelerate. So, I think we feel good about that. Neely, now, that’s a positive for us. And I can tell you virtually in our men’s business, everything is working. And there is almost -- it’s hard for me to find something we’re not doing in our men’s business at this point, which tells -- which is both about a brand story as well as it’s about the quality of our private label efforts too, I should add, in terms of the work our team has done there. So, I feel good about those aspects of where we’re at. Now, I’m not going to talk about individual categories within departments or brands. Those are -- those tend to be proprietary information for us. But generally, I guess -- and the other thing I’d say is as seeing the transaction gains coming through with the quarter-to-date numbers, we haven’t run a transaction gain since I think the fourth quarter of 2014. So, this is also from my perspective encouraging. So, all that Neely, and I’m glad in those individual merchandising, we’re spending more effort on that front and I think you’ll see us do more over that here over the next few months. As you know we never want to sit still and rest, we’re going to continue to push and try all sorts of new things. So, we can talk more about that and around I think in this call but all things we’re doing around localization and other aspects of our efforts too. But that all being said, feeling a bit encouraged, but I think Chris and I both feel that peaks are different than non-peaks in this world. So, we’re being a bit cautious relative to what’s going to happen when we move out the peak back-to-school cycle. We’re also cognizant that we have to do better than this positive comp and this quarter to really leverage our cost structure. So, we have more work to do on that front and again, we need to -- we’re going to challenge ourselves in so many areas of our business to do better. So, I guess Neely, I’d wrap it up by saying yes, there’re number of things I think we’re encouraged about. You’ve seen some of them. Again, we’re encouraged about the private label, our good work there in both men’s and women’s, likewise the brand efforts that we’re seeing and emerging brands. But, we still have a lot of work to do and to drive results and I think and continue to win share in the marketplace. So, let’s hope this is good but we’re cautious yet too as we think about the rest of this year.

And I just have a follow-up question. There’s been so much written in the press over the last seven days around some of the potential shipping delays from a particular transportation company. So, anything you can share with us about whether or not you guys are being impacted by that or kind of help navigate investors thinking about that? Thank you.

Yes, absolutely. Neely, I’ll take that one. As you expect, we are currently monitoring the situation. To-date, we’ve not been made aware of any significant disruptions in our supply chain from our branded partners. We are closely monitoring as well for our own private label goods that we take more ownership of bringing over here. And we do have some direct dealings that are caught up in this situation but the amount currently impacted product is certainly not material to our overall private label business or our combined business. So, we feel okay about where we’re at. And I think the teams have responded really well; they’re working around the issue. And we’ll keep moving forward as business as usual.

Thank you. Our next question comes from the line of Jessica Schmidt from KeyBanc Capital Markets. Your line is open.

I guess just first on the product margin improvement that you’re guiding to for the full year. I guess, can you just talk about what sort of driving and do you think that the promotional environment is getting a little bit better or is this really something more that you’re doing?

So, for me, I’ll start it off, Jessica, and then Chris can add if he feels necessary here. But, for us, you’ve heard us say over the last couple of calls that we think there are long -- this is a game, we’re playing in a newly empowered consumer world that’s about share consolidation. And I think we suggested a couple of calls ago that there were -- we thought they’re indicators of those are going to win share in markets and one of those indicators was the continued strength of -- and stability of product margin, which reflects I think and particularly for our business our ability to sell at full price and full margin to our consumer, which is really for me representative of brand strength, our Zumiez brand strength, meaning that our consumer sees value on what we are doing and is willing to pay full price. So that is partly reflecting there. I think as our buyers have done a great job, it reflects back to our previous comments earlier here on the call about being -- about having unique brands that are merchants in the marketplace, it reflects back to the comment we made about the strength of private label here performing well, and it also reflects back to the fact that we were down a little bit last year. So, we intend to get that back and some of that I think as Chris said is looking forward into the back half of this year. So for me, the strength of product margin is focused on a lot. Yes, it’s very competitive out there. You will find I think because we are not playing that competitive game as we think about it. We feel pretty good about where we are from an inventory perspective I think. And we are clearly planning for value in our business, so we can deliver value to our customers. But we think about that again as full price and full margin in terms of how we think about value -- offering values to our customers. So, feel pretty good about where we are at on the product margin base. And Chris, do you have anything to add?

Yes, I’d just add little more color on the cadence of product margin. We were down in the first quarter about 50 basis points. And as we stated on the call today, the second quarter was up 30 basis points. So, we feel really good about how our product teams manage product margin here coming through the quarter. From a Q3 perspective, our guidance contemplated today basically flat margins for the third quarter. As we said in our prepared remarks for the year, we really do -- the fourth quarter is where we have opportunity in product margin. And as you may recall from last year, it was our lowest performing quarter overall from a product margin perspective. So again, coupled with what Rick talked about as far as how we are able to drive product through the store that resonates with the consumer, we feel like the opportunity is still ahead of us on the product margin side.

Great. And just as a quick follow-up, can you talk about any changes if you are seeing, if you are not in terms of the footwear statics for this season; if there is shift going on, how you kind of managing to that?

Sure, I’ll take that Jessica. Footwear is as you are aware, to put this in context a little bit, it’s been tough for us almost the last four years. Now, remember when we had about a four-year positive run prior to that. So footwear for us over the last four years and I think what we have been -- what we would characterize, I think the market can characterize is that’s more of a performance athletic or basketball trend in footwear, just one we’ve not been able to play in. So, we seeded the share in that regard over the last four years in footwear, but we picked it up in other parts of our business too. So, now, we certainly are seeing some things are working in our footwear business that I sort of characterize as fashion, athletic, plastics. Those are things clearly working for us. And I think some of what we are seeing again as we think about this modern consumer power world is just how fast things can change. And that’s certainly our thinking. And as we talked about with jogger pants in the past that trend cycles are -- when they move, they move quickly. So, it’s still to be determined in my mind as to how this footwear cycles going to play out. We are definitely I think getting in the latter part, in my opinion for a four-year run. We’re looking for something new, we’re clearly playing with a lot of different things in our store, trying new things in footwear in both men’s and women’s, trying to find that next element for us. But I think wherever it goes, the winners and losers are probably still to be determined in footwear. And as you heard us say in our remarks regarding the quarter-to-date, the positive comp that we achieved so far quarter-to-date is being driven by men’s and women’s apparel and accessories. Footwear for us at this point has continued quarter-to-date to be a laggard. So, now, strength of our model as always said, as I think I said earlier, it’s been about diversification around lots and lots of categories of business, lots and lots of brands within our business. So, our goal is to use that diversification to find trend and right unique product for our customer. And I like to think that over the long run we can find ways to drive sales, even if it’s department like footwear maybe a bit challenging for us. So, that’s currently where we’re at with footwear as we think about it today. And we’ve got some challenges out there yet. I am not sure exactly where it’s going, but quarter-to-date continues to be a laggard in spite of us getting significantly better in other parts of our business.

Thank you. Our next question comes from the line of Randy Konik from Jefferies. Your line is open.

Hi. It’s Janine [ph] on for Randy. I just had a question on the international strategy, I hope you could elaborate a little bit more there, specifically what attracted you to Fast Times, any plans you have for that business? And then anything you’ve learned from Blue Tomato that maybe can be applied here? And then lastly, what markets you’re not in that you think could be opportunity going forward?

So, let me share a little bit about our thinking around acquisition of Fast Times. It’s a small acquisition for us. And first, let me start just by saying how excited we are about welcoming the Fast Times team to the Zumiez family. I would tell you that in the case of -- one thing that’s consistent between Fast Times and Blue Tomato is that they are both strongly aligned with the Zumiez culture. And that is very, very important that we have value alignment amongst ourselves in terms of how we think about running the business in different parts of the world because there we can truly rely on our partners around the world and can leverage our strength as an organization across our global businesses. So, I can tell you that the Fast Times team is tightly aligned with us in terms of wanting to own their business and wanting to learn and grow all the time and have been super competitive. And these are all key parts of the Zumiez value system. So, we feel very great about that. And again, welcome to the Fast Times team, they’re going to be I think a lot of fun partner for us to have as we look at now growing in the new part of the world. But I also want to back up little bit just to make sure that when we talk about what we’re doing internationally, I want to put this in the context of our long-term strategy. And so, I want to talk about that first from the consumer point of view and then second from our brand partner point of view. So, we definitely -- and we’ve been saying this for a while now that our consumer -- we believe our consumer is a global consumer. They shop the brands and trends globally. And that’s true. We see that is true for our domestic businesses in Europe and the U.S. and Canada, as well as, as we see it from consumers from us on our websites in both the Europe and the U.S., buying from us from locations around the world where we do not have stores. I think we’d also look at the initial work and research we’ve seen around Gen Z and say, this is even going to be more so with this next demographic wave of Gen Z consumer. They definitely embody this idea of wanting to be active in the local communities but also be part of the broader global community. So, we have felt that this was the way the consumers going. And the reason is because of how empowered the consumer is and because of the sheer computing power and ability, transparency has been created by mobile phones. So., this has been part of our thinking for a while now. And we’d also tell you that in the current modern world, we see brands and we believe brands will emerge from anywhere, new brands can emerge anywhere and quickly reach our niche consumers anywhere in the world through these mobile devices. And we’re definitely seeing evidence of that in our business today. And that’s a pretty exciting thing for us too. So, from the brand point of view, I think our goal has always be the best retail brand partner for our -- for the brands that we work with around the world. And what we’re trying to do is provide them the highest quality retail distribution platform, so we can help them easily grow their brands in key markets around the world. So, we began this process in terms of a long-term strategy, doing a lot of work in Canada and then opening our first stores there in 2011 again, lot of work in advance in Europe before the acquisition of Blue Tomato in 2012 and now adding Fast Times here in 2016. So, again, as part of the long-term strategy, we intend to grow these markets and as we grow these markets, our goal is going to be rolling our full suite of omni-channel tools, our full suite of merchant tools including our ability to micro assort local markets. And I think we’re only now beginning to explore the idea of a global omni-channel model which is I think a whole new way for us to be thinking about how we’re going to serve a global consumer. So, much, if I guess, the some of the step up from long term strategy point of view is we want to be aligned with our consumers, we want to be in service of our brand partners and our goal is the same as our customers, as they think about how they work in the world. We want to be in their local shop, but we want to be the local shop with global reach and global scale. So, that’s how Fast Times sits in this for us; it was an important aspect within our lifestyle niche; it was probably the next most important developed country that we were not doing business in. So, it’d been on our list for last few years to look at. I think we’ve partnered with the strongest player in Australia. And so I think we feel very good about the opportunity. Chris, do you want to add anything?

I think you covered it.

Thank you. Our next question comes from the line of Richard Jaffe from Stifel. Your line is open.

Thanks very much guys and really encouraged by the men’s apparel business and accessories, and wondering if you could provide a little more detail. It sounds like things just comp positive end of the quarter or now into September. And just trying to get a better sense if the trends are consistent in men’s and accessories, you mentioned footwear continued to be a laggard. And then, if you could talk about now that things are working and the stores are looking a little bit more innovative, I don’t want say crisper because your stores aren’t that kind of exciting there.

What -- Richard, I can’t believe you’re saying that… [Multiple speakers]

Whatever. Maybe the visual merchandising efforts, if you could talk about marketing and making your stores more appealing from a marketing standpoint as well. Sorry about that.

Again, I just want to, on that last point Richard, I mean, I always appreciate your input. That -- but we know our consumer incredibly well and we know what we’re trying to do for them. I think we know better than anyone about how we appeal to them. And we certainly think we have some opportunities from visual merchandising perspective, you’ll see us put some effort around that here; we already have, you’ll see more I think. But we never -- our business is about serving a very unique consumer. We don’t serve all teenagers; we serve a niche of young people who want to express themselves more so in a more dramatic way than the broad -- than the vast majority of people within their age demographic. So, we have always done well in this marketplace and we are winning; I believe we are the winner in our niche of markets. So, I just want to encourage you to think about it from this perspective because we do know what we are doing in this area. And I think our performance over the years reflect it and I think our performance over the next year’s will reflect it even more so. Now, as it relates to the quarterly -- I am not going to add a lot of color, again, we don’t want to talk specific categories of business, we don’t want to talk about specific brands, again because our story’s always been about diversification. But as we said, the men’s business, I mean virtually everything has been working well for us. We are doing quite well on the men side. So, I hope this can be a foundation of us. Now, again, as we said, we have some caution about that just because of peak is different than non-peak, and we know that. And we have more work to do. At one point two comp is not good enough to leverage our business. We have got to continue to push and innovate and do better and do better at serving our customer, attracting them to shop with us in all channels. So, we have more work to do there Richard. I guess, I’d add some -- a bit of color around women’s. We definitely saw women’s meaningfully improve as we moved in to the last week of August and the first 10 days of period eight. So that was encouraging for us too and an accessory was good throughout the cycle. And again there is obviously some rotation. To be clear, there are some categories in accessory running negatives in and others were just running big gains in. And we are -- again, I think the team has done a great job, because the gains are exceeding our negatives in accessory at this point time in both men’s and women’s accessories. So, feel good about those. And then lastly, again we have a gain in transactions. This is -- I have always said I like gains anywhere they come whether through formation of transactions and AUR. I’ll take it -- get more units, I’ll take gain anywhere I can get it. But that is important cycle for us. And I am very encouraged that we are seeing transaction gains here through the quarter-to-date number. So that would be -- that was much I am going to add to Richard to the comments at this point.

Thank you. Our next question comes from the line of Betty Chen from Mizuho Securities. Your line is open.

Thank you, good afternoon. Thanks for taking our question. Congrats on the nice start to the quarter. I was curious, Rick, on how you think about the back-to-school season. It seems like we have heard that sometimes in the past, it’s more procrastinated and people buy a lot more even after good start. What is your thinking in terms of what you are seeing this year versus prior year’s patterns? And then, my second question was more about going into the winter with the fourth quarter. Chris you mentioned there is a meaningful product margin opportunity. I guess we are also curious when you look back hindsight 2020, what were some of the learning’s from last year’s holiday season that you think might be helpful for this year? Thanks.

Alright. Thank you Betty. I’ll take the first part and let Chris address product margin in the back half or the main half of the year. So, there is no doubt. We have been seeing year-over-year-over-year that all peak seasons have compressed into fewer and fewer days. I think this is a nature of the modern world, again where people have access and complete transparency of price and availability of products via their mobile devices, Betty. So, I think there in a lot of respects is a natural evolution of the consumer having power and I think also the consumers are very smart. They’ll wait and try to wait out the retailers on price. And a lot of retailers are willing to accommodate consumers on price, I might add as it gets later into the season. We have not been won to do that historically over the long view of what we try to do. We try to hold price. We have constant -- we do not price differently between channels in our business. We’re very-disciplined about that because we believe that if we have it in both channels, there must be complete pricing clarity between both channels. So, we’re really disciplined about that and we’ve seen this continued progression, both in holiday and I would tell you again at this back to school season a further compression towards the last weekend of back to school and even more movement towards the first weekend post schools going back. And we actually track this by -- we can actually report on which stores are going back at what point in time and we actually track what happens each week before they go back and each week based on their starting and what happens the weeks after they go back. And there is no doubt that we saw the same pattern pretty much throughout the entire back to school cycles, lower build up before school starting, hit right at the few days before school goes back and then a bigger post back to school shopping in those areas after they go back. And I would say that was probably the most pronounced we’ve seen it in recent years and maybe ever in our world. And that is partly though why we’re telling you so much and focusing on the quarter-to-date numbers because clearly volume got consolidated the big weeks in our back to school cycle are week three of August, week four of August and week one of September. So that’s why I don’t think that August itself the 1.1 negative comp told the whole story there, and because everything was compressed tighter to the go back date and then post the go back. So, for me this is continuous trend and I think it is related to what consumers can do and how we’re empowering them to see what we have, when we have it. And I think they’re smart to try to wait out people on discounts. We just try to avoid that trap if we can. We don’t believe that’s right thing for our brand partners. And we want to sell unique cool stuff that’s hard to find. So that’s our mission. And so that’s how we’re thinking about it, more pronounced than ever I would say.

Hey Rick, can I just ask quick follow-up on that as that was really helpful to know? I was curious whether you saw similar behavior online in terms of the peaks around weeks three and four and week one of September?

Yes. And the answer is yes, we do. When we talk about business, we look at business from trade areas now. So, we can actually look at -- when we talk about sales, Betty, we’re actually looking at sales on a trade area basis. So, yes, we’ve seen the same cycle around that. We don’t really think of the web as a different channel at this point. We think of it as just another way that customers buy from us in a trade area. And we think that the two channels as incredibly tightly integrated, which is why in my opinion you can’t price differently between the two channels. And now, the challenge is around that to say the least, but that’s why the discipline for me is so important because consumers are smart and they’ll learn to play channels against you if you play that game yourself. So, when we think about it, we think it about as one. So yes, we find the same general patterns in the digital world too.

Okay.

And then just from -- before -- I’ll answer the holiday question here in a second, but before I move to that, just put some quantification to the quarter and everything Rick is saying. I mean, when you just look at August alone, August represented about 43% of the quarter and was a negative 1.1 and then obviously getting to a positive 1.2 over the first 10 days, you can tell the magnitude of the push in the lightness of back-to-school. And I think that’s the piece we’re really trying to highlight with the quarter-to-date numbers. So, if you think about holiday and the opportunity there, I’m going to refrain from giving Q4 guidance other than to kind of go back to what we said in our prepared remarks, which is really, I mean from the sales perspective -- we believe we’re doing some things that are really working in the business and our team in connection with our branded partners and our sales teams are all very much aligned in how to serve the customer to the best way possible. And with that we do expect to see better results than what we’ve laid out here in our guidance for Q3 in the fourth quarter. I’m not going to quantify what that is at this point because I think we still have ways to go and a lot to learn but we continue to believe that we have opportunity here in the fourth quarter on the sales side. From a margin perspective again, we were down 110 basis points in margin in Q4 last year. And so as we think about the opportunity from a margin perspective and some of the things we have working in the business, again our expectation is that we can -- we should be able to drive value in Q4 while really serving the customer in the best way possible and providing them what they’re looking for. So, that’s why we gave those comments and color just to kind of try to outline the year. And as we wrap up the third quarter in our third quarter earnings release, we’ll give some more color on what we think that actually will come out at.

And I guess I’d only add Betty that there’s -- we did do a lot right last fourth quarter. So, it’s reflected in the sales and the margins. So, we could learn a lot from that and hopefully we’ve seen some of the stuff we’ve done here play out better, I think hopefully back-to-school would be a better indicator of what we might be able to achieve at holiday. And then of course, it would be great if have winter broadly across the country that as you know we have a strong winter business that’d be a positive for our business too.

Thank you. Our next question comes from the line of Pam Quintiliano from Suntrust. Your line is open.

So, you’ve mentioned a number of times about just peaks versus the non-peaks and cautioning us about back to school definitely being the peak season. But do you -- how do you think about communicating with the customer during those non-peak periods? Is there any change in your thought process there; are you reaching out to them more, reaching out to your loyal customers more, doing anything different online, just how should we think about that?

Yes, that’s great, Pam. And let me help you with that a little bit. Clearly, we have different strategies in non-peaks than we do peak. And in peak windows, we’re about -- all about our communication with customers, so primarily about driving volume and about sales and about uniqueness of product in the stores as well as value messages. We definitely, as a lifestyle retailer, we appeal to all socioeconomic groups. So, we want to provide value and plus the overriding thing with all consumers these days is they all want a value offering. So, in a peak, it’s about those things, it’s about sales now. And in a non-peak, you’re going to see us switch much more to a mode that is about unique products, that’s about unique experiences, both from a grassroots event perspective. We do a lot of events throughout the year across the country of all scales, small little tiny ones in markets, really big ones in key markets around country where we want to focus our tension within those markets. So, you will definitely see us folks as I’d characterize it this way is that peaks are about driving our volume and they are about clearly product messages, they are about connecting our customer to product in our stores relentlessly. And in non-peak it’s about brand and it’s about the brand experience that’s expressed through what we can tell stories with at Zumiez and how we tell stories through our brand partners and through working together with them. So, thematically, those are the big switches you will see in there. And then, we would also be talking about brand launches within there and seasonal differences, seasonal floor set, like for example in snow product, we’ll hit in key markets around the country. So, broadly that’s how I’d characterize how we think about messaging to consumers. Peak is about product and sales and driving volume and connecting with the consumer on value; and non-peak is about brand experiences and connecting with them, connecting with our core consumer in a more intimate and personal life.

And forgive me for what maybe an obvious question. But, is there -- given the dramatic shift between peak and non-peak versus historical, and I know you guys have always done a great job keeping it real with your customer and offering a lot of very differentiated events. Are you doing more of that than you have historically, even though it’s the same kind of thought process, you are amping it up, or should we think about it as similar to where it’s been over the past few years?

We have over the last couple of years, amped it up. It was a bit of a change in strategy away from major events and more into localized events, and in clear partnerships and with our brand partners. The types of events are also much more varied, I’d tell you too as we talk about what we have done over the last couple of years. So, we are doing -- and do you know Chris, the number of events a year, it’s approximately 300 number to give you a sense of the scale of events we are doing. If we can do more, we will do more, because -- and you have to think about these as not some grand global event structure we’re doing, there are about localized, personalized events that are targeted just like we’re micro source stores, they are targeted at certain regions of the country, because that brand resonates there in a way it does in any other part of the country. So, there has been a change over the last couple of years and how we have been doing this. And as we can afford to invest, I think you will continue to see us do more things like this.

That was very helpful. And if I could just do one follow-up regarding the brands and some exciting new brands that you have out there. Is there any way to think about how much exclusive you have with that product and how you are able to protect it especially as head into the important holiday season?

Yes. Again, I’d tell you, the brands we have been talking about over the last few months, we have near -- it’s our sales where they are biggest partner and there are local shops that are clearing the products. But outside of that that’s really where they’re limited at this point. Yes, we do think about this and as you might imagine, spend a ton of time at how we think about unique product from all of our brand partners. And of course we would love to be a long-term partner for a young brand that emerge and that’s part of our trying to build a global platform, how can we help them grow quickly and efficiently in a low cost way around the globe. And that’s part of our internationalization strategy with Canada, with Blue Tomato and now with Fast Times. And I think we can do a lot of work there yet on how we can be a better partner for our brands as they move from emerging to growth brands and hopefully in a way that they can make more money and grow their business quickly, but always be in a full price, full margin environment in high quality, culturally driven brand experience like at Zumiez.

Thank you. Our next question comes from the line of Benjamin Bray from Robert W. Baird. Your line is open.

Could you comment on the concentration of the recent comp improvement? Obviously, men’s is getting better, accessories seems to be getting better, but are some of those lagging categories also getting less negative?

Yes. And just to give you a little bit more color around that Benjamin. Footwear was a laggard but it did get less negative and skate hardgoods lagged even more and actually got more negative now within the peak. Now that is not unusual, to be clear; back to school is not a big skate hardgoods window. So, that tends to be more in the spring, more towards holiday and gift giving. So, it’s not necessarily a signal about skate hardgoods would be what I would tell you at this point. It’s just the nature of back to school, it’s not where dollars are spent, they’re more spent in apparel, more spent in accessories, more spent in footwear.

And then on the Q3 margin guidance, it seems like that implies a decent amount of SG&A growth. Could you just walk us through some of the components of that growth in the near-term?

I think I’d go back to how we started the year where we talked about it at the beginning of the year. We talked about SG&A growing at a higher rate than what it did in 2015. And we put that mostly on the increase in minimum wage. I think there is certain investments that we believe are important for the long-term here. And as we look at SG&A in the third quarter, we’re actually -- we’ve been trying to manage costs pretty well through the first couple of quarters. But there are some investments that are coming in line here in the third quarter. I think when you look at SG&A and then based on our guidance, you can tell there is some de-leverage there. I mean the biggest impact to de-leverage here is still the flat comp and the fact that even at the top of our guidance range at a flat comp that we’re going to see some de-leverage in SG&A. I think some of the spend that we have tried to moderate in Q1 to Q2, we are going to move forward in a small way there. And so, you’ll see a little more -- a little higher increase there in SG&A. And lastly, I think there is just some general timing into the third quarter that didn’t -- that we didn’t experience on the same cadence last year around things like the marketing event, I think there is some discretionary spend items around incentives and things like that that are just hitting a little harder in Q3 this year. So, overall we continue to maintain our annual SG&A guidance that we expect that will be greater than -- our SG&A growth for 2016 will be greater than what it was in 2015. And I think you’re just seeing it magnified a little bit more in Q3.

Thank you. Our next question comes from the line of Jeff Van Sinderen from B. Riley. Your line is open.

I actually got on the call late, so apologies if any of this is repetitive. But just wanted to clarify on the men’s business, the performance there is not really concentrated in any certain categories, the merchandise. It sounds like it’s really across the board. And then also as far as the transaction gain, I think you spoke to quarter-to-date. Is that due to an increase in traffic? Just clarification on both of those.

We’ve not answered those. So, I’ll be glad to take a shot at it for you. Again, in the men’s business, it is -- we are doing well of virtually every category product we have, yes. Some are doing better than others clearly in the business, some are driven by our private label business in terms of what we’re doing and others are completely brand driven. So, on men’s, the strength is broad. And that’s I think a pretty encouraging thing. We don’t have in our store traffic counters. So, I can’t tell you whether or not the transaction gains are driven by higher conversion rates or more traffic. I can’t answer that specifically, I’m just happy to have more transactions.

And then, just a follow-up if I could on SG&A, since that topic came up around Q3. I’m just wondering how we should frame our thinking about SG&A for next year. Obviously this is an investment year in 2016 sort of within I guess in the context of unit growth you’ve planned for next year, just wondering how we should think about maybe I don’t know maybe speak to SG&A dollars for next year or I mean you’re not going to give guidance but maybe when you think that the leverage point may start to arise, is that a Q4 thing possibly, is comps are good or is that I don’t know any color you can give there would be helpful?

Jeff, you know me too well, I’m going to stay away from proving any guidance on ‘17. And I think what I’d continue to reiterate is as we look at our expense model, we continue to see like a 3 to 5 comp is leveraging here. And as we think about where we’re at in this type of environment, our focus is very keenly on looking at expenses and investments to try to be at leverage on the lower side of that range. And so we -- as Rick said in his comments earlier in the call, we’re excited by the change here, the trend here over the back-to-school, the recent last couple of weeks to back-to-school but we’ve got to continue do better. And so our focus is to get that -- get the topline higher and try to manage expenses the best we can, but we’re not going to be at it at the expense of what we think right for the customer as well. So, there’ll be continued investments. We’ll continue as we said in our prepared remarks, we’re going to rollout our commerce suite and in 2017 we would expect to have that fully rolled out in North America. So, we’re very -- we’re working very hard right now in getting that placed and getting it all tested and ready to roll but we expect it to be rolling it out here and those costs will also come into 2017. So, we’ll provide more color as we move to the year and have more clarity on how we’re looking at things. But what I can tell you is we’re going to be -- take a very detailed approach to planning 2017 to make sure that we’re making the right investments over the long-term but managing costs based on where the results of the business are.

Sharon Zackfia from William Blair. Your line is open.

I just wanted to follow up on the peaks versus valleys kind of commentary that’s been going on for years. I guess I’m curious from a labor standpoint kind of as labor gets scarcer and scarcer and wages are going up, how -- what if anything that you’ve been able to do at a store level to kind of optimize that labor better, given the compression in your seasons?

We’re -- we actually have a whole team of people that is focused on this topic, about how we’re going to have to adjust our business. It’ll include many factors as we’ll think about this. I think to some extent we have to redefine roles of our team and how we think about even down to the role of temporary, part time workers and how they fit into our current business model we have, the omni-channel model, the localized model, how we really make sure our sales leaders are focusing only on sales, and the way that -- it will include how we think about order routing algorithms over time. These are all the new complexities that we have now a chance to impact our business on, now that we’ve gone to this fully localized route. And as you know, we also don’t have the labor of a centralized fulfillment center, so we have been able to think differently there. And I think this is actually from a peak, non-peak perspective is probably I think in the long term an advantage for us. Not only are we faster but many stores at a non-peak are at minimum hours. So, I think that there is some opportunity there over time, that gets around to how we think about the sophistication of our order routing algorithms and why it’s certain time for route orders the different volume levels of store than we think about it other times of the year. So, these are all options out there for us. Now, the opposite for us is around wage level is going up. I can tell you that, Chris has said this on previous calls as the worth possible scenarios of happening to us now which is that we get cities with different minimum wage laws, states with different minimum wage laws. We would much prefer a national solution because I think it would allow us to think and allow our brand partners to think about how we might price differently when we had a national solution to minimum wages because I think it’s pretty clear that those countries at higher minimum wages do have higher prices in their cost structures. And of course, this is also sharing the other aspect that I think we have to think about in regards your question is it adds the level of complication to it, is that there has the pricing rationale in the market to start with. So, this gets back to who is a long-term winner, how do you think about that, how do we drive about excess capacity particularly in U.S. marketplace. And those I think are still longer term challenges for us in that regard because as much as we might like to think there is a long term pricing solution with a national change in minimum wages, we also have to deal with the rationale pricing by those retailers who are struggling this to survive. So, I still think I have a long term view about that. I think there are things we can do in the short-term, Sharon, that we can manage the business more effectively. As I said we have a team of people working on. There will be a number of different levers I think we can pull. But it is going to be challenging. It kind of ties to the question about, a moment ago, about SG&A wage rates at the store level, obviously we have FSLA challenges come here up in December. And those are going to be the challenges for us. So, short-term, challenges, I think long-term, we can turn those challenges in opportunity.

Can I just ask a quick follow-up? Do you happen to have what your average hourly wage inflation is for this year?

I think I don’t have it top of my head. It’s something we could look to provide.

Your next question comes from the line of Adrienne Yih from Wolfe Research. Your line is open.

Hey guys, it’s actually Doug Drummond for Adrienne today. Thanks for taking our questions. Just switching gears to Blue Tomato, Europe was down 8.5% in net sales inclusive of the two net new stores over the last 12 months. Can you just talk about the current trends there and do you see a potential course correcting in the second half of the year? Thanks a lot.

Yes, I’ll take that one. From a Blue Tomato perspective, I think the story is pretty consistent if you’ve been following our monthly sales calls. And as we think about 2015, if I go back to 2015, 2015 was not a strong year on performance for our domestic business here in the U.S. but we talked pretty openly throughout much of the year about the strength in Blue Tomato. And they were significantly really strong in one category in particular, although almost all categories were up throughout the year. And now, as we have moved into 2016, we feel we’re going to fall off in that category. And it has impacted their overall results. I think what gives me some comfort there is when we look at the multi-year stack both for that category as well as for the entire business, we’re still looking at a business that’s running double-digit improvement. So, overall, I think there is a little bit of a pull back here on the Blue Tomato side, based on some trend issues over there but the teams continue to work through that as well. And as I said on multi-year, we feel pretty good about where we’re standing.

And I would just add to Chris’s comments, Doug, that this is a again reflective for me of how fast trend cycles move today. We had a huge gain, as Chris said, this particular category product a year ago. Blue Tomato and now it’s reversed this year. And the magnitude of both directions was big. I’d just say for me that’s a reflection of again how fast trend cycles move in the modern world. And now, again, we still feel great about where we’re at there. And as Chris said, on a stack basis, stock comp basis over the last two years, we’re still having a big gain at Blue Tomato. And I would add that other categories of business are -- we have other categories of business at Blue Tomato that are running game, just not sufficient enough to offset this trend item.

And then switching gears to promos, obviously your Labor Day sale is quite important. This year, I know you ran a quite different sale in both timing and the style. Can you help us with the rationale behind that? Thanks a lot.

We are reacting at different times for different reasons in our business, and at different points in time, Doug, our strategies will depend upon where our inventory position is. So, a year ago, we were then much more aggressive on price and promotion than we were just because of the spend in the business. This year, we didn’t feel we needed to be. And so, we feel that the way we structured the business was one where based on what was working is we could take a promotional stance. And again, I can think of to kind of break this down in this case by where consumers want to buy what channel in your business. So, there are certain categories of business that consumers are just driving to the Internet that would be clearance on lot of sale product. So, again, if we look on a trade area basis, we’re finding that we feel pretty good on our overall promotional strength and what that meant for product margins through quarter-to-date. As Chris said, we’re planning them essentially flat for the quarter-to-date. So our strategies depend upon our inventory position where we’re at that moment and how we’re thinking about it, and if we can be less promotional and because of the strength of our business, we certainly will be less promotional.

Thank you. Ladies and gentlemen, this now concludes our question-and-answer session. I’d like to turn the call back over to management for closing remarks.

Again, I’d just close the call with my thanks to everybody and for your time and interest today in what we’re doing. I think it’s been interesting, fun interesting back half of the year for our opportunities here at Zumiez. We feel good about where we’re at, a lot more work to do, and we know we have a lot more work to deliver for our shareholders. So, look forward to talking all on our third quarter call, later in the year. Thank you everybody.

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program. You may all disconnect at this time. Everyone have a great day.