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

Jeff Van Sinderen - B. Riley and Company Benjamin Bray - Robert W Baird

Good afternoon, ladies and gentlemen. And welcome to the Zumiez Inc. First Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct the 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 concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available on Zumiez’s filing with the SEC. At this time, I’ll turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome everyone. Joining me on the today's call is Chris Work, our Chief Financial Officer. I’ll start today’s call with a few brief remarks regarding our first quarter performance. I’ll then give an update on our broader strategy, and will hand the call to Chris, who will take you through the numbers. After that, we’ll open the call to your questions. First quarter net sales came in at $181.2 million, up 4.7% compared to the first quarter of 2016. Comparable sales increased 1.8%, which was near to the high-end of our guidance range of flat to plus 2%. As we expected, our monthly comp performance varied widely during the first quarter. Following a difficult February, comps returned to positive territory in March and accelerated the high single-digit in April, driven by the later Easter holiday this year. Overall, small traffic trends for the quarter in total appear to be more challenging than the industry expected. While we are not immune to these challenges, we are encouraged to see our third consecutive quarter of positive comparable sales and transaction gains. We continue to believe that the retail environment is radically changing as the customer continues to redefine their shopping experience. In response to this change, we've made great progress towards evolving the business and believe the investments we have made in several key areas have created competitive advantages, allowing us to enhance the brand and customer experience. It is these investments that we believe will allow us to capture market share in the current environment. Let me outline a few of these key focus areas. We’ve continued to enhance our brand experience through unique product and investment in our people. 2016, we launched over 100 new brands, which was consistent with each of the last five years and how we expect to bring newness to the business, going forward. While these brands are generally not a significant portion of our overall offering in their first year, they continue to bring uniqueness to our customers and will represent the next wave of meaningful brands in the coming years. In addition to unique product, we continue to invest in our best-in-class sales teams. In early May, we again held our annual store manager’s retreat. It's a great event that provides valuable skills to a multiyear training format that allows our managers to be better teachers and leaders. At our event this year, we saw more participants in the advanced classes than we have ever had, representing reduced manager turnover and the strength of our teams. It is our belief that this event sends our retail managers back to their stores with renewed energy and enthusiasm with the Zumiez brand and cultural experience. We've significantly enhanced our ability to engage with customers on multiple fronts through the integration of our physical and digital channels. We have a comprehensive customer experience that allows them to see all inventories through any channel and includes features in which our customers have access to their local stores inventory, can buy online, pick up in store, reserve online, pay in store, and buy whenever and however they choose. Included in this experience is fully localized fulfillment in our North American business, putting the local customer experience back in the hands of our store teams and significantly reducing our order to delivery time. In 2017, we're continuing to roll out our new customer engagement suite across the U.S. store fleet. We're very excited about this system enhancement, which in concert with existing omnichannel capabilities, gives us new ways to learn more about our customers and to engage with them in a more meaningful way. Through this level of interaction, in conjunction with face-to-face dialogue in stores, we'll be able to keep our finger on the pulse of local trends allowing us to provide hyper localized and purely authentic product assortments and a superior personalized brand experience for our customers. Lastly, we continue to believe our physical stores are integral to successfully executing our customer centric growth strategies. As our store expansion in the U.S. and Canada moderates, we continue to our new ways to leverage our physical presence in order to bring long term value to both our customers and our shareholders. Our goal in managing our current store base is not to have one more store than necessary in any given trade area to service the customer. Looking overseas, we're optimistic about our long term growth prospects. Over the last five years, in Europe, we have successfully expanded our presence despite unfavorable macroeconomic conditions. That said, our presence on the continent remains relatively small. By continuing to execute our omnichannel strategies, which includes selective store openings along with localization efforts, we remain confident that we can profitably advance Blue Tomato. The same is true in Australia where we gained a foothold with our acquisition of Fast Times last year. We believe the combination of best practices from each of our teams provides a strong foundation for future growth in this strategically important market. At the speed at which changes in consumer shopping behavior continues to gain pace, we are confident that the investments we've made in our business and our people, coupled with our ability to manage costs, have us well positioned to outperform relative to the industry and deliver increased value to our shareholders over the long term. With that, I'll hand the call over to Chris for his review of the financials. Chris?

Thanks, Rick and good afternoon everyone. I'm going to start with the review of our first quarter results, I'll then provide a brief update on May before discussing our second quarter guidance and some high level perspective on how we're thinking about the year. First quarter net sales increased $8.2 million or 4.7% to $181.2 million from $173 million a year ago. Contributed to this increase was the net addition of 25 stores since the end of last year's first quarter, including six Fast Times stores in Australia; and positive comparable sales growth of 1.8%. During the 2017 first quarter, we saw an increase in transaction volume, partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction resulted from lower units per transaction, partially offset by an increase in average unit retail. men's and junior's categories comp positive while footwear, hardgoods and accessories comp down for the quarter. From a regional perspective, North America net sales increased $6.1 million or 3.9% to $162.5 million. International net sales, which consists of Europe and Australia increased $2.1 million or 12.5% to $18.6 million. First quarter gross profit was $52 million, an increase of $2 million or 4.2% compared to the first quarter of 2016. Gross margin was 28.7% in the quarter, down 20 basis points compared to 28.9% a year-ago. The decrease was primarily driven by 50 basis points increase in inventory shrinkage, partially offset by 40 basis points increase in product margins. SG&A expense was $58.3 million in the first quarter compared to $53.9 million a year ago. SG&A as a percentage of net sales was 32.2% compared to 31.2% of net sales in the first quarter of last year. The increase was primarily driven by 80 basis points related to investment in salaries, minimum wage increases and deleverage of labor costs, and 30 basis points related to incentive compensation. Operating loss in the first quarter of 2017 was $6.2 million compared to the operating loss of $3.9 million in the first quarter of 2016. Net loss for the first quarter was $4.4 million or $0.18 per diluted share compared to a net loss of $2.1 million or $0.08 per diluted share for the first quarter of 2016. Our tax rate in the first quarter of the year was negatively impacted by new accounting guidance for share based payments, which reduced our tax benefit and earnings for the quarter by $0.4 million or $0.02 per share. Turning to the balance sheet, cash and current marketable securities totaled $76.5 million as of April 29, 2017, up from $62.1 million as of April 30, 2016. The increase in cash and current marketable securities is driven by cash generated through operations, partially offset by capital expenditures, stock repurchases and cash used in the acquisition of Fast Times. As of April 29, 2017, we had $122.4 million in inventory, up 8.4% from this time last year, driven primarily by our recent sales trends, increased global store count and strategic investments in inventory that we believe are equating and will continue to equate to higher sales. Turning to our May sales results, total net sales for the four-week period ended May 27, 2017 increased 6.5% to $53.2 million compared to $50 million for the four-week period ended May 28, 2016. Comparable sales increased 3.3% during the four-week period ended May 27, 2017 compared to comparable sales decrease of 7.6% for the four-week period ended May 28, 2016. The comparable sales increase was driven primarily by an increase in transactions, partially offset by decrease in dollars per transaction. Dollars per transaction were down for the four-week period due to a decrease in units per transaction, partially offset by an increase in average unit retail. During the four-week period, men's and junior's posted positive comps, while hardgoods, accessories and footwear posted negative comps. Looking at guidance for second quarter, 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. We are currently planning second quarter comparable sales results in the range of positive 1% to positive 3% with total sales in the range of $185 million to $189 million. We anticipate that gross margins will be in the range of down 20 basis points to positive 20 basis points compared to the second quarter of 2016. Consolidated operating margins are expected to between negative 1% and negative 2% with loss per share between loss of $0.06 and loss of $0.11 compared to a loss of $0.03 in the prior year second quarter. Year-over-year, our second quarter EPS is negatively impacted by investments made throughout 2016 and into 2017, as well as increased incentive compensation levels planned in 2017 that were not achieved in 2016. Before I wrap up, I would like to give you a few thoughts on how we’re thinking about 2017. While our recent comparable sales trends remain positive, the retail environment in general remains uncertain. As we look to the back half of 2017 and beyond, we continue to believe that the investments we’ve made in our infrastructure, particularly our omnichannel presence, as well as those investments we continue to make in Zumiez brand and team will drive long-term top and bottom line growth. With that in mind, we continue to believe that comparable sales will be positive for the year and we will experience earnings growth based on our current planning. There will be an extra week in fiscal 2017, resulting in 14 week fourth quarter and 53 week fiscal year. This extra week will benefit sales and earnings growth in fiscal 2017, and will be a detriment to sales and earnings growth rates in fiscal 2018. As a reminder, we saw product margin expansion in each quarter of 2016 with the exception of the first quarter. In 2017, we expect product margins for the year to be greater than 2016. However, we anticipate that the increase will be modest. From a cost perspective, we are currently planning SG&A to grow at a greater rate than in 2016. As we continue to absorb minimum wage increases across the country and invest in important initiatives for our long-term success, such as continued investments in our people, the roll out of our new customer engagement suite, and other strategic initiatives. We are planning to open approximately 19 new stores, including four in Europe and two in Australia, with roughly two-thirds of the openings occurring ahead of the back-to-school season. We expect capital expenditures for the full 2017 fiscal year to be between $24 million and $26 million compared to $20.4 million in 2016. The majority of the capital spend will be dedicated to new store openings and planned remodels. While our store count growth rate has decreased in 2017, the related decrease in capital was offset by an increase in remodels for the year. We expect the depreciation and amortization will be approximately $27 million in line with the prior year. We are planning our business assuming an annual effective tax rate of approximately 38%. And lastly, we are currently projecting our diluted outstanding share count for the full year to be approximately 25 million shares. Now with that operator we'd like to open the call up for questions.

Thank you [Operator Instructions]. Our first question comes from Jeff Van Sinderen from B. Riley.

First, let me say great work delivering comps that is outperforming many in the space. You guys deserve credit for that. Maybe you can give us a little bit more color on how we should think about emerging brands. I know you touched on that a little bit in your prepared comments; and whether you believe that the brands that have been your most outstanding brands lately will be the same brands that outperformed as we start thinking about back-to-school. So I guess just trying to get a sense of how you’ve planned those brands, those leading brands, for back-to-school, or if there is a shift that you think is substantial that might incur?

So again I'll just go back and highlight that uniqueness in our product assortment has always been a key part of what we've been about, and that uniqueness historically for us is as traditionally, primarily been driven by young brands becoming, going from the emerging state to going to the growth state in their brand formation. And I think as we've talked about previous calls, those cycles have one of the things that has changed in the new world is how much more quickly brands can launch in today's world, how much more quickly once they find their right spot and really resonate with consumers can grow much more vastly from emerging to grow. And then I still think we're going to see when they're in growth mode, we're going to see that we have a multiyear play on those brands. So I think with the brands we've been talking about for over a year now in terms of really start talking at this time last year about our confidence and some of the brands we saw that were going from the emerging phase to growth phase, we still feel pretty good about where we're at. And we do a number of things internally, Jeff that we’re not only tracking how many brands that we're introducing into the system each year. And again, I would tell you that year-to-date we're feeling good about that relative to our 2017 targets. So I think we’ll be at/or better than our historical levels for bringing new brands into our system. But we also track the position of those brands relative to those brands that are gaining compared to those brands that are going down. Because of course so you have brands that are gaining in our world, as you know from our concentrations in top 10, top 20 brands, we have significant turnover. So we're always looking at the net position between top gainers and top losers. And I think as we look forward in the rest of the year, we're still feeling relatively confident that we have some brands that are capable of driving some gains for us. Now, we'll see if we can do that as we look forward that's going to be determined by the marketplace. But again, we know we've brands that are going to decline, but we also have these brands that have been running gains over the last year. And I think we feel confident that they have some room to go yet in terms of our processes and thinking about those brands. And as you guess, we're also, Jeff, pushing forward those next level brands that we think may have an opportunity, that doesn't mean that they're going to become growth brands as back-to-school, but it means that we’re positioning to try to help them as a brand partner, and position them for introducing to a wider consumer base outside of where they may have launched initially within our system. So we're constantly working with our brand partners about how we can help them and move their brand forward. And again, we're going to be launching many brands, planned yet for the year coming up and many categories of our business too. So I think we're encouraged about that. So I think generally, Jeff, we're feeling good about where we're at. Again, time will tell here if this logic will hold out.

And I know you guys, you mentioned that you have incentive comp this year and so forth versus not much last year. But let me ask you if you continue to grow sales, both from new stores, ecommerce and a positive comp. At what point do you think we should start considering SG&A leverage coming back into play?

I think it's a really good question Jeff. And it's something we're very focused on too. And I think as we think about the incentive, I just want to make sure that I'm clear on how that's working for us this year, because as we entered 2016 much over a year ago and we built our plan, we really -- based on the challenges we had in 2015 and how we're seen in '16 play out, we could not build a plan that we thought warranted a full incentive payout. So what you saw in the first quarter of 2016 and the second quarter of 2016 is really throughout the year was us accruing to and planning to a level of incentives that we thought was warranted with the results. Obviously, 2016 was not as strong as we had hoped, and those results came in on a consolidated level much lower than we had anticipated actually approximately around 30% of the total planned incentive payout. So as we move to 2017, we believe that we had built a plan that work to payout the full incentive, as well as reward our shareholders with sales and earnings growth. And that incremental step up on the year is about $4.4 million. And what I'd tell you about that is as all incentive payout, its contingent on us hitting those sales and earnings growth, contingent of paying that amount out. So as we move through 2017, we'll continue to evaluate that based on where we're at. But what we plan to do is as we move through this and we can hopefully more normalize our positioning is that we would get into a spot where we can leverage SG&A just like you'd expect and we'd expect to grow earnings over the long term. So I would anticipate as we continue to plan that that's going to be part of our goal is leveraging SG&A and growing gross margin. And hopefully, we can do that while we're still able to payout our incentive levels.

Thank you. [Operator Instructions] Our next question comes from Benjamin Bray with Robert W Baird.

Just wanted to talk about the Q2 comp guidance and some of these assumptions built into that. Obviously, May was pretty strong at plus 3.3, the rest of the quarter seems to imply a little bit slower than that. Should we interpret that was just conservatism or was there anything there that you would call out in terms of what is that guidance?

No, there is not a lot to call out here. I think basically, as you called out, we came in a quarter at 3.3, we have spent a lot of time analyzing our own results, obviously, in relation to how the first quarter came in, which as Rick pointed out in his prepared remarks was a little bit choppy. And we're trying to -- we've been trying to analyze where the run rate is. And quite frankly, we felt pretty good at that low single-digit one to three comp range for the second quarter. So I think it's in line with where we landed in May. And as we think about what are the drivers of the business and how we're thinking about June and July heading into back-to-school, it filled up at an appropriate level for us to plan the second quarter. So I can promise you, Ben, we're going to going to try to beat it. That's always our goal. But I think in this type of environment, we were feeling pretty good about that range.

And then I also just wanted to ask about your ecommerce business and was curious to hear if some of these localization efforts or any other investments you’re making there. Just what kind of impact you’re seeing on your digital business?

I'll let Chris talk about the digital business. Let me, kick it off, though, Ben with again. We don’t think about the digital business as a standalone entity. These are from our perspective we’re working in a channel-less world to serve our customers. And that's why things like the omnichannel efforts, things like localized fulfillment, creating great brand experiences at every touch point, whether that’d be in the digital touch point or physical touch point, it's so critical to our long-term success. And you heard us talk about the comps of the trade area and how we think about measuring trade area and about where sales really belong, are they digital or physical, what's the -- where is it aligned. Those are hard things to tell nowadays. So I just -- I'll let Chris take the comments we hear about. I just want to make sure as we think about here the -- I hope that over the next few years we’re not going to talk about digital channels, we’re going to talk about this trade area success and how we might measure success and marketplace differently based on our performance and how we’re serving customers in an integrated channel-less world. So just keep that in the back of mind, and I'll turn it over to Chris.

Yes, and I’d just add to what Rick said. As we analyze all of our numbers from many different directions, we firmly believe in Rick's comment because of what we see in the numbers. And where we don’t have stores, we really don’t have much of a Web presence. When we open stores, we typically get a pretty big Web impact. And so what I would tell you is we think the customer is shopping in both channels. And what's hard for us, as far as I can tell you what the Web numbers are, I can tell you what the store numbers are, I just am not sure how accurate they are anymore, because the customer may shop in an in-store channel and go home and make the purchase or start online and come into the store and make the purchase. And I think that makes the complexity of reporting one channel or the other more challenging. When I do breakout the numbers, which the numbers we lay out are based on origination, meaning where did the sale actually take place and originate, but to the best of our knowledge. I can tell you that our Web penetration year-over-year has grown and our Web comp is performing ahead of the consolidated comp that I've given you today. But again, knowing our customer pretty well and spending time in stores like we do, we certainly see that customer start online and head into store and get an experience in store that translates to their online activity. So we believe they're very integrated but we're seeing Web growth ahead of our comp growth just like most retailers out there.

Thank you. Speakers, I'm showing no further questions, at this time. I'd like to turn the call back over to you.

All right, thanks very much. Again, we appreciate everyone's attention today and time. And we’ll look forward to talking to you as we get through second quarter, and of course, post our Labor Day weekend. Thanks everybody very much. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.