Richard Brooks - Chief Executive Officer Christopher Work - Chief Financial Officer

Neely Tamminga - Piper Jaffray Sharon Zackfia - William Blair Jeff Van Sinderen - B. Riley & Company Jonathan Komp - Robert W. Baird & Co., Inc. Richard Jaffe - Stifel Nicolaus & Company, Inc. Doug Drummond - Wolfe Research Betty Chen - Mizuho Securities John Morris - BMO Capital Markets

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated Third 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 Incorporated business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number 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.

Hello, and thank you, everyone, for joining us today on the call. With me is Chris Work, our Chief Financial Officer. I’ll begin today’s call with a few brief remarks regarding the third quarter and then provide you with 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. Third quarter diluted earnings per share increased 19% to $0.43 from $0.36 a year ago. This is well ahead of our initial guidance range of $0.21 to $0.26, due primarily to stronger than expected sales. During the third quarter, monthly comparable sales trends accelerated turning positive in September and October to finish the quarter at a positive 4%. This compares with our original outlook for comparable sales in the flat to down 2% range, was particularly encouraging to see this top line strength across several key departments, as we recorded gains in our men’s, accessories, and junior’s departments. We also encouraged to see the sales growth driven by transaction gains in both our physical and digital channels. Our momentum continued in November, as comparable sales rose 5.7%. While these top line results are a great sign of our brand strength and a testament to the strong execution by the Zumiez sales teams, we are cognizant that headwinds persist throughout the retail industry and challenges associated with muted mall traffic and macroeconomic uncertainty are still bringing unpredictability across the retail sector. Accordingly, we are proceeding cautiously and tightly controlling expenses to protect profitability. Our primary focus remains on executing the strategic objectives that best position us for the long-term. This includes serving our customer and the authentic and personalized manner they’ve come to expect, including a hyper localized product assortment, best-in-class sales teams, a superior omni-channel experience, and our continued efforts to localize the Zumiez brand experience, including an initiative such as our in-store fulfillment. During the year, we’ve continued to make progress on our customer engagement suite in North America. And while the enhanced touch points are only represented in a minority of stores, we believe the ongoing roll out over the remainder of 2016 and into 2017 will continue to enhance our ability to engage with customers whenever and wherever they choose to shop. By improving the customer experience, we can create a continuous two-way conversation, enabling us to stay in lockstep with their changing needs and desires and drive long-term profitable growth. During the third quarter, we opened 10 stores, including seven in North America and three in Europe, and acquired five stores in Australia, bringing our total store growth for the year to 31. We continue to see our physical store expansion as an important piece of the customer omni-channel experience, with a digital platform, both enhancing our in-store experience and driving further optimization of our store network. Our goal with all of these investments, whether physical or digital is to strike a balance between market presence and demand. Such that, we opened the right number of stores in any given trade area and not one more than needed to serve our customers. In North America, while we still see room for physical expansion, we anticipate that our new store openings will further slow in 2017, as we continue to focus on maximizing the impact of each of our stores in its own geographic trade area. In Europe, we continue to see the highly fragmented nature of this market creating the opportunity for continued expansion. While Europe is facing its own macro economic headwinds, we remain optimistic that our highly differentiated concept and omni-channel platform has us well-positioned to further consolidate market share. Meanwhile, our recent acquisition of Fast Times that closed in the third quarter, provides us with further opportunity to expand our global presence by extending our reach to Australia. While it’s still early in this new endeavor, we’re excited about the opportunity to combine best practices between our teams and successfully capture additional demand on Australian continent in the years ahead. In wrapping up, we’re obviously very pleased with the top line and bottom line momentum we’re seeing, as we head into our strongest revenue and earnings quarter. We believe these trends are direct result of the continuous investments in our brand, our people, and our omni-channel capabilities, combined with our continued localization efforts. Looking ahead, we’ll continue to manage our business in the near-term with a prudence and cost consciousness needed to weather the unpredictability in the current environment. At the same time, our focus remains what has been all along on making the investments in our business that we believe will propel us forward and return real shareholder value over the long-term. With that, I’ll hand the call to Chris for a review of our financials. Chris?

Thanks, Rick. Good afternoon, everyone. I’m going to start with a review of our third quarter results and then I’ll provide some thoughts about the remainder of the year, after that, we’ll open the call up for your question. Third quarter net sales increased $17.1 million, or 8.4% to $221.4 million from $204.3 million a year ago, driven by positive comparable sales growth of 4% and the net addition of 35 new stores since the end of last year’s third quarter, including the five stores added in the acquisition of Fast Times in Australia. During the year’s third quarter, we saw increases in transaction volume, partially offset by decrease in dollars per transaction. The decrease in dollars per transaction was a result of lower units per transaction and a decline in average unit retail. Our third quarter net sales were driven by gains in our men’s, accessories, and junior’s categories, while hardgoods and footwear comp down for the quarter. From a regional perspective, North America net sales increased $14.7 million, or 7.8% to $202.9 million, and other international net sales which now consists of Europe and Australia increased $2.4 million, or 14.6% to $18.5 million. Third quarter gross profit was $76.2 million, up $6.1 million, or 8.7% compared to the third quarter of 2015. Gross margin was up 10 basis points from the prior year, coming in at 34.4% in the 2016 third quarter. The increase in gross margin was primarily driven by an increase in product margin during the quarter. SG&A expense was $59.3 million in the 2016 third quarter compared to $54.8 million in the third quarter of 2015. During the third quarter of 2016, SG&A as a percentage of net sales was 26.8%, flat to the year ago third quarter, as we saw 40 basis points of leverage across our store expenses offset by 40 basis points in corporate investment. We generate an operating profit of $16.9 million, or 7.6% of sales in the third quarter of 2016, up from $15.2 million, or 7.5% of sales in the third quarter of 2015. Net income for the third quarter of 2016 was $10.7 million, or $0.43 per diluted share, compared to net income of $9.7 million, or $0.36 per diluted share in the third quarter a year ago. Looking at the balance sheet, cash and current marketable securities totaled $49.2 million as of October 29, 2016, down from $75.6 million as of January 30, 2016, and $51.1 million as of October 31, 2015. Year-to-date capital expenditures totaled $16.8 million. During the third quarter, we repurchased approximately 136,000 shares on the open market for a total of $2.3 million, bringing our total stock repurchases for fiscal 2016 to $20.5 million, or 1.2 million shares. As of October 29, 2016, we had $33.9 million remaining under our share repurchase authorization. As of October 29, 2016, we had a $150.6 million in inventory, up from a $133.6 million at the end of 2015 third quarter, driven primarily by an increase in inventory per square foot in our increased global store count. Throughout though inventory has grown in excess of our square footage growth, we feel confident in the general quality of the inventory and have seen our aged inventory defined as inventory older than four months decreased as a percent of total inventory year-over-year. Now, to our November sales results. Total net sales for the four-week period in November 26, 2016 increased 10.3% to $69.3 million, compared to $62.8 million for the four-week period in November 28, 2015. Our comparable sales increased 5.7% during the four-week period in November 26, 2016, compared to a comparable sales decrease of 13.8% for the four-week period in November 28, 2015. Higher transaction volume drove these year-over-year increases, offset by a decrease in dollars per transaction. Dollars per transaction in the period were down due to a decrease in units per transaction, while average unit retail was flat to the prior year. During the four weeks in November 26, 2016, men’s and junior’s posted positive comps, while hardgoods, accessories and footwear posted negative comps. Year-to-date, through November 26, 2016, comparable sales have decreased 1.7%. Turning to our guidance for the balance of 2016. Once again, I’ll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin, and earnings growth, given the variety of internal and external factors that impact our performance. While our third quarter top line results were encouraging, we are cognizant that the headwinds affecting the industry persist and are planning our business accordingly. Keeping that in mind, we are currently planning fourth quarter comparable sales result in the range of positive 3% to positive 5% with total sales in the range of $258 million to $263 million. We estimate gross margins to increase 50 to 100 basis points compared to the fourth quarter of 2015. As a reminder, last year’s fourth quarter gross profit was impacted by lower product margins clear inventory and the $1.2 million charge related to the closure of our Kansas fulfillment center. Consolidated operating margins are expected to be between 9% and 10% with diluted earnings per share between $0.60 and $0.66. A few other thoughts regarding the balance of the year. Through November 26, 2016, we had opened our acquired 32 new stores, including six in Canada, five in Europe, and five stores of the Fast Times acquisition completed in August. This brings our total store count as of November 26, 2016 to 689, including 656 in North America, 28 in Europe, and five in Australia. We plan to open one more store for the balance of fiscal 2016. Full-year capital expenditures are expected to be between $21 million and $23 million. We anticipate depreciation and amortization will be approximately $28 million, or 6% to 7% below the prior year. We are planning our business assuming an annual effective tax rate of approximately 37.5%. And lastly, we are currently projecting our weighted average shares used in the calculation of diluted earnings per share for the full-year to be approximately 25 million shares, excluding the effect of any additional share repurchases made during the fourth quarter, 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 with Piper Jaffray. Your line is now open.

Oh, great. Good afternoon and really congratulations on the job really well done and well executed. So, Chris, if you could or Rick, give us a little bit more on the gross margin. You said positive product margins, but if we kind of peel back that onion a little bit more, is that on the IMU side, on mix, or is that just kind of the reduction on unplanned markdowns in the clearance activity? And then how would that those different layers kind of look as we look into Q4? Thanks.

Yes, I – I’ll start and let Chris add Neely. I think, it’s a combination of all those things. Mix is included in the aspects of the business, obviously, as we move more towards an apparel-driven side of our business, the margins tend to be higher. And for the quarter, as you know, private label mix changes in that, private label has a higher initial markup. So it’s a combination of all those factors. And then, as Chris said, in the guidance, and I’ll let Chris take it from there in terms of again the thinking relative to fourth quarter guidance.

Absolutely, what I would tell you is, we kind of putting our comments throughout the year that we saw we had margin opportunity and specifically in the fourth quarter. And as Rick mentioned, our business is always impacted by mix and the transfer of private label to brands depending on what’s trending in the cycle that we’re in. But we also knew, as we came into Q3 and Q4 that we had some opportunity based on the prior year. As you know, our comps got more challenging, as we move through 2015. And our philosophy has always been to try to move on from inventory versus carrying into the next season. So the team got very aggressive in Q4 last year, as we saw results decline and move through quite a bit inventory. And we’ve always known, we had a little bit opportunity here in the fourth quarter to try to get back some of that margin. So it’s a mix of everything. But we’re definitely, we saw good product margin gains here in the third quarter and we’re projecting within the fourth quarter guidance some additional product margin increases.

And lastly, Neely, I’d just like to tieback Chris’s comments there to is, the comments in our prepared material and the script, which goes back to the currency of inventory and we feel very strongly, we’re entering into the fourth quarter with some of our highest level of current inventory that we’ve had a long time. So I think, we’re well prepared for the quarter and that’s also obviously going to reflect upon the potential for markdowns in the quarter itself, yes.

Thanks for that [ph] And if I just may one more kind of technical, I guess, on counting to question, Chris, when you guys, obviously, you’re doing much better which is fabulous, and that means, people get paid bonuses and will make some assumptions maybe in and around that. Do you – we accrue for that? Was this your guidance is like Q4 reflects kind of the season we accrual for those bonus payments, or performance incentives, or did you actually take some of that also in Q3 as well as Q4? Thank you.

Yes, I mean, there’s – as I look at the cadence of Q 2015 compared to 2016, there’s a little bit of variability quarter-to-quarter and how we look at those incentives. Obviously, in 2015 going the opposite direction there, or 2016 has appeared, we started to take bonus off the table, as we move through the year. This year we were a little more – we did – we didn’t take as much bonus off in the first part of the year, because we were expecting to see alternative [ph] results around. So we’ve been a little more of an even playing field, as we move through 2016. Our guidance today for Q4 factors in where we think the incentives will land. With Q4 – with the Q4 results we put out there today, in the event, we were to exceed them, we would have the potential to increase incentive. But that would be factored in as paying for itself, right. As the results go up, we would expect pretty meaningful flow through on where we are today. So the guidance calculates the bonus that we’ve got out there and we’ll see how we wind up, but I wouldn’t expect to see a major additional flow through unless we really exceeded the guidance range that’s out there.

Fabulous, thanks. And we wish you all the happiest of holidays and best wishes for holiday season. Thank you.

Thank you, Neely.

Our next question comes from the line of Sharon Zackfia with William Blair. Your line is now open.

Hi, good afternoon. Chris, just sort of a quick follow-up on that. Did you have any incentive comp kind of true-ups in the third quarter, given the performance?

We didn’t have any true-ups. What we had was more of as we relate to last year, last year at this time, the third quarter was a pretty bad performance overall. So we took the incentives down. Where this year, we were a little more level, as we move through the quarter. So we saw those be more where we would expected them for the third quarter.

Okay. And then on November, obviously, the Black Friday weekend them, of course, the most important part of it, I mean, did you see any kind of change and the trend in your business between the earlier part of the march towards the holiday part of the end of the month?

Yes, sure. Let me try to breakdown November. As we stated in the release, we ended Q3 kind of each month getting better and October being very strong. As we moved into November, we definitely took a step back in the first couple of weeks and saw the first two weeks of November be much softer than the last two weeks, while I should mention, all week were positive comps for the [consolidate and see] [ph] definitely much softer in the first couple of weeks, perhaps tied to some of the noise around the election and weather and some of the – those things that are out there. As we moved into the week before Thanksgiving, things got much stronger, and the week of Thanksgiving was good as well. As for Black Friday, I’d start off saying, we’re not a highly promotional retailer. So that’s not a big piece of what we’ve done. I’m sure, you like others have read a lot about the percentage – the high percentages of discounted product that people are buying out there, and that’s just not a place where we play as much. But overall, or I should say, secondly, for the weekend, it’s not much of an international event. So for North America, we were up 6.3%, which is obviously ahead of our monthly comp there. And so we had a good weekend. We were happy with the results, especially happy with the results in light of. We did see meaningful hours decreases in our comparable stores in the double and mid-teens, I should say, hours decreases on Thursday and Friday, and that was really coupled with two things. First off, we made the election here to give back to our people and their families and we did not open on Thanksgiving across the country until 9 o’clock, which our historical practice has been to open when the mall opens, but we decided to wait until 9:00 PM to open. And secondly, we did see some reduction hours across the country from malls not opening, and so even some of the bigger malls across the country that elected not to open at the same hours they did in 2015. So we were happy overall with the results and an online perspective continues strong into Cyber Monday. And our teams did a great job of working through the volume throughout the weekend.

And I guess, I just add Sharon that again. Really look at the U.S. is a driver of our business. The first two weeks, as Chris said, were significantly weaker. We think there was some noise around the election. The last two weeks were significantly stronger, including week four overall was significant – was actually stronger than our Black Friday comp itself. So to add to Chris’s comment, I think part of what we’re seeing is that, Black Friday weekend is really becoming more like Black November in terms of the promotions being spread out over time. And I think, we may see over the next few years potentially some decentralizing of sales in the month of November, as opportunities to buy things persist throughout the month at a promotional basis. So the week four for us is actually stronger than the weekend itself. And with – and then the first two weeks were the by far the weakest in the U.S. And I think there was some noise around the election.

Okay. And then lastly, on expansion, I think kind of everyone appreciates the desire to monetizer or improve the current store base, so that’s you can. But I also know in the past like you’ve talked about growth of the cultural imperative at Zumiez. So I’m just kind of trying to balance in my head how you think about continued slowing unit expansion and that culture you guys have spent so much time building out that and how you think about that?

That’s a really a fantastic question, Sharon, to ask. And you might imagine, we’re talking about that a lot over the last few years in our, because we obviously can see the maturing of the U.S. business. So I think we’re looking at this from a number of different perspectives, including I think some of the issues or some of the opportunities that you’ve heard us talk about around localization initiatives in our business. I think that we expect that we’re going to be able to provide growth opportunities for our people through basically increasing the challenge that as we believe is going to exist in a new kind of – a new level of retail that moves forward. We’re going to where store managers drop in our world, I think are actually to become more empowering. They’re going to have more responsibilities. I think. we’re going to capture more share, as we do more and more of these localization initiatives like localized fulfillment. And I think we’re going to be able to offer new kinds of growth opportunities for our teams, as well as we’re going to have an opportunity over time to, I think, to do some sharing across geographic locations for our team members. We’re certainly in the process as we always are trying to hire always, when we hire them off as always hiring from our store team first and their capabilities. So, I think, you’re going to see us challenge our teams and challenge them to grow as leaders, and as retailers, and as businesspeople in that opportunity. And I think in this, and as we reinvent kind of what retail is going to be like, we’re on this mission. I think, over the last five years and probably the next five years to reinvent that what the nature, especially retail is going to be like. We’re going to be able to offer our people some really interesting challenges and hopefully, as we consolidate share, and I do believe this continues to be a share consolidation gain we’ll be able to afford to pay our people to take on those additional responsibilities and opportunities.

That’s great. Thank you.

Our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.

Good afternoon. And I know you guys have great people at the company. But I guess, I’m wondering how much of your recent success do you think is from, you’re having lost some product content versus your target demographic maybe favoring sort of the broader genre of merchandise that you have a bit more. Just trying to get a sense of whether you feel maybe there has been somewhat of a tied change that plays more to your strength. And that also if you could update us on what you’re learning from selling e-com orders from your stores?

Great, Jeff. I’m glad to do take tackle both of those for you. So, as you know right in retail, it’s not about one thing, it’s about how all the things work together. So you have to have what they want from a product perspective to give the tools product and the primary tool that we put that we give our salespeople to unleash their capabilities in working with customers. So they go hand-in-hand. And likewise, if you did – if you had knows. If you have good salespeople, you would have lower sales results. And if you don’t know the right product, you’re going to have lower sales results. And as you know from, I think, our comments last year, we believe that trend cycles have accelerated in such a way that, I think, periodically in this world where their fashion cycles, in our case, we have really three thing to drive the business fashion cycles, brand cycles, and item driven cycles. And I think 2015 was a very unusual year for us, in that, we had peaked the couple of brands. We didn’t have those emerging brands yet coming up to offset that volume. We had a fashion cycle that had carried over that was strong in 2014 and weakened in 2015. And we didn’t have any new whether it be fashion cycle, brand cycle in 2015, I’m talking about 2015 now or hot items to really drive business forward. And I think because of the speed of cycles in the modern world, I think, each retail uniquely to their own position every so many years is going to find a whole potential in their business might be a step back and then a chance to step back in as trend cycles return back into your favor and what you do uniquely special for your customers. So I think, hopefully, we’re back in a track now and where we’re going to be able to see, particularly, as you know, we – we’ve been talking over the last year about the importance of them. Now we have some emerging brands that have now become growth brands in our business. Typically, those are multi-year runs. It’s been our historical experience with that. And so and I think we feel good about our brand pipeline. We are working very hard in terms of thinking about new ways that we can work to make our brand partners more successful. And one of most obvious ways, I can point out to you in terms of our initiatives over the last few years has been – has to build a global retail network, high-quality global retail network. So we can help young brands grow around the world, because clearly, I think, that one things we’ve learned is that, brands become global much more quickly than they used to by the nature of consumer technology and the Internet and social media. So we have a number of initiatives like that, Jeff, that we’re working on the brand front. And we launch a lot of new brands every year, and I think, we – as I said, I think, we feel very good about our pipeline for where we’re at. I’m hoping that we’re going to able our arm our sales teams and arm our marketers with a lot of interesting product to help our – to help serve our customers. I view that when I say that our mutual costs between our brand partners, and of course, Zumiez, how we serve those customers. So I think, you’ve got to have all of it and it’s got to be great at every touch point. It’s all part of the brand experience that we’re trying to bring together collectively for our brand partners and for our customers that takes place at every touch point along the customer journey, where that be digital or physical touches. So that’s the first part of the question. And then your second part relative to local fulfillment. This is, I mean, I have to tell you how proud I’m of our teams. We’re now in, obviously, in through the Cyber Monday. We had actually performance relative to our local fulfillment initiatives, very impressed and encouraged by our teams. What we said in the last few quarters is, we are much faster than we’ve ever been. And I think, surprising our customers, we’ve heard that from some of our customers how fast we are in terms of getting the product term through localized fulfillment. And I guess, I’d just say, I – this is – this actually ties back to as we said in our prepared comments to much broader initiatives we have around the ideas of localization. And the most obvious example that we’ve talked about for decades now has been localizing of assortments, the product assortments, and now you hear us talking about how we’re going to hyper localized trade areas in marketplaces. So we have a lot of localization initiatives like this, Jeff, that we continue to work on, including enhancing and improving the idea of hyper of hyper localized in assortments for trade areas. And that includes optimization capabilities within that for how we think about optimizing performance of the business within a trade area, trade area being defined as all sales whether they’re digital, or physical in a marketplace. And so we have many more initiatives like this to come. We think we have tremendous room to improve what we do around hyper localized assortments. We have yet tremendous room to improve and opportunities around localized fulfillment. And we have a whole series of additional localized initiatives that we’re going to be putting into play over the next three years that we’ve identified, we’re timing out when we’re going to do them, and we’re going to continue to push this forward, because we think it creates the right brand experience for our customers. So, I guess, I’d sum all that up by saying super encouraged by where we’re at, it’s working, and we’re faster than we’ve ever been. And I think, there’s going to be many ancillary benefit from localized fulfillment trust. Now, I’ll ask Chris to comment on the cost side, again, to make sure, we’re communicating clearly on that too. Chris?

Absolutely. Yes, I mean, as Rick mentioned, this is just – it’s an important next step. And when we made this decision, it’s difficult decision to close Kansas in Q4 last year. We knew at the time that this was not a P&L benefit, this was more of a break-even proposition. And I think overall, we’ve been pretty close to that mark from a standpoint of we have taken the cost out of the business that are – were associated with the web fulfillment center in Kansas and we’ve had sort of, we’ve had an increased cost of shipping, as there are more splits. When you do it this type of – this type of way and then we’ve had to surgically enter payroll, right, where I mean, where it needs to be inserted like this important Black Friday weekend just to keep up with the demand. So, overall, we’re seeing this kind of come out, as we had planned. We’re not significantly above or behind the expectation. And as Rick mentioned, I think, the exciting part for us is it is such a better customer experience. And we have a lot of room to still work to harvest the efficiency of this model, right, whether it’s the assortment planning, or the algorithm, or our store labor planning, and ultimately, hopefully, some increase margin benefit from this, from being able to really be out there and harvest inventory at some of yours lower volume location. So overall, on track, with good room to move forward and we’re excited about the change we’ve made.

And I just add to that filing closing this topic, Jeff, that again. All these – we’re learning so much every day that there’s this reinforcing loop of information that comes back into this cycle that allows us to do the things that just Chris just described about further enhancement, further improvement of this process, because obviously, hyper localizing assortments depends upon understanding how we do with fulfilling and how close we’re to fulfilling demand in trade areas. And so, we’re putting all sorts of new measures in place. We have all sorts of new capabilities from a reporting perspective, new incentive programs around to align these topics, and all of them are informing, better decisions looking forward around, our order out in algorithms around how we’re – around how we might localize assortments for trade area. So it’s a reinforcing positive virtuous loop that we’re in right now. And I’m relatively optimistic that we’ll be able to wring out the benefits – optimization benefits from what we’re doing here.

All right. Good to hear. Thanks very much and best of luck for holiday.

Thank you, Jeff.

Our next question comes from Jonathan Komp with Robert W. Baird. Your line is now open.

Yes. Hi, thank you. If I could follow-up on the comps for a minute and just looking at the guidance for the fourth quarter, I’d like to understand it, it sounds like you’re exiting the month of November, probably trending up in the high single digits, and guiding to 3% to 5% for the fourth quarter, which I think at the low-end would be in the low – fairly low single-digit range for the next two months. So could you maybe talk about how you’re thinking about the outlook for the fourth quarter?

Yes, sure. So while we exited – we ended November at a 5.7% comp, which is about 30% of the quarter. So the lion share of what we have here is in December. As we mentioned in our remarks earlier on the call, the last couple weeks we’re stronger. So you’re right, we are running at a higher level here to exit November than what our guidance would indicate. But there is a law here, and we’ve seen this over the last few years between Thanksgiving and Christmas, and we’re continuing to monitor the business and see how it goes. And right now, our current run rate would have us kind of just above where we set the comp. And so, we are kind of monitoring to that and we’ll see how this plays out. November was our biggest opportunity last year from where we were in Q4 and the comps got a little bit better, although, it’s still pretty bad in December and January. So we said, it kind of about where our run rate has been, and we’ll see how this plays out into the important December month.

And I want to ask a little more broadly in the last few months, the strongly positive comps that you’ve seen. Could you maybe help parse out how much, if any you think has been, any changes in the competitive – the direct competitive set versus maybe a little more color on some of the merchandising initiatives and product that that might be trending fairly well right now?

Yes, it’s certainly, Jonathan. And I would tell you that, I think, it continues to be competitors ever in the marketplace. I don’t think so from a relative positioning across this year and last year, I don’t think much has changed from that perspective. It’s just super competitive in retail period. And I even think that this Black Friday weekend was even slightly more price sensitive. And as Chris said, that’s – we’re actually not playing that game is what we try to do in the marketplace. We’re trying to be a full price, full margin retailer. So for us, I don’t see a lot of change from it. I think, it’s still just super competitive aspects across retail. So that would tell you then that what’s driving our business is what we’re doing uniquely And I think that is relative to this idea of emergence of brands. I think, we’ve also played fashion cycles very well. I don’t think we’ve been on top of the trends from a fashion perspective, whether that be long teas or what’s going on with denim, I think, our teams have been there, both in the branded side as well as our private label side of the business. And I think, we haven’t missed on those fronts. I think, we’ve been right there and appropriately for our customer with our own twist on that business, our private labels performed well during this cycle. And then, as we said, we’ve had these, what we believe we’ve had some brands go from emerging to growth brand. So I think what’s made a stand out on a relative basis is our unique position in the marketplace. And I’m hoping that, again, as I said that particular brand cycles that something can have a bit of legs to it here as we can run that out for a period of time. So I think, our differentiation has been how we’ve executed our unique position? How we support young brands? And then, again, as we put them into get them and they get to the point where they can grow more broadly, we have the people that know what to do with them and how to serve customers and then you combine that with the omni-channel capabilities we – we’ve established, I think, we’re one of the leaders there. It allows us – omni-channel allows us to maximize those sales in each window. So, again, and then of course, we’re trying to improve brand positioning through a lot of – our own Zumiez brand through a lot of the localization efforts. So I hope you see us all come together, and I think, a lot of what we’re doing is working on the product front, but it’s also working all these other aspects of what we’re doing.

And maybe just one follow-up to that. Rick, when you talk about the growth brands having potential to have a – sometimes a multi-year track. Is that maybe could you comment on the ability for to maintain some exclusivity around those trends of the brands, or any any perspective on how you need some of those drivers are to Zumiez?

I think that the brands that we’re talking about are very unique to Zumiez, particularly in the mall setting. I know, we are by far the biggest partner for these brands by a large margin. I think that we again are trying to position ourselves, so that we can provide the brands growth opportunities within the network, because brands today can quickly – very quickly look to be over distributed because of the power of everyone’s multi – multiple retailers and distribution channels and media and social media outlets. So I think brands are very smart today about how they think about distribution, about how they want to play it out, and of course, they think about their own longevity as a brand. I can tell you some of our brands of – that we’ve had been very successful have cutback distribution over the last year or two, because they thought it was the right thing to do. I think we’re at a new point in understanding this cycle from a brand perspective with our brands. I think, probably more clearly than ever understanding that control distribution and allows them to control pricing and margins more effectively as a brand, which of course, controls how their brand is perceived. So I think, we’re in a new – kind of a new state there. And again, I said, we’ve had a significant brand for us in the last year significantly cutback our distribution, but cutback everyone’s distribution of their business, because they wanted to grow more slowly. So these are new ways, I think, brands are thinking about the business. And I think a lot of our emerging brands are becoming growth brands are learning from those other brands than they experienced in the last few years. And I think we’re going to see over the next few years that, there’s going to be very, very controlled limited broadening of distribution for a lot of these brand partners.

Great. That’s helpful, perspective. Thank you.

Our next question comes from Richard Jaffe with Stifel. Your line is now open.

Thanks very much, guys. Just a question about footwear, it seems to have been on the mantra on the upswing and then, obviously, not so hot for the quarter. Can you sort of talk us through what happened in the quarter and what your holiday outlook is?

Sure. I’ll be glad to do that, Richard. I think about footwear and you’re right. We’ve had a couple of periods, where footwear has been positive in Q3 and it wasn’t in November. And so it has been variable, I think, that’s been true this year, where we’ve seen some flickers in footwear and then it tends to go negative. So for me, I think, what we’re seeing here partly is that, in November, my experience here at Zumiez has been that footwear in November always diminishes as a function of percentage of your business, because it’s not tends to be not a top gift giving item. And where we really see footwear in this quarter really expand and become a bigger part of business as part of the mix is in this post-holiday post-Christmas, when the kids come in with gift cards and are ready to buy at that point. So I think some of this may be transitional within the quarter, as we see – as we think and see about it what’s going on in footwear’s, I think, there are just differences between the November and December in that regard. On a longer-term basis and I think, as you know, we had a very positive footwear cycle. And footwear cycles again tend to be longer cycles in my view between 2009, 2012, and then we move into the cycle it has not been good for us, and really it’s been driven by the idea of performance athletic and basketball footwear. And that’s not a cycle that our customer that customers come to us for in terms of product. So now that’s been a long cycle. And I think partly what you’re seeing in our business is, there’s interest, I think, by our consumer and having some newness in footwear. And I think that the performance athletic cycle is getting a bit old now, still really strong clearly in terms of results. So I’m not sure the timing of how fast it’s going to move. But I know that from our perspective, we’re trying and as you know in our business, we’re trying new things all the time in footwear. We’re trying new brands. We’re, of course, trying to do unique things with our brand partners in footwear to try to differentiate our presentation and we’ve had some success in that regard, I think, over the last few months. So I’m hopeful that this aging of the current cycles is going to lead to some emergence of new cycle. Can I tell you what that is, or can I tell you. I can tell you, it’s a brand cycle probably doesn’t favor us very well. I think I can tell you where it’s going to go, but I’m encouraged that I think, at least, we’re going to see some change at some point over the next 12 to 24 months maybe in this footwear cycle. And that is my, of course, my inclination to say that that’s probably going to benefit us relative to, because it certainly hasn’t been so great the last four years. So I’m hoping that we’re going to see some confidence. I’m hoping that what we’re seeing here over the last few months is with what we’re being having some positive trends to it is that some of the things we’re doing have been working. And then I’m hopeful and optimistic, we’re going to see some interesting new things happening in footwear over the next 12 to 18 months relative to fashion and relative to brands.

Well, change would certainly be good and gives – give us all room for hope or more sales?

More sales, that’s right.

Got it. Thanks very much.

Thank you.

Our next question comes from Adrienne Yi with Wolfe Research. Your line is now open.

Hey, guys, this is Doug Drummond on for Adrian. Can you give me an update on targets category as to where we are in that cycle and what opportunities are you seeing there drop demand? And also switching to Europe, can you spend a moment elaborating on what you’re seeing in that environment? I think it sounds like you’ve had a slight to – slight pickup since 2Q sequentially. And I guess, what categories were helping to drive mix there versus the rest of chain. Thanks a lot.

Certainly. I’ll take the first and then ask Chris to chime in. For me, our business has always been cyclical. So again, done this a long time, have a chance to think about it over a long period of time. So we had a terrific run in skate hardgoods in our business over the last few years. And now we’re seeing that step back a bit in the U.S. and again, it’s – it wasn’t good months, good weeks, you will see it bounce around a bit. But generally, after a good three-year run up, I think and positive results in skate hardgoods here in the U.S. That’s tended to step back a little now, and for, I think, a number of reasons. But again, for me, these tend to be cyclical cycles and customers go where newness exists. And so now you’re seeing their dollars rotate into like apparel categories, both in men’s and women’s, where there’s a lot of newness, I think and excitement in the product. So I think these tend to be typical trends and that’s why we talk in our business about being diverse, both in brand presentation and in presenting everything within in our – the lifestyles we represent from a category – from a department and category perspective. So for me, in the case of skate hardgoods, this is a cyclical cycle. We’ll work our way through it. It’s a very important part of our business. If we’re going to talk about skate hardgoods in the business we’ve had a tougher start in this season mainly around weather the snow hardgoods. Now, snow hardgoods has been really it’s kind of a down trending business for us for a long time. So we always look at buying snow hardgoods, I would tell you, from a product perspective very cautiously. And we know that it always – isn’t going to snow somewhere in the U.S. And we know that we can move product around or again using our omni-channel model, we can manage our order algorithms to ship product from different parts based on where the snow is selling and not selling. So snow hardgoods is, again, something we’re committed to, Doug, in this. But it’s also something, it’s been a tougher part of our business. It’s a much smaller part of our business now than it was 10, 15 years ago. We’re committed to doing though, because we think it’s still part of our identity. And then I think we’re good at managing the inventory aspect of what we’re doing and how we buy it and how much we buy which brand. So I feel very confident in our merchant from that side of business. Europe, and I’ll let actually Chris talk about Europe and some of the trends there, because they are very specific.

Yes, absolutely. And from a Europe perspective, as you know, Europe continues to be a tough place to do business. I’ll tell you 2015, as we talked about Europe throughout the year, we mentioned, it’s significantly exceeding our results here in the U.S. They had a great 2015. As we talked about Europe over the first couple of quarters, it was definitely more challenge, as it had anniversary some of its own trends from 2015 and hardgoods been the main specific one. They had a great run in the hardgoods section specifically around skate during the first quarter and second quarter. And as we anniversary that in 2016, we did come up against some challenge. You’re right in your assumptions it would – looks at the trend looks better in Q3 and Europe was positive in the third quarter. In fact, I can tell you that all categories were positive in Europe with the exception of the skate hardgoods, which continue to be up against some of its 2015 comps. But overall, as I said in the last couple of quarters, if I look at this on a two-year stack, the results are pretty good. The business continues to grow very well. We continue to add stores there And from a top line perspective, the business is really pushing it. So we’re really excited about what the team is doing there. And their important quarter here is coming up in Q4. They definitely have a much bigger snow presence than we do here in the States, and we’re excited to see what that leads to here in the fourth quarter.

Okay, that’s helpful. And I guess, quickly, if you can give an update on the integration of Fast Times and do you have a longer-term brick-and-mortar go in Australia? Thanks a lot.

Yes, I’ll take that question, and overall, I can tell you this is a great team. Again, we think we found the best operator here in the very, very core to what they’re doing shop here in Australia. We’re really excited about partnering with them and see where they can take this business. The integration is going great. We closed the transaction on August 31, again, just working really closely with them to make sure that we’re connected in doing the right thing. What we’ve learned from our own growth here in the U.S. and our growth in Europe is, this business is about people, and it’s about really growing at the right pace over the long-term. So at this point, we’re not going to talk a lot about growth plans beyond 2016 into 2017 other than we do think, there’s good opportunity there, and we’re excited about where this can go on the market. This is an incredibly small acquisition and very small in relation to our overall business. So it will have a big impact on results in the short-term here. But we think over the long-term it can be a nice little business in Australia and perhaps beyond. So we’re excited about the opportunity there and the integration has gone very well.

Okay, understood. Best of luck December.

Thank you.

Our next question comes from Betty Chen with Mizuho Securities. Your line is now open.

Thank you. Good afternoon. Congrats on a nice quarter in a tough environment. I was wondering, Rick, I think, earlier you mentioned that you’re going to kind of pause in terms of the U.S. for opening and really focus on lot of the initiatives you outlined. Also thinking kind of related to that, does it give you additional thoughts on sort of what is the right fleet size in the U.S., given the omni-channel initiatives and some of the localized fulfillment that is tracking really well in terms of meeting the customer service. And then my second question was regarding what you said about some of the years needing different cycles. And with 2016 getting some emerging brands becoming growth brands, any kind of insight into what you’re thinking about 2017, as we look forward? Thanks.

All right. Thank you, Betty. Glad to spend a bit of time that that I think we’ll probably spend more time on these questions in our March call. But let me just say that, I think that the as you framed your question, I think, you’re exactly right that we are like, I think, any retail looking at what is the exact right size for the fleet of stores in every mature and particularly in maturing markets, where we operate. So I think this is a key question that all retailers are wrestling with. I think, the answer is going to be different by retailer, because I think each, if you’re really doing something unique for and special for a group of customers, I think, your business and your answer this will be uniquely different to your needs of your customers. So we are thinking the same thing, that is why fundamentally we’re not where I will tell you, we’re not exactly sure what the right size of the fleet is in a mature market at this point. And so, that’s part why we say we’re going to slow down a bit, because we really want to spend sometime thinking about optimizing in a trade area, the right mix between the digital and physical activities that we have in place along the customer journey to capture market share. So and I think we’re just, we’re five or six years in, Betty, to this cycle. I think we have another five years. You have a lot of change to take place. And I think there you’re going to continue to be a lot of consolidations is going to take place. So it’s not even that it’s just our understanding of the cycle the things we have to change and look, we have to, I think, continually reinvent and I – we have done a lot of that in our business. We’re doing things completely differently. I would tell you today than we were doing six, seven years ago in terms of how the business operate. You’re going to see us continue to change all those things going forward. But it’s not just what we’re going to change internally, it’s what the customer is going to demand, and it’s how consolidation is going to take place and shake out over time. And I continue to think, there’s going to be fewer retailers in the marketplace, the share consolidation continues over the next five years. I think, many retailers own a larger share clearly of the marketplace. And you’re going to have to be able to serve customers in all new ways than we are today. And those are the things that we’re working on that. We know we can control that we like we talk about our hyper local – hyper localized assortments and in-store fulfillment, where we’re just flat out faster to the consumer, that’s important when you’re selling things at that. Our customer really wants and they want as soon as you can get it. They want to be the first to wear it right that item, that brand. Those things are really important. And so those things are the things that we can control, but there we also know that we have to be constantly looking at the marketplace, constantly address things that are going to happen. And we have to fine tune these ideas uniquely to our own business model and the U.S. will lead the way here. But as we mature in Canada, we’ll look at – we’re going to continue to think about how we would apply that. And then, of course, in Europe we have to look at it almost on a country-by-country basis. So I think you’re going to see us focused on building up countries that allows us to build out the omni-channel integrated model with their very strong web business in Europe at Blue Tomato. And so you will see us rolling things at different times in Europe than we will, because and I think we would in more mature markets where we have a good coverage physically in U.S. today. So your question is right on the money, and I think you’re going to see us as why we say we’re going to deposit it on unit growth in 2017, because we think there is opportunity and a lot to be learned to optimize the business and to experiment with what is the right thing in each market around the country. And I might even say that, I think, we’re going to find, there’s going to be different answers in different markets around the U.S. as of what the right fleet and the right mix of digital and physical capacities are going to be.

And Betty, the only thing I would add to that is, this is also we’re approaching the range of where we thought we would be at that 600 to 700 stores. When we – and we continue to address that with our Board. And so, we do think there’s more opportunity for sure, but we’re kind of also getting towards the end of that what we had mapped out originally. So we’re feeling good about that. And I think the last piece I would say is, we continue to look at the portfolio of where we can reposition as well, because there are opportunities, but there’s lower performing stores that we’ve been able to reposition the markets and see benefits there.

Yes. I think your last question, Betty, relative to 2017, we’re actually not going to address that today. We’ll hold through that till March, again outside the comments I already made that I tend to think that brands that go for merchant, the growth tend to have a longer cycle maybe not as long as they did 10 years ago, but they’re still multi-year cycles has been our experience, and again, each brand is unique. Every brand has to do their job too in terms of continuing to – from the creative aspects of proving their product from that from the creative point of view and continue to build their brand and their marketing that goes with it. So it’s not just what we do together, it’s what the brand does on its own to further its position too to maintain that its growth profile. So we’ll – those I do believe those tend to be multi-year cycle, so even in the modern world. So more to come on that as we get into 2017.

Okay. Follow-up to, Chris, what you said earlier about even repositioning the stores, does that also include perhaps change in the type of mall, whether it’s A, B, or C that you’re currently in and moving it to a different trade area that’s maybe seeing more demographic shift, or demand, or maybe where you can maximize the rent, as well, like how should we think about that?

All of the above really. I mean, I think when it comes down to as it, when we talk about maximize in any given trade area, there are going to be markets where there’s one store in the trade area, and that’s it. There’s going to be markets where there’s five or six potential opportunities in the trade area. We’ve got to pick the best two or three. So I think it’s a combination of both. And it’s also – it’s looking at your portfolio and managing your portfolio on risk, as well, your best centers and your highest performing centers. We’re going to be comfortable locking up for 10 years and probably even investing in them as there are great assets to the brand. And then some of the lower performing stores, we might do shorter leases, as we kind of monitor and see what’s happening in each trade areas. So it’s a combination of managing both. And I think there will be opportunities to reposition over the long-term and there will be markets, where maybe we’ll just determine there’s too many stores, and I think it’s good. We’ll take that on a trade area by trade area perspective.

Okay, great. Thank you so much. Best of luck for the holidays.

Thank you, Betty.

Our next question comes from the line of John Morris, BMO Capital Markets. Your line is now open.

Thanks. Hey, my congratulations to you guys. Really good results in a tough environment. Rick, I don’t know that you guys breakout the private label mix. You talked a little bit about, how how margins tend to help. I think, you guys have done a great job with private label. Has that mix shifted very much and can you give us a directional feel for where that is and where might be going in terms of apparel? And to the extent, you can give us any color around men’s and women’s? Thanks.

I’ll let Chris answer that here in the numbers. But cashing [ph] on our initial answers, again, you have to look at private label on a full 12-month basis, John, because of the seasonality and importance for the holiday season. But we can give you, I think, some directional perspective.

Yes.

Yes. I was thinking about it up from the annual perspective, yep.

Yes, typically, John, we do come out with this annually. So we’ll update this obviously at the end of Q4. At the end of 2015, we’re about 21% penetration, and that was a step up from 14% by about 140 basis points as a percent of our consolidated sales. We had period. We went through a cycle in 2012 – in 2012, where it was just a branded cycle, and we actually saw private label go backwards as a percent of total sales. And so, we’re going to see that change over time. We may see a pick up in private label over the short-term here based on international businesses, where currently our international businesses have a much lower penetration of private label. And that’s an offering that we’ve given to them and they are using within what they’re selling today. And so, we expect to see some growth there. But I think it’s important we’re a branded retailer, and the vast majority of what we do is brands. And we’ve got some great branded partners that we work with and where we’re really using private label as supplement of what we do. And so, I think, we’ll see cycles where that goes up and we’ll see cycles where that gets a little bit smaller. As a percentage of the business, we’ve got great brands leading the charge. And I think, I would also add to that, you’re going to see a different category by category. There are certain categories that have very little with no penetration in private label and other places, where it just is a bigger piece of what we do. So, I think, we don’t we don’t set a mark on where that goes. We just kind of report on what it is. And we’ll see what the customer really wants over the long-term.

Great, thanks. Good luck for the rest of holiday.

Thanks, John.

I’m showing no further questions in queue. At this time, I’d like to turn the call back to Mr. Brooks for closing remarks.

Right. Thank you, Liz. And again, thank you all for joining us today and for your interest in Zumiez and the great questions. We always enjoy the dialogue that we get to have with the analysts and investor community to thank all of you. We want to wish everyone a great holiday season personally and individually. And we’re going to look forward over the next few months to get any chance to talk with you about our fourth quarter results when we talk again in March. So thank you, everybody. Have a great holiday season and hope to talk soon.

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