Zumiez, Inc. F3Q08 (Quarter End 11/01/08) Earnings Call Transcript

Nov.20.08 | About: Zumiez Inc. (ZUMZ)

Zumiez, Inc. (NASDAQ:ZUMZ)

F3Q08 Earnings Call

November 20, 2008 5:00 pm ET

Executives

Richard M. Brooks - Chief Executive Officer, Director

Trevor S. Lang - Chief Financial Officer, Corporate Secretary

Analysts

Sharon Zackfia - William Blair & Company, LLC

Mitch Kummetz - Robert W. Baird & Co., Inc.

Jim Duffy - Thomas Weisel Partners

Crystal Kallik - D.A. Davidson & Co.

Stephanie Wissink - Piper Jaffray

Linda Tsai - MKM Partners LLC

Betty Chen - Wedbush Morgan Securities, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

Nadine Francis - Roth Capital Partners

Operator

Welcome to the Zumiez, Inc. third quarter fiscal 2008 earnings call. My name is Francine and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions)

The following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please note that actual financial results of the company for the periods being discussed may differ materially from the financial results projected or implied in the forward-looking statements. Additional information concerning factors that could cause actual financial results to differ materially from projected results is contained in the company’s annual report on Form 10K and other documents filed by the company with the Securities and Exchange Commission. The company disclaims any intent or obligation to update forward-looking statements.

No recording or rebroadcast of this call is permitted without the company’s express written permission.

I would now like to introduce your host for today’s conference, Mr. Rick Brooks, Zumiez’s CEO.

Richard M. Brooks

Thanks for joining us to discuss the Zumiez third quarter fiscal 2008 results. Joining me today is Trevor Lang, our Chief Financial Officer. Following my opening remarks Trevor will review our financial and operating highlights and then we’ll turn the call over to the operator to conduct the question and answer portion of the call.

We are in unprecedented times and consumers are lacking confidence which is having a direct impact on discretionary spending. We are not immune.

Similar to the second quarter we started out the quarter relatively strong with a 0.2% positive comp in August. This was up against our toughest comparison of fiscal 2007 when we comped up 17.4%. We have historically performed at our best during peak volumes and our team repeated this again in August. However as the quarter progressed we saw marked deterioration in both our sales and product margins especially in apparel.

At the same time September marked the first month when our stores in the Pacific Northwest and Rocky Mountain regions, which make up approximately 30% of our comparable store base, experienced same-store sales declines in the mid-teen range. This pattern continued into October and combined with the housing affected states of California, Arizona and Nevada created a very challenging sales environment in the Western half of the United States where more than half of our comparable stores are located.

Our team continued to find ways to offset the worse than expected product margins by cutting costs.

For the quarter footwear posted a positive comp. This has been our strongest performing department in 2008 and continues to be an important part of differentiation for us. Our skate hard goods business which had also performed well during the first six months of the year was down in the third quarter as consumers cut back on higher ticket purchases.

As we head into winter season our snow hard goods which consist primarily of snowboards, boots and bindings becomes more important and represents about 8% of our sales while snow jackets and snow pants represent another 10% of our sales. Our assumption is that these categories will be challenging for us as they are discretionary, high ticket items and the consumer has shown a lot of caution in spending on these types of products.

Apparel which constitutes about 50% of our sales continues to be the most challenging area of our business. In order to remain competitive in this retail environment we have become more promotional. We continue to do well with new and smaller brands that are more exclusive to our stores in the mall; however the larger more national brands continue to negatively impact our overall sales and product margins.

In August I stated that this was the most difficult retail climate I’d seen during my 15 years with Zumiez. Unfortunately the environment has since deteriorated evidenced by recent headlines and our performance in October which represented our worst monthly comp in the company’s history. Obviously the world we operate in has changed significantly and these are very difficult times.

That said the original philosophies, goals and ideals on which we built this business remain the same and are intact. We believe Zumiez is the destination store for action and sports lifestyle apparel, footwear and accessories for teens and young adults across the country and our unique store format and merchandise selection is unmatched in the industry. This has served us well in the past and will continue to do so in the future.

Now I’ll turn the call over to Trevor to discuss the financials in more detail.

Trevor S. Lang

For the third quarter net sales totaled $112,200,000 an increase of $8,200,000 or 7.9% compared to $104 million in last year’s third quarter. The increase in net sales reflected the opening of 57 new stores since the third quarter of last year offset by a decline in same-store sales of 5.8% compared to an increase of 13.2% last year.

Our third quarter comps were in line with the guidance we gave you in August and were driven by negative transactions and to a lesser extent a decline in average unit retail. From a product perspective our footwear department led the way with a positive low double-digit comp increase, our accessories comps decreased in the negative low single digits, and our hard goods and apparel comps were in the negative mid-teen range.

We’ve opened 55 stores since the end of fiscal 2007 and are on plan to open 58 new stores this fiscal year. As we’ve discussed for a few calls now our stores in California, Arizona, Florida and Nevada continue to be particularly challenging for both new and comping stores. In addition, during the third quarter the Pacific Northwest and the Rocky Mountain regions became challenging as well while the Northeast and the Midwest performed relatively better.

Gross profit for the third quarter increased by $800,000 or 2% to $39,300,000 or 35% of net sales compared to gross profit of $38,500,000 or 37% of net sales in the third quarter last year. The decrease in gross profit margin was driven by an increase in store occupancy costs as a percent of sales and to a lesser extent lower product margins. Within our product margins, lower apparel margins was the driver of this decline.

Moving to expenses. In total SG&A expenses increased $3,100,000 or 12% to $28,900,000 or 25.7% of net sales compared to $25,800,000 or 24.8% of net sales in the third quarter last year. We managed the growth in SG&A to 12% on a 21% increase in square footage growth. We deleveraged in-store labor and other store operating expenses due to the negative comps and are focused on trying to make the consumer experience a good one, but we leveraged at our home office expense particularly in incentive-based compensation and stock-based compensation.

Operating income was $10,400,000 or 9.3% of net sales compared to $12,700,000 or 12.2% of net sales in last year’s third quarter. Net income for the third quarter was $6,800,000 or $0.23 per diluted share compared to $8,100,000 or $0.28 per diluted share in last year’s third quarter.

Turning to our year-to-date financial results. For the nine months ended November 1, 2008 the company reported net sales of $283,200,000 an increase of 11.1% over the $254,800,000 in sales for the first nine months of fiscal 2007. Comp store sales for the first nine months of 2008 decreased 3.2% compared to an increase of 12.2% in the first nine months of fiscal 2007.

Gross profit increased $5.5 million to $93,900,000 or 33.2% of net sales from $88,400,000 or 34.7% of net sales in the first nine months of fiscal 2007. The decrease in gross profit margin was primarily driven by an increase in store occupancy costs as a percent of sales due to the negative comp of 3.2% and the 57 new stores added since the third quarter last year.

SG&A expenses increased $9,200,000 or 13.4% to $78 million or 27.5% of net sales compared to $68,800,000 or 27% of net sales in the first nine months of 2007. The slight increase in SG&A as a percent of sales is due to store operating costs deleveraging on a negative comp and 57 new stores added since the third quarter of last year somewhat offset by lower home office costs as a percent of sales.

Operating income totaled $15,900,000 or 5.6% of sales compared to $19,600,000 or 7.7% of sales in the first nine months of fiscal 2007. Net income was $10,900,000 or $0.37 per diluted share compared to $12,900,000 or $0.44 per diluted share in the first nine months of fiscal 2007.

Turning to key balance sheet highlights. At November 1, 2008 cash and marketable securities increased to $67,300,000 from $37,600,000 at November 3, 2007 an increase of over 79%. Inventory was $81,800,000 at November 1, 2008 versus $67,900,000 at November 3, 2007 an increase of about 21%. Average retail inventory during the quarter on a comp store basis was down about 1.6%. Also at November 1, 2008 the company had no long-term debt including no outstanding balances on its revolving credit facility.

Now to our guidance. For fiscal 2008 we expect sales to be between $406 million and $410 million compared to our previous sales guidance of $418 million to $425 million. This is based on our target of opening 58 new stores and our recently revised expectation that fourth quarter comps will be in the negative mid-teen range.

We recently updated our outlook for diluted earnings per share to be in the range of $0.52 to $0.57 for the fiscal year ending January 31, 2009. This guidance assumes that fiscal 2008 operating margins will be in the 5.5% to 6% range driven primarily by lower gross margin due to lower product margins and higher occupancy costs as a percentage of sales.

Our current expectation is that SG&A will grow about 11% for the year, almost half the growth rate in our square footage.

In 2008 we plan to spend approximately $29 million to $31 million in cap ex down from our previous projection of approximately $33 million to $35 million.

Weighted average diluted shares for fiscal 2008 are expected to be approximately 29,400,000.

Despite the recent economic events and their impact on our business, we continue to be optimistic about the long-term growth prospects and the future potential of our concepts and our brands. Over the near term we will continue to focus on controlling costs, capital and investments until the visibility improves. To that end we recently announced that we would slow our new store expansion to no more than 15% square footage growth and reduce our capital expenditures to approximately $28 million in fiscal 2009.

I know many of you have questions regarding our preliminary fiscal 2009 projections. We are not ready to share any specific details until we finish the fourth quarter of this year which represents approximately 40% of our annual earnings. That being said our current belief is that if our comparable store sales are negative next year, we will have lower earnings than we had this fiscal year. We are completing the planning process and will update you on our thinking regarding 2009 in March after we finalize this fiscal year’s results.

We remain confident that we have one of the most talented groups of people in the business and their hard work, passion and dedication to Zumiez is more important and more evident now than ever before. We have seen everyone across the board step up during these tough times and I am incredibly proud of our team. We believe we will come through this extremely difficult retail environment more unique in teen retailing and will be stronger than when we entered it.

Francine, I think we would now turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sharon Zackfia - William Blair & Company, LLC.

Sharon Zackfia - William Blair & Company, LLC

On merchandising it sounds like you’re worried about some of your higher average ticket items. I’m wondering if you have an opportunity as we go into the holiday season to try to minimize the exposure at the higher price point items or what basically you can do on the fly at this point?

Richard M. Brooks

You did hear that correctly as it relates particularly to the snow hard goods business. As we addressed in our comments we are concerned about it. We’re doing a couple of things. We’re doing the things you would expect us to do.

The first is we’re obviously working very closely with our suppliers on the condition of this business at this point in time, the snow hard goods business. We’re also being more aggressive from a price perspective and trying to drive product out the door with price promotions. I think you have probably seen that in our stores already. Those are really the two things we’re doing. We’re working closely with our vendors and driving it from a price perspective and trying to move the product out the door.

Trevor S. Lang

Just to follow up on that. The guidance that we gave a couple of weeks ago obviously intimated that we were planning our product margins to be down pretty substantially, probably more than they have certainly ever been down since being a public company. The marching orders are very clear to our teams that we are to end this season clean in inventory. The team has done an amazing job over the last five years under Lynn’s leadership to keep inventories clean both in the good times and even in the tough times that we’ve been in for now for a year.

If you look at the level of inventory that’s aged over four months, it’s a pretty low percentage. If you look at the flexibility we think we’ve given ourselves based on the guidance we’ve given and the orders that we are marching to from a merchandising perspective, our expectation is that even though we’re not happy about the environment we’re in and snow is an important piece of what we’re doing, our goal is to get cleaner inventory.

Again we think we’ve given ourselves enough room and been conservative as we see the world today enough that we will execute against that goal when we get the year-end inventory.

Sharon Zackfia - William Blair & Company, LLC

Are you already seeing snow off to a slow start or are you just worried about it because of what happened last year?

Richard M. Brooks

It’s off to a slow start.

Sharon Zackfia - William Blair & Company, LLC

Trevor implied in your SG&A guidance for the full year is a pretty swift slowdown in SG&A I think to like a 5% or 6% year-over-year clip in the fourth quarter. Are there things you’re doing? Is that reversal of bonus accruals? We’ve not seen that grow at that low of a clip I don’t think ever as a public company.

Trevor S. Lang

I think there are a number of things. There’s no reversal of bonus accrual this year. We are accruing substantially less than we accrued last year. We accrue our incentive-based compensation as we earn our net income so historically roughly half of our net income came in the fourth quarter. So last year for example roughly half of our bonus would have been accrued in the fourth quarter. This year our bonuses are much lower as performance has suffered.

We have cut expenses you’re right in a number of areas. We mentioned on the prepared comments that our SG&A has grown about half the rate of our increase in square footage. Again I think it’s one of the things that we’re happy with what the team has been able to do in a very difficult environment.

I’ll just give you a few things. We have ratcheted down our store labor where we are still deleveraging on the store labor but we have brought it down to a level that we’re more comfortable with. We have done a better job on shrink this year. Our percentage rent has come down as business has gotten tougher. Our merchandising costs as a percentage of sales have come down. We’ve negotiated new credit card fees, better logistics costs. Just across the board we have lowered our costs.

I do want to be clear. Incentive-based compensation and stock-based compensation as well are large drivers of that. It’s sort of broad across the organization where we’ve had those savings.

Just to follow that thought on the cap ex, we mentioned that the cap ex was going to be lower. We again have done a pretty good job of re-engineering some of our cost structure on our cap ex. Our stores are costing just over $20,000 less per store this year. We’ve done six less remodels and relocations because we felt like there wasn’t as much need as business has gotten tougher. We put off some not necessary IT projects and fixture upgrades. Nothing that we believe will hurt the long-term interest of the business but costs that we thought were prudent to make when we saw business continue to be tough in the earlier part of this year.

Operator

Our next question comes from Mitch Kummetz - Robert W. Baird & Co., Inc.

Mitch Kummetz - Robert W. Baird & Co., Inc.

I was hoping you might be able to comment on your month-to-date comp or at least let us know if it’s trending in line with what your revised Q4 comp guidance is?

Trevor S. Lang

We’re not going to do that other than to say we’re at this point sticking with the guidance we put out there.

Mitch Kummetz - Robert W. Baird & Co., Inc.

Trevor, you mentioned that pressure on the gross margin line in Q3 some of it was occupancy and some of it was product margin and specifically within the apparel on the product margin. How are you looking at that in Q4? I would guess that you would expect pressure as well on the snow side of the business. When you think about as much gross margin pressure as you’re expecting in the earnings guidance, is it more so on the snow side that you expect it or is it still more so on the apparel side or how are you thinking about where you expect that pressure to come from?

Trevor S. Lang

Let’s just talk about the third quarter first and then we’ll talk about our projections. In the third quarter our gross margins were obviously down 200 basis points from 37% to 35%. Roughly 80% of that deleveraging in the margin, that 200 basis points, came from the deleveraging of occupancy.

Basically the remainder of that came in lower product margins and then within the product margins ostensibly all of the deleveraging or the lower product margins came out of the apparel business. There was a little bit of snow hard goods in there but snow hard goods is less than 1% of sales in the third quarter. So it’s been driven by apparel really since starting about the June timeframe of this year.

For the first five months of this year our product margins were actually up but as people got much more promotional. We spent a lot of time talking about this in the second quarter. As the apparel parts of the teen retailing space got very promotional, we felt that pain and we’ve reacted to some extent to keep clean on inventories and to be ahead of it.

If you look now toward the fourth quarter and the product margins that we have intimated in our guidance, our margins for the fourth quarter at the high end of the guidance would intimate some portion of 670 basis points of lower gross margin.

We are assuming the vast majority of that is going to come through lower product margins. There is going to be some deleveraging on rent but the bigger piece of that gross margin is going to be due to lower product margins and from within that I think you’re thinking about it right; it’s going to be the snow hard goods piece of our business which as Rick mentioned is about 8% of our fourth quarter sales as well as the higher priced snow jackets and snow pants in our apparel. Those types of categories in aggregate last year represented about 18% of our sales.

So yes, our apparel and our snow hard goods are going to be the drivers of the significant decline in gross margin for fourth quarter ’08 relative to fourth quarter ’07.

Mitch Kummetz - Robert W. Baird & Co., Inc.

Two more quick questions. One for you Rick. I know it’s probably hard to separate out the macro from merchandise trends but when you look at what’s happening merchandise-wise in the stores today, do you feel like you’re being hurt by a lack of trend as well? Do you feel like the hoodie business has gone a little soft just based on maybe that trend having run its course? I know there was pretty strong skate driven skinny leg denim trend going on out there for the last couple of years too. Do you think you’re being hurt to some degree just by lack of new trend in the merchandise or is it just all macro at this point?

Richard M. Brooks

As you know I think our business has always kind of been leading that trend, a bit of that skinny denim for a number of years now. I think what we’ve seen is there have been a lot of changes; therefore everyone’s gotten closer to us on the trends. Now while I say that, I think that all pales in comparison relative to the issue of the macroeconomic environment. That is really the key driver of what we’re seeing here. We just have fewer people coming in the doors to buy things.

Mitch Kummetz - Robert W. Baird & Co., Inc.

You’ve talked about bringing down the square footage growth in 2009. When do you start cutting deals for 2010? Have you started that process yet? I’m just thinking how you are thinking through the process as you look into 2010 since I’m guessing you’re going to start that pretty quickly.

Trevor S. Lang

That’s correct. At this point in time we just are putting new deals on hold for 2010. We’re going to wait and see how this holiday season comes out before we make any commitments. We have very few commitments at this point for 2010 and we want to see again how we go through the holiday season before we start making any commitments for 2010.

Operator

Our next question comes from Jim Duffy - Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

Within your vendor base are you finding any key vendors that are having challenges to find access to the capital needed to support your business?

Richard M. Brooks

At this stage of the game, again I won’t comment on any of the public companies because their information is public and you guys can do that with your own determination. As it relates to our smaller vendors, in most cases we’re their biggest customer so if we have a lot of cash then I think we’re the big driver of their liquidity. At this point we have not had many, if any, issues that I’m aware of with any of our smaller brands.

Trevor S. Lang

One follow up on that that I think is important is people who are not as familiar with the story, we are very brand diverse. Our largest single brand represents less than 7% of our sales and as you get past those 10 brands like our number 11 brand represents 1.8% of our sales. It certainly would be not a good thing for any of our vendors to go away but we are not so confined to a certain number of vendors that if one brand did go away that it would be catastrophic for us.

We have had a good record in the industry for a long period of time of working with brands that we think have a long future in front of them. I think to the extent there was a brand that we thought was relevant and needed some help, we might help out in that regard. But again I think it’s important for people who aren’t as familiar with our story to understand that we’re not someone who only has 20 or 30 brands. We have a lot of brands that sort of mitigate some of that risk.

Jim Duffy - Thomas Weisel Partners

That kind of leads well into my next question. Historically you guys have done things to help brands out where needed. Do we possibly get into a scenario here where there are so many brands that need help that it becomes more difficult to do so or we’re not even close to there yet?

Richard M. Brooks

Again I don’t think so partly because of the diversification we’re at. I’m not hearing and I’ve asked this of our buyers, they’re not hearing at this stage, from our brands that there are issues out there. So we’re not seeing it at this point in time and I don’t believe that that’s the case as long as we’re going to be financially healthy, because again for most of these smaller brands we are their biggest customer.

So with our financial strength as you can see from our cash position I think we provide a lot of security for those brands. Again you have to remember that the majority being produced by these smaller brands are T shirts and hoodies and things that are screenable in nature. So it can be relatively quick turn, quick reaction product.

Jim Duffy - Thomas Weisel Partners

A couple questions on the leases. With regard to the lease structure are there out clauses, things like co-tenancy agreements or occupancy rates and so forth, that could possibly afford you the ability to slow growth further in ’09?

Richard M. Brooks

We have in virtually all of our leases co-tenancy requirements as well as kick-outs in almost every lease deal we do usually around a year three or four. We’re always looking at where we’re at relative to those kick-outs as they come up as well as the co-tenancy on an ongoing basis, for not just these current years but as it relates to any co-tenancy requirements across our portfolio for older deals too.

Jim Duffy - Thomas Weisel Partners

For older deals I presume it’s a matter of whether the store is four-wall cash positive which makes it go/no go decision to continue operating it?

Trevor S. Lang

Yes, and how it’s trending and our strategy and belief in that market and a number of other things too.

Jim Duffy - Thomas Weisel Partners

A couple quarters ago you guys had talked about for the first time seeing offers of down rents. Have you seen the landlords get even more aggressive? Are the rates falling off sharply?

Richard M. Brooks

I would not say it’s changed much from what we talked about earlier.

Operator

Our next question comes from Crystal Kallik - D.A. Davidson & Co.

Crystal Kallik - D.A. Davidson & Co.

Trevor, it sounds like you’ve been pretty aggressive as far as addressing the cost structure and cuts so I guess my question is for ’09 with all the adjustments you’ve made, do you still require a mid-single-digit comp to leverage costs or how is that changing?

Trevor S. Lang

This year the answer would have been no, but we have taken some pretty tough cuts. We’ve had the ability to do that. We’ve had a significant pay for performance model historically where we’ve had a pretty large piece of people’s compensation be in the form of commissions and bonuses. That number has come way down. The other expenses that I mentioned that we’ve had the ability to cut we have cut.

We don’t feel like we’ve cut anything that is going to be detrimental to our long-term growth. We are still investing in our IT organization. We think we need a little improvement there. We are investing in our e-commerce business because that is a business that has continued to grow for us and we continue to fund that growth as well. But the rest of the expenses, there have been a lot of things where we’ve taken a different approach as things have gotten more difficult.

As you look out into next fiscal year, we will not be able to make on a relative basis the same level of cuts because in a number of cases those expenses have gone to some number close to zero.

Crystal Kallik - D.A. Davidson & Co.

I was wondering though from an actual comp leverage perspective, it sounds like you’ll be able to leverage on a slightly lower comp than you have previously based on the cuts you’ve made?

Trevor S. Lang

Yes. Again if you look at where our expense structure grows in this business, occupancy expense is our second largest expense by far. Then our store labor is our next largest expense and then depreciation on our stores is our third largest expense. Those expenses follow square footage growth. To some extent some of those expenses are going to grow at a faster rate. In the case of occupancy it usually grows at a faster rate than even the square footage growth just because you get cam increases and real estate taxes and things of that nature that increase as well.

I would not change that 3% to 5% leverage structure. I would characterize this year as a year where we really just got more strenuous and focused and difficult with the team on cutting costs.

Crystal Kallik - D.A. Davidson & Co.

Are you still predicting about $80 million to $90 million for year-end cash?

Trevor S. Lang

Yes. We said on the release a couple of weeks ago that we expected to have at least $75 million in cash by the end of the year. A lot of that has to do with how this year turns out and whether we hit our guidance or not but based on current expectations we said we’d have at least $75 million by the end of the year.

Crystal Kallik - D.A. Davidson & Co.

Could you tell us as far as the actual impact of California, Arizona, Nevada, Florida to the Q3 comp and then the Pacific Northwest and Rockies? Can you give us some idea of the magnitude of the drag on the consolidate comps from those regions?

Trevor S. Lang

All of those regions together which make up 56% of our sales comped down in the sort of 11% range. Had those markets just been flat we would have comped up about just under 1%. Of those markets really the Pacific Northwest was the most difficult followed by the Arizona markets. Really the rest of them were pretty close in the low double-digit negative comping range.

Crystal Kallik - D.A. Davidson & Co.

I think you had mentioned that initially at least a few weeks ago and so much has changed in that timeframe November comps you were looking to benefit from the shift of a snow event by about 100 basis points? Based on how things are starting out slowly, how do you feel about that?

Trevor S. Lang

Yes. What we said was is we had a snow event that moved out of the end of October into the second week of November. Now November is a much more meaningful month than the month of October obviously because of the week of Thanksgiving. That shift of that event did have about a -1% drag on the month of October but it would not have the opposite effect of that in November because November’s such a higher volume month. So you might get a 0.5% improvement out of that. That event did happen. It’s behind us now. It’s not going to be a one-for-one trade because of the fact of November’s a much higher volume month for us.

Crystal Kallik - D.A. Davidson & Co.

I’ve noticed a pretty significant increase in the amount of emails that you all are sending out. I’m assuming that you’re getting pretty good customer response from that new marketing initiative?

Richard M. Brooks

We always increase it this time of year so some of it’s a timing of year relative to the beginning of the holiday season. As Trevor mentioned earlier in his comments we’ve also continued to make investments in that arena too. It’s a function of both those things.

Operator

Our next question comes from Stephanie Wissink - Piper Jaffray.

Stephanie Wissink - Piper Jaffray

Rick, you mentioned that your national brands were specifically impacting apparel sales and margins. I’m just curious if you’re able to go back to those brands and vendors and get some help with that burden as you progress through the holiday season?

Richard M. Brooks

Those conversations are steady and constant. We are working very closely with those brands.

Stephanie Wissink - Piper Jaffray

Have you had any luck thus far?

Richard M. Brooks

I’m not going to get into commenting specifically but we view this as a long-term partnership in terms of working with these brands and that’s our approach with them and we believe we have great partners.

Stephanie Wissink - Piper Jaffray

Two follow-up clarification questions for you Trevor. You said your goal for inventory was to be clean at the end of the fourth quarter. Does that imply a down year-over-year on a comp store basis?

Trevor S. Lang

Our current expectation is that we will be down on a per square foot basis in the low negative single digits when we get to year end. The reason that’s not in negative mid-single digits, we mentioned this on the last earnings call, was we know we were light on inventory on a few new stores last year at the end of the year and we know there was some transitional product between the winter season and the spring season that we underinvested in. So we’re going to make some very small investments there because we know there were some opportunities to drive a little bit of sales there.

Year-end inventory is seasonally adjusted about the lowest inventory level we have so even those small investments are not overly meaningful because of the fact that it’s really the lowest level of inventory we have on a per square foot basis. I think as we look out to the end of the first quarter we would probably get back closer to our negative mid-single-digit inventory on a per square foot basis.

Stephanie Wissink - Piper Jaffray

Trevor you also stated that in reference to next year if you were to comp negative, your earnings would be down year-over-year. Can you just give us some insight as to what that implies about your new store performance?

Trevor S. Lang

I wouldn’t say it’s necessarily as much about our new stores. We are expecting that our new stores will continue to be difficult. Our new stores have been pretty constant, I’ve been here just over a year now, at running about 65% of mature store volumes. Sometimes it’s closer to 60% and then we have some stores that are getting close to 70%. I think what it has to do with is just the structure of the number of stores we brought in in the last few years, the growth in some of the expenses on those and the number of cuts we’ve made this year.

More to come on that. We’re continuing to evaluate it. We’re not done with the planning process. We are going to continue to go back with the teams and look at opportunities. But we are assuming that it is going to be a tough year going into the first part of next year so we just wanted to share that information with you guys based on our preliminary view of how fiscal ’09 looks today.

Operator

Our next question comes from Linda Tsai - MKM Partners LLC.

Linda Tsai - MKM Partners LLC

Have you given any thought as to how you might plan the snow related goods business differently for next year should the current environment persist?

Richard M. Brooks

It’s too early for that at this point. We will wait on those decisions. We’ve seen all the products at this point. We’re going to wait on booking that product. We don’t have to book it now so we’re going to wait and see how this season turns out in its entirety and push that decision as far out as we possibly can relative to seeing how this year turns out.

Linda Tsai - MKM Partners LLC

What’s the furthest that you can push that out?

Richard M. Brooks

We’re into late January.

Linda Tsai - MKM Partners LLC

How are skate hard goods holding up?

Trevor S. Lang

Skate hard goods has been comping up for us up until about the last three months for most of the last three or four years. So it’s been a very great part of our business for a long period of time. Skate hard goods is one of the more expensive things you can buy in our stores on a relative basis. Fortunately there’s not a lot of competition in what we do in skate hard goods but I think it’s [inaudible].

It has been a recent phenomenon that it has started to comp down but of all the departments we have in the five major departments we have it’s up against the toughest comparisons by far. So I think it’s just a bit of as the overall macro picture has gotten more difficult it’s a slightly more expensive thing we sell and it has comped up substantially over the last four years. It’s sort of grounding out a bit.

We’re very careful not to let skate take over the business as well because we don’t want to be viewed as just pure skate shop. We’re an action sports lifestyler so we are careful not to let it take over too much of the square footage as well.

Linda Tsai - MKM Partners LLC

What categories do you have the easiest comparisons in and how are those areas trending? Is that still apparel too in terms of being easier?

Trevor S. Lang

We comped up last year I think in the 4% range for the fourth quarter. I don’t think that there were any of our departments last year other than snow that comped down just a little bit. We don’t really have I think any lay-ups if you will when we’re looking at the fourth quarter that we’re up against.

Linda Tsai - MKM Partners LLC

As you’re buying for next year are you trying to shift your buys into some lower AUR items?

Richard M. Brooks

At this point I don’t want to get too into that because we’d have to then start talking on a category-by-category basis. Suffice it to say that our job is to meet the needs of our customers and that’s what our buyers do and I think we have a long history of doing that fairly well.

Linda Tsai - MKM Partners LLC

Some of the retailers have been commenting on strong online growth. Are you seeing similar results in your direct business?

Trevor S. Lang

For this year our online business for the quarter was up about 56% year-to-date. Our web business has been up slightly over 60%. So yes, our web business has been strong for us. Now it’s smaller relative to our entire business than most of the public companies you are viewing. It’s just over 1% of our sales last year. We have a smaller base to grow from but that business has continued to be good for us although as of late even that business has gotten slightly more difficult for us as well. Yes, it has grown from the last few years at a much faster rate than our overall store base but even that business has gotten a bit difficult in the more recent timeframe.

Operator

Our next question comes from Betty Chen - Wedbush Morgan Securities, Inc.

Betty Chen - Wedbush Morgan Securities, Inc.

I know you don’t want to comment too much about 2009 but Rick you had mentioned that you were seeing better traction with the smaller brands or perhaps less pricing competition. How should we think about that for 2009? I know that a lot of these brands are long-term relationships but is there some flexibility for you to skew maybe more towards the smaller brands in the merchandise planning for next year?

Richard M. Brooks

Yes. Again our approach there is to do what our customer tells us is the right thing to do. These brands are brands that in some cases are regional in nature where we’re meeting the needs of a certain region of the country relative to that brand. So it’s a very individualized approach to looking at how that brand works, what the sell-through of the brand is, and the customers are what drive that decision for us. If the customer is demanding more, then we’re going to buy more. We always view it from the perspective of how it is performing based on what our customers are telling us and that will drive what we do.

Betty Chen - Wedbush Morgan Securities, Inc.

In terms of the 2009 store openings have you been able to adjust whether the expected sales volume to think about the ROI for those new store openings given the environment and their expected year one trends?

Trevor S. Lang

We mentioned earlier that there’s the class of ’07 stores and the class of ’08 stores. The class of ’07 have now basically all anniversaried and they’ve done about 65% of our mature store volume. You are projecting a substantial amount on the class of ’08 because they haven’t been through the holiday season but our current projection is that the class of ’08 is going to perform pretty similar to the class of ’07. When you get into the class of ’09 we have evaluated the things that we’ve evaluated for a very long period of time and our expectation is that they are going to continue to perform similar to how the class of ’07 and the class of ’08 have performed.

It’s different as you would imagine geographically. Stores in the Midwest and Texas and parts of the Northeast are performing a bit better than stores on the West Coast so we’re very cognizant of that. Generally speaking the A malls are performing better than the B malls and the C malls so we’re cognizant of those things as well. Most of the deals that we’re going to open in ’09 that have already been signed were done well before things got really, really tough in the last three months.

We are factoring all that into our projections and that is part of what we have given the high level guidance today and we’ll give you a further update when we update you guys in March.

Betty Chen - Wedbush Morgan Securities, Inc.

Trevor you had mentioned I believe that for 2008 we should anticipate roughly 11% SG&A growth on an annual basis. How should we think about that for ’09? Can some of those savings that you talked about, controlling payroll and all that, continue into next year as well?

Trevor S. Lang

We’re not going to get into any specifics on that because we have so much of this year left to do. We are going to look at all the variable costs and the discretionary costs. We’ve made investments in people and infrastructure and we plan to garner those investments. Next year there are continued savings that we think we can do in our distribution center, continue to focus on the discretionary expenses at the store level. But that being said I think we’ve done a really good job this year and it’s going to be hard to take the same level of cost savings out of the business next year the way we’ve done it this year.

Betty Chen - Wedbush Morgan Securities, Inc.

In terms of the inventory it was clearly down again for the third quarter and I know you talked about expectations for the end of Q4. Could you give us a sense of the split of that composition between shoes and apparel? It seems like footwear has been holding up or outperforming the other categories and I was wondering how you feel about the composition of your apparel inventory.

Trevor S. Lang

You’re thinking about that right. As you would imagine, our shoe business is doing well so we’re investing in that business. It’s comping up in the double digit range so our inventory is higher in that arena and we’re doing a really good job there. Our accessories business is up a bit on a per square foot basis but not meaningfully so, and again accessories is becoming more and more unique to us in the mall setting as other people are spending less and less time on accessories. The places where we have made substantial decreases on a per square foot basis is in the snow hard goods and in the apparel side of our business.

Operator

Our next question comes from Jeff Van Sinderen - B. Riley & Company, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

Just to clarify, did you guys say that you’re fully committed on your 2009 leases at this point?

Richard M. Brooks

No, we’re not fully committed yet.

Trevor S. Lang

We said we currently would limit to no more than 15% but we can come in less than that and are continuing to evaluate the deals that haven’t been signed yet.

Jeff Van Sinderen - B. Riley & Company, Inc.

Any other color you can give us in terms of how you’re planning your promotional cadence for holiday maybe this year versus last year?

Trevor S. Lang

You’ve got to look at our business in two distinct pieces in my opinion.

You’ve got the shoes that we’re very unique in and doing very well in. There’s really not much of a need to promote it.

You’ve got our accessories, again where we’re pretty unique in that. If the kid’s into the action sports accessorizing, we’re pretty unique there. There’s not a lot of reason to be highly promotional in that atmosphere.

On the hard goods you really can’t get the majority of the hard goods that we sell elsewhere in the mall as well. Those things make up about 50% of our sales. So there’s not going to be as much pressure for us to be highly promotional in those arenas of our business because we’re very unique and it’s hard to get the brands and the product offering we have there.

When you move into the apparel side of the business and even specifically within apparel on the private label stuff as well as the brands that are more ubiquitous in the mall setting that’s where we’re thinking we’re going to have to get a little bit more promotional.

Richard M. Brooks

I’d add to that that again for us we manage this on a fairly fine level. As we think about promotional cadence obviously our guidance indicates that we’re going to be more promotional in terms of having to drive the business here in this fourth quarter. But it’s really done at a very fine level relative to how our inventory’s positioned and relative to sales we raise on a very fine category/brand analysis. It gets very detailed in our view of it and very focused in how promotional we’ll be relative to the category and brand combinations.

Operator

Our last question comes from Nadine Francis - Roth Capital Partners.

Nadine Francis - Roth Capital Partners

For the signed leases for 2009, how many of those are in the challenged area like the Pacific Northwest or California or Arizona? What percentage of those leases?

Trevor S. Lang

It’s currently based on our contemplated leases. Less than 20% of our stores will be in California or Arizona. We currently have no deals in Nevada or Florida.

Operator

I’m showing we have no further questions.

Richard M. Brooks

Thank you everybody. On behalf of Trevor and myself and the team here we really appreciate your continued interest in what we’re doing here at Zumiez and we look forward to speaking with everyone again when we report our fourth quarter results in March.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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