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Zumiez, Inc. (NASDAQ:ZUMZ)

Q1 2014 Earnings Conference Call

May 22, 2014 5:00 PM ET

Executives

Rick Brooks - CEO

Chris Work - CFO

Analysts

Dave King - ROTH Capital Partners

Steph Wissink - Piper Jaffray

Mitch Kummetz - Robert W. Baird

Edward Yruma - KeyBanc Capital Markets

Liz Pierce - ACM

Jeff Van Sinderen - B. Riley

Alex Pham - Mizuho Securities

Lee Giordano - CRT Capital

Operator

Good afternoon, ladies and gentlemen and welcome to the Zumiez Incorporated First Quarter Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference.

Before we begin, I would like to remind everyone of the company’s Safe Harbor language. Today’s conference call includes comments concerning Zumiez’s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements may be made on this call that are not based on historical facts are subject to risk and uncertainties and actual results may differ materially. Additional information concerning a number of factors could cause actual results to differ materially from the information that will be discussed is available in Zumiez’s filings with the SEC.

I would now like to turn the call over to Mr. Rick Brooks, Zumiez’s Chief Executive Officer. Please go ahead, sir.

Rick Brooks

Alright. Thank you and welcome everyone. I am joined today by our Chief Financial Officer, Chris Work. I’ll start the call today with some prepared remarks about the first quarter and then Chris will take you through our key financial and operating metrics. After that, we’ll open up the call to your questions.

First quarter net sales of $162.9 million exceeded our guidance as comparable store sales increased 1.8% in the quarter versus a mid single-digit decline we initially projected. Importantly, after getting through some excess inventory early in the quarter the upside was driven by full price selling in the back half of the quarter. This, along with better expense management, allowed us to deliver earnings per share of $0.09, $0.06 above the high-end of our guidance range.

While the first quarter is a seasonally smaller quarter for us, we are certainly encouraged by consumer response to our merchandise and selling strategies. We believe our ability to exceed our sales and product margin projections in the current retail environment is a testament to our highly differentiated products assortments and the seamless shopping experience we provide our customers regardless of which channel they choose to engage with us.

We have talked a lot over the past few years about the investments we have been making in developing a strong omni-channel presence, inclusive of a highly productive store base and a robust e-commerce platform, both domestically and abroad. I am pleased to say that as anticipated these investments are starting to pay dividends and are further separating us from the competition. This quarter, while it appears mall traffic remained sluggish, our business performed better than expected in the first quarter with total sales up 9.7% as our customer connected with us across all channels.

In North America we opened five new stores in the first quarter including four in the U.S. and one in Canada putting us on-track to add 50 new stores between these countries this fiscal year. Regards to our store count I would remind you, we continually evaluate our portfolio as a whole in an effort to optimize our physical presence in all markets. As such we may reposition or close underperforming stores throughout the year in order to maximize long-term productivity.

Although our European operations are still a small part of our business, this region again comped positive in the quarter and was a key driver of our sales performance. Not only is this encouraging for the near-term but it underscores our decision in 2012 to extend our reach globally and highlights a long-term potential for this business. In the quarter, we opened two new stores in Europe and we remain on-track for the planned addition of five new stores in 2014 which will bring our total physical European store base to 17 locations.

One of the unique things about Zumiez’s culture is that our success is not simply predicated on investments in the markets or infrastructure. We are also passionate about investing in our team and empowering them by providing the right tools, training and support so they can deliver a genuine high-quality experience for our consumers. Two weeks ago we had our Annual Manager Retreat where we bring in all of our store managers for an intense teaching and learning experience that takes place over several days. Our culture is on full display at this event, [inaudible] reinforces with me how important our focus on people is to our success as a lifestyle retailer. The impact our national events have on our store team is meaningful, long-lasting and feeds a passion our employees have about the brand, the lifestyle and the Company. The passion our employees bring to the job is not only the driving force beyond our top-line success but enables and encourages good stewardship of the brand and our unique perspective in the marketplace. Obviously we are excited by the progress we continue to make on our growth initiatives. And we are encouraged by our first quarter results relative to expectations.

That said we remain cautious with our short-term outlook as the uncertainties surrounding the retail environment persist. As always, we will continue to focus on the long-term and believe the investments we have made in strengthening our omni-channel capabilities will play a significant role in propelling our brand forward. We are increasingly able to bring our differentiated and compelling product offering and superior service model to our customers wherever and whenever he or she chooses to shop, which will provide us with meaningful opportunities to grow as we continue to evolve our retail model in the years ahead.

I will now hand the call over to Chris for a review of the numbers.

Chris Work

Thanks Rick. Good afternoon everyone. As usual I will start with a brief review of our first quarter results and then shed some light on how we are thinking about the second quarter. First quarter net sales increased 9.7% over the first quarter of 2013 to $162.9 million. By region North American sales were up 8.1%, and Europe sales were $12.3 million, an increase of 34.6% in the quarter.

Comparable sales increased 1.8% in the first quarter inclusive of e-commerce sales. The increase was primarily due to an increase in comparable store transactions partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction was primarily due to a decrease in average unit retail, partially offset by an increase in units per transaction. In terms of category performance accessories, hardgoods and juniors posted positive comps while footwear, boys and men’s comped negative. We finished the quarter with a total store count of 558 stores, up from 503 stores a year ago.

Gross profit was $50.5 million in the first quarter of 2014, an increase of $2.5 million over the first quarter of 2013. Gross margin was 31.0% in the quarter, down from 32.3% in the first quarter of 2013 primarily due to 130 basis point decline in product margins as we cleared through excess inventory early in the quarter.

SG&A expenses for the quarter were $46.8 million or 28.7% of net sales compared to $43.9 million or 29.6% of net sales in the 2013 quarter. Included in the SG&A in the current year period, was $0.6 million associated with the amortization of intangible assets associated with the Blue Tomato acquisition, while the year ago period included $1.7 million in the acquisition-related costs which included the contingent earnout and amortization of intangible assets.

First quarter operating profit was $3.7 million or 2.3% of net sales compared to $4.0 million or 2.7% of net sales during the first quarter of last year. Finally, first quarter net income was $2.5 million or $0.09 per diluted share which includes $0.6 million or approximately $0.01 per diluted share of Blue Tomato acquisition-related costs compared to the first quarter of 2013 net income of $2.5 million or $0.08 per diluted share which include $1.7 million or approximately $0.05 per diluted share of acquisition-related costs.

Turning to key balance sheet highlights, we ended the quarter with cash and current marketable securities of $107.8 million, up from $97.6 million at May 4, 2013. The year-over-year increase was driven by cash generated by operations partially offset by capital expenditures primarily related to new store growth and approximately $32.8 million paid to repurchase our common shares. Inventory was $97.6 million at May 3, 2014, up 7.4% from $90.9 million as of May 4, 2013. Inventory per square foot was down slightly at quarter-end compared to a year ago. During the quarter, we continued to buy back shares opportunistically and repurchased approximately 0.8 million shares of our common stock for an average cost per share of $23.03 for a total of $17.4 million. As of May 3, 2014, we had $27.2 million remaining in our current stock repurchase authorization.

Turning to guidance, as always I’ll remind everyone that formulating our guidance involve some inherent uncertainty and complexity in estimating sales, product margin and earnings growth given the variety of internal and external factors that impact our performance. As Rick touched on in his comments, our short-term outlook remains cautious in the face of an uncertain retail environment.

With that in mind, we are planning second quarter comparable sales results in the range of low single-digit decrease to flat and total sales to be in the range of $167 million to $171 million. We expect gross margin will be down 100 to 150 basis points compared to the prior year’s second quarter primarily due to deleveraging effect at store occupancy and to a lesser extent lower product margins. Although not to the extent we saw our first quarter product margins declines as we sell through excess inventory.

We project consolidated operating margins to be in the 3.5% to 4.5% range with diluted earnings per share between $0.12 and $0.16. Included in our second quarter guidance is an estimated $0.6 million or $0.02 per diluted share in intangible amortization cost associated with the acquisition of Blue Tomato. As many of you know our business is seasonal with the majority of our sales and earnings occurring in the back half of the year. Current trends are not a good roadmap for how the remainder of the year will play out and the state of consumer sentiment is hard to gauge. However, I’d like to reiterate some of the general thoughts from our March call about the year.

With the uncertainty in the marketplace, we are not prepared to give comments on sales results for the year. We believe that our proven strategies around product and people coupled with the investments we have made to provide a great omni-channel experience will result in top-line performance ahead of the team sector in general. We achieved record product margins in North America in 2013. And while we are a full price retailer, our product margins can be impacted by a variety of factors most notably shifts in product mix. As a result, we are projecting product margins will be down moderately for the remainder of 2014.

2013 was an investment year, and while we do not expect the same level of investments in 2014, our growth initiatives are on a continuum and will be funded as necessary. Also, to the extent our comparable store sales results are low or negative, our cost structure will deleverage. That said we are planning SG&A growth in 2014 to grow at a slower rate than 2013 excluding the impact of the Blue Tomato earnout accrual reversal and the legal settlement in the prior year. One other comment on our cost structure for the year, in 2013 our results did not support a full incentive compensation payout. In 2014 to the extent sales and earnings grow rates that would support target payouts our expenses will increase.

We are planning to open approximately 55 new stores in 2014 including five in Europe with a cadence similar to our historical openings of two-thirds prior to back-to-school. We expect capital expenditures for the year to be between $37 million and $39 million compared to $36 million in 2013 with the major capital projects being new store openings and planned remodels. We also expect depreciation and amortization to be approximately $30 million or an approximate 12% increase over fiscal 2013. We expect our annual effective tax rate to be approximately 38%.

Lastly, our diluted outstanding share count for the full year is projected to be approximately 29.2 million shares, which includes the impact of the share repurchases through May 3, 2014. Any additional share repurchases during the year from the 27.2 million remaining on our authorized repurchase program will further reduce our share count.

Operator we are now ready to take questions.

Question-and-Answer Session

Operator

Mr. King are you there, you may proceed with your question your phone maybe internally muted.

Dave King - ROTH Capital Partners

No, I am actually here, thanks. Can you guys hear me okay?

Rick Brooks

Yes.

Dave King - ROTH Capital Partners

Okay, perfect. I guess first off my question was on the product margins guidance that you have both for the year I guess and then for the quarter it sounds like for the year some of that is due to mix but then if I think about the second quarter is that fair to assume that that’s what’s driving that there and then just more color around what specifically is driving that would be helpful? Thank you.

Chris Work

Certainly, yes, as you probably recall when we came into the first quarter we gave product margin guidance in the range of down 150 to 200 basis points we specifically gave that guidance based on some of the pressures in the environment but more specifically because of the excess inventory we are carrying as of end of the quarter. So our approach has always been to keep very clean inventory so we knew we need to move through that pretty aggressively and because of that there’d be an impact on product margins in the first quarter.

As I indicated in the prepared remarks we ended the quarter with product margins down 130 basis points. As we think about this into the second quarter and beyond we feel much better about our inventory levels as we close the first quarter. So, while we still anticipate some pressure on product margins as we move through the year partially due to mix and there is other factors as well we do not expect them at the levels that we experienced in Q1. And I think it’s important to note as Rick has pointed on his comments is we aim to be a full price retailer and that’s very important for us full price and full margin. And so as we plan the business going forward for 2014, we do expect there to be some deleverage on the product margin level but we’re aiming to be at full price.

Dave King - ROTH Capital Partners

Okay, so then it sounds then like there is some carryover inventory that maybe impacting that to some extent that in the second quarter specifically?

Chris Work

Yes, I would say there is some, it’s a very small piece. We feel much better about our inventory levels ending the first quarter than where we were at the end of Q4.

Dave King - ROTH Capital Partners

Okay, thanks for the color Chris. And then in terms of the footwear business I think last quarter we talked about maybe some increased risk that you guys might be taking but still within budget in terms of what you guys are looking to do. And then over the course of the quarter I think footwear I would say it’s probably was one of the underperformers versus maybe some of the other segments. Rick, could you just sort of update us on what you are thinking there about the footwear business? Are you having any success to some of those risks that you’re taking and just sort of outlook kind of going forward for that business could be helpful?

Rick Brooks

Sure. Footwear as you correctly got from our comments in the way we order the category performance it was a tougher category in Q1. Now, we are doing things trying to target improvements in the footwear business. I would tell you that we’ve had marginal success with those that we are fighting a uphill battle in both men’s and women’s footwear. So, there is just some trend items that are against the hot brand on the women’s side that’s not quite as hot as it once was. And on the men’s side and I think we all are well aware that athletic performance footwear, basketball shoes and things like that are actually more in trend than our typical product that we carry. So we’ve had modest success, we’re still fighting those upward battles in both the men’s and women’s side of the business.

Now that being said, as we have pointed out we comped positively for the quarter, so I’d just like to remind everyone that we ride trends, we ride trends around brands and brands will go up and down, we ride fashion trends, and we take advantage of those, and we are also are subject to category trends in things like footwear. So for a number of years we talked about how footwear was a driver of our business from the category perspective. We are going to recycle that. We’re finding that other categories that we have been talking about like skate and women’s have been leading the way over the last few quarters. So this isn’t unexpected or anticipated. We expect to go through cycles like this. We try to minimize those trends on the downside by pushing hard in the other departments you are going to trend up to maximize those cycles. So I’d like to just to make sure we all think about this from the perspective of again managing a portfolio of brands and categories and that together we are pretty good at driving that gain.

Dave King - ROTH Capital Partners

Alright, thanks so much guys.

Operator

(Operator Instructions) And your next question comes from the line of Steph Wissink with Piper Jaffray. Please proceed.

Steph Wissink - Piper Jaffray

Hi. Good afternoon everyone. Just a couple of questions, if I might, as a follow-up to the earlier question on inventory, Chris I think you mentioned maybe this notion of balancing comp with merchandize margin. Can you just talk a little bit more about how we should think about that through the balance of the year? Are you working inventory to a level that you feel like you can control merchandize margin a bit better, even if it comes at the expense of comp? So that’s kind of one question. And then Rick a question for you, just on the run rate of the business on a longer term basis, as we kind of see this high single-digit top-line rate of growth merchandise margin at this kind of current level, does this alter the cost assumptions of the business model? Are you thinking any differently about kind of how you invest to the interior of the P&L to really support maximizing profitability potential? Thank you.

Chris Work

Sure, I will take the first part of your question here Steph, on product margin. As we think about product margin for the remainder of the year, and I’ll remind you, our North America product margins for 2013, were at a record high. So as we look at how we are planning product margin for 2014, we do expect product margins on a consolidated basis to be down moderately. So we will have some impact there, albeit this is something we will continue to manage.

In regards to comp, our business is to sell brands that have a great equity, and marking them down is not what we think is in the best interest of the brands that we work with. So we are going to continue to try to find great brands to work with and partner with that we can sell their inventory at full price and give a great presentation to our consumer. And so when we do do more promotional things those are things that we hope we can plan into to manage the business. So we are not managing it to mark inventory down just to drive comp or managing it to what’s right for the brands or what’s right for the long-term brand as you need.

Rick Brooks

And let me take the actually Steph the last part of your question there related to our thinking around long-term run rate, it’s relative to comp sales, and if I got your question right, then does it alter some of our thinking around cost assumption and investments we need to make in terms of maximizing productivity. Well the answer is yes. We think about all those things and we think about that a lot because retail over the last two years - we do also - and be stuck in low gear here. So it tells us I think a couple of things from that perspective and well I say that I do want to -- I just make sure I want to point out that our low gear appears to be better than most retailers low gears, in terms of how we are performing both on a comp and profitability perspective. So I just want to make sure I’m clear about that.

And that is because we’re doing something very different out there in terms of what we are doing in our business model. Differentiated, unique in terms of the experiences we always talked about here relative to product and relative to what we do with our people and the integration of a multi-channel selling platform. So, but yes, that we are thinking about all these things and of course are challenging ourselves around what can be do around the cost assumptions now. As you know having been around us for a long time, we don’t have a lot of fat here at Zumiez. So we have always been a very lean organization. So for us to look at costs, we going to have to look at things very creatively, and I think where we can, we will do that.

Now while I say that -- I will tell you that there still will be more investments to come over the next few years because the business will require it. And I think those investments are what’s going to separate the great retailers from everyone else. Because you have got to keep moving forward, you got to keep putting yourself to position to maximize your interaction and your relationship with your customers. So we will be making some more investments. And as Chris said, R&D kind of thing, but these things are going to continue on overtime. And if there are things we can do to change the cost curve in our business, we are looking for those opportunities and we always use that. And we are planning our business and my guess to try to drive us to those for those opportunities that we think about the business.

Now, all that being said, I think we’re aware that as we know we peaked a couple of very big brands for us in mid ’12 and so we’re working through that cycle and I think as we have said before we are seeing the de-concentration of sales amongst our top-10 brands and I think top 22 customers. We view that as very positive because that means that young brands are taking a larger share few of our business through 2013 and at the full year again we mentioned on our full year basis we look at 2013. And I expect Steph as you know while to there has no lot of fashion cycle change. So we expect that those things are going happen we will see some movement in fashion. We expect that we’ll continue to see small brands gain share emerging brands gain share and as Chris said we want to be a great partner in for those brands to make sure their products is well represented in the store represented by people who really get it in what they’re doing and understand the brand presentation, and with uniqueness around it for our customer. So I do think that some of there, there can be these I think there is long-term idea around run rates but we are going to see these other factors moving change to overtime.

Steph Wissink - Piper Jaffray

Alright, thanks guys. Best of luck.

Operator

And your next question comes from the line of Mitch Kummetz with Robert Baird. Please proceed.

Mitch Kummetz - Robert W. Baird

Yes, thanks. First question I guess has a couple of parts to it, so on your Q1 performance. I am just curious how much did weather play into it was there a net positive, negative? And then in terms of exceeding your comp plan on the quarter I know Rick you talked about better performance in the back half on full price selling. But as you think about the upside relative to your major product segments, is there anything that stood out from a product standpoint that drove the comp better than planned? And I’ve got a follow-up.

Rick Brooks

Alright. I’ll let Chris talk about it if there is any, we can see any regional differences Mitch but I am not sure we have any great insight here clearly the weather I think was the factor but we’re not going to probably I think tell you anything great that we see any unusual insights relative to a positive or negative it just is what it is. And we’re happy to generate positive numbers. And I think as we said previously the -- we performed particularly well in April as we said in the back half of the quarter and that was driven by the Easter check. And with while we are not disclosing weekly sales anymore is you can takes from my comment that Easter was very powerful in terms of the sales result in the month of April.

So those factors and when that happened is as we always talk about Mitch the peaks gets to be a little steeper and so we do well when we have a peak like hat and I think that’s what is reflected the customer likes what we’re doing and we have the money that can now be spend disproportionally that money with us. So I can tell you that everything got lifted in April and so proportionately so from that perspective I can’t really call for any particular trends I would say I think it was just generally that as we got better everything got better. I think again as the traffic and people’s willingness to spend money.

Chris Work

And I would just add to that Mitch on the regional perspective the way we typically look at that is what’s a reasonable standard deviation from the man of 1.8 comp that we landed on in the quarter and as you look across all regions and even internationally really everything was roughly in line obviously our European operations as we said we’re a positive impact on the comp and you’d expect that from a growth business and as tough as it has been in Europe they continue to come positive as they have since we’ve own them and so that was a good piece of our business in Q1 but all other regions we’re within a reasonable deviation from the company average.

Mitch Kummetz - Robert W. Baird

Okay. And then as a follow-up on Chris on your SG&A outlook I think you said a couple of things I mean I think you said that you expect slower SG&A growth this year than last year but then it sounds like your accruing more for bonuses. Did that I catch that right and is the slower SG&A growth inclusive of more on the bonus side?

Chris Work

Yes, great. Thanks Mitch. No, let me kind of just back up on SG&A overall because this was an area as we talked about 2013 being an investment year that we did see a spike in the growth of our SG&A line item. So as you look at SG&A for 2014 I think it’s important to note that we will see a benefit in Q from a GAAP basis in Q1, Q2 and Q3 as we were accruing the contingent earnout in the prior year. Now that will be a determent to Q4 and the year in general as we wrap it up excluding charges as we think about SG&A it’s -- our overall SG&A in Q1 had a lower growth and as we look into Q2 we would expect it to see a lower growth on the year we do expect to see higher growth levels that we’ve seen over the front half of the year albeit lower than where our growth was in 2013.

So I think when we think about our cost structure it’s important to note that while we’re not planning 2014 to be a heavy investment year, our growth initiatives do have a continuum and we don’t have any specific major projects to call out at this time but we may continue to make incremental investments and what I meant on the incentive piece of the business was that in 2013 we did not accrue more pay to the high level of our incentive level. And so to the extent that we are able to exceed what we believe is a reasonable level of performance, we’ll have to accrue those incentive and pay those incentive levels again which will increase our investment in SG&A.

Mitch Kummetz - Robert W. Baird

Okay, I got it. Thanks.

Operator

And your next question comes from the line of Edward Yruma with KeyBanc. Please proceed.

Edward Yruma - KeyBanc Capital Markets

Hi, good afternoon, thanks for taking my question. I guess a bigger picture question, you know you guys have been incredibly successful at being the authentic action sports retail in the mall but clearly there’s a move towards more diverse fashions I guess, how do you feel about the balance between kind of the core action sports apparel versus potentially street wear and then also as it relates to the percentage of hardgoods that are in the business? Thanks.

Rick Brooks

Alright, thanks Ed. So, I’m happy to address that question and again we’ve been doing this a long time right, so we are definitely perceived in the market as a core action sports retailer and, but we have been doing something even more fundamental in the marketplace than just that market that core action sports consumer and we always have been. So in the mid-90s we had a whole urban run with Fubu and South Pole and all sorts of brands and we will see this play out, I can give you numerous examples over the 20 years I’ve been here and how we see that play out.

What I’ll tell you that means for our brand, is that we have permission from our customer to do much more than just action sports and we’re really serving this consumer who wants to be different, who wants to be unique, wants to make a statement about who they are and what lifestyle they’re embracing through what they wear and, not just what they wear but they do on a holistic basis. So I just you know historically we kind of get pigeon holed as with action sports retailer. But we’ve always been able to move much more broadly. So what you see us doing with street wear is exactly that, responding to what our customers tell us they want us to do for them and we’re obviously very good at that Ed, and that’s what you’ve seen us do with that.

So, now can I tell you what the exact breakdown is between street wear versus what’s skate related or some other lifestyle driven business? Well, now. I really can’t because so many of the brands today have a multiple lifestyle approach, so you might look at a young brand that might have some heritage in skate but they’re really more street wear today, so how do you classify those two things and separate them out it becomes very difficult to do, and again from our perspective our customer doesn’t care. It’s not really cool stuff that’s really unique and special that fits with who they are, so that’s kind of how we perceive it Ed and we’ll go anywhere, our customers gives us permission to go and I think that’s much broader than just action sports and I think that’s what you see reflected in our street wear business today.

I will tell you and I’m glad you asked the hardgoods component of that question. Because again hardgoods works the same way and why we’ve been doing very well, with skate hardgoods for a couple of years and it’s been a really great part of our business and we’re really good at it, I will add to that again, I mean it’s something I think we really excel at and with great people who know what they’re doing in our stores. The other parts of hard goods been terrible, and there used to be much bigger parts of that business, this again shows you how we’re moving with the changes in the marketplace and also snow has been declining in our business for over a decade, and it used to be a much bigger part of the business relative to what it is today. When you look over that decade we’re growing sales across that entire timeframe on a comp store and overall basis, so again hardgoods is a illustration that for me, Ed is, we’ll go where our customer tells us to go and we’ll move between all the categories and all the brands to drive the sales number. So it’s all interrelated but again I think we have permission to go in a lot of these direct, lot of different ways where our customer like us to go and that’s what we’re doing.

Edward Yruma - KeyBanc Capital Markets

Great, thanks so much.

Operator

And your next question comes from the line of Liz Pierce with ACM. Please proceed.

Liz Pierce - ACM

Thanks for taking my question as well, I mean kind of a dovetailing on just what you were speaking about, are there things that are happening perhaps in Europe that would if you can test into the U.S. that might revitalize the men’s in the footwear category?

Rick Brooks

So, again are things happening in Europe that might comes this direction that summarizes it?

Liz Pierce - ACM

That’s basically it, yes.

Rick Brooks

Very good, you know I would tell you again that the lifestyles we’re up selling are global lifestyle position so, and a lot of it’s still borne here from the U.S. particularly around street wear and action sports lifestyle, so while there are local brands in Europe that were certainly carrying and representing and our important to us there, we are not seeing many of those make the transition in Europe, and that is none significant really in footwear outside of the big brands already have a presence here like Adidas. So the answer to your question is, really not. Most of it still comes from U.S. and moves outside the U.S. globally.

Liz Pierce - ACM

Have you actually tested some of this I mean it’s or you just know for it does not work?

Rick Brooks

Well, again we have our -- we have lots of ways to follow what our consumers are asking us for, and these are the little European brands, are not on the radar of the U.S. consumer.

Liz Pierce - ACM

Got it, okay. And then just kind of a follow-up question in terms of that you said you know you’re going to go where your customers tell you to go with that and just maybe backing on Steph’s question, are you still comfortable with the size of the stores?

Rick Brooks

You know again I think we have said in some previous calls, and I will echo it again is, we are constantly looking at trying to manage our store portfolio and trying to manage it in a number of ways, so first, from a product perspective we have always been and continue to try to improve our ability to micro-assort the stores. I think we have some of the best, maybe the best micro assortment tools in all of specialty retail, and our buyers are very good at doing this. So we’re not talking about categories of stores Liz, we’re talking about individual stores in terms of how we are trying to merchandise and present the product. So and everything is about little local brands that does support our market to the different mix amongst the bigger brands and different types of products to sell better in that environment.

So I think we are way beyond where most people, most of our competitors are at in their ability to micro-assort stores. So you look at and you have capabilities to do that and then you combine that with the omni-channel world where consumers are going to tell us even more about themselves, they’re going to share more data with us. They are going to use the digital world connect to the physical world. I would tell you that I think over the long-term that potentially stores -- we are biased to say that average store sizes over the long-term are more likely to come down than to grow. And as we have said, even in the comments today, we are actively managing our store portfolio because our goal is that if you look at business in a trade area we don’t want to have one more store necessary when it takes to capture that entire market share, while we want to own in that marketplace across all channels. So that is one of the way it is going buying to Steph’s question that we hope over time to understand this better and be able to execute better in this new world and have the exciting number of locations we need to capture all of the share across all of the channels, so that we can maximize the efficiency, productivity and profitability of the business in the trade area.

Liz Pierce - ACM

Great that was actually really helpful, thanks Rick.

Operator

And your next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Jeff Van Sinderen - B. Riley

Good afternoon, I wonder if you can give us more color on how you are thinking about and planning inventory for second half? And then I have a follow-up.

Rick Brooks

I will give you the headlines, and I will let Chris follow on Jeff. We’re not doing anything different than well I just kind of follow that along with the question from Liz, which is again, we’re planning inventory in incredibly detailed level. And there is our planning processes whatsoever way up. The top-down inventory planning comes down from our planners. Those plans are reconciled along with our sales objectives. So our goal is not been position to be clear where we are at the end of fourth quarter with an overhanging inventory. We want inventory clean, that’s part of being a whole merchant retailer, and I were going to as Chris said in his comments we are in a much better position today relative to if you look at where our sales are, relative to inventory position I were feeling pretty good about it. We’re not going to do -- Jeff, anything different we try to do, we have done historically which is planned the business at a very detailed level and really try to maximize sales so we can minimize markdowns and so the product that we sell to our customers for our brands for a margin.

Chris Work

And I’d just add to that, as we think at the back half of the year, we would land differently, we have been looking at this but we would expect inventory to grow at a pretty similar level to our store count and I would expect per square footage to be relatively flat with the prior year.

Jeff Van Sinderen - B. Riley

Okay that’s helpful. The other thing I just wanted to touch on is your digitally based elements of your business. Is there anything that you are learning there that you would care to share, anything new; and then if there is anything that your line is shaping your plans for the future?

Rick Brooks

There is lots, we’re learning Jeff about the digital world, how we’re interacting with our consumers in that world, how fast our loyalty program is going to fit into all of that, and none of that at this point, I am willing to share. I think you have to -- we all have to think of this, the modern world is just one continuous feedback look. And ultimately we are going to find ways to include that feedback group in predictive abilities and assortment planning in a few years out. But we need to gain scale in all those digital channels we need to get scale in our loyalty programs and that still continued to be our primary focus in royalty at this point is gaining scale so we get consumer insights and we’re learning more all the time in that feedback group. So we think we have lots of great ideas we have lots of ideas and things we like to do and try and experiment with some of them are will be about brand, some of them will be about driving sales and each will each channel will have a different focus based upon where that channels out how that channel interacts with our consumer base.

Jeff Van Sinderen - B. Riley

Okay, fair enough. Thanks and good luck.

Operator

And your next question comes from the line of Alex Pham with Mizuho Securities. Please proceed.

Alex Pham - Mizuho Securities

Hi there. It’s Alex on for Betty Chen. We’ve heard a number of retailers express difficulty in their Canadian business just wondering if you guys could touch on how Canada is performing anything in the call out in regards to the competitive environment for action sports there and maybe how the team is thinking about the growth opportunity there longer term? Thanks.

Rick Brooks

Okay, great. I’ll try to take a shot at that for you Alex. Like I would tell you every market today that we are working is an incredibly competitive marketplace so and Canada was no different upon entry there. I think we understood the competitive landscape well in going into marketplace as there were a couple of good competitors in the marketplace one of them tends to I think to be have been weakened over the last few years. We anticipated and as we went into Canada that we knew that cost structure doing business in Canada was different now look through to the cost real estate we also knew that generally sales performance on a per location would be higher because of the fact that the mall space in Canada is not as built out as it is in the U.S. So I will tell you that as we look at our performance of stores we look at classes of new stores with our board annually and review how we’re doing I will tell you that in aggregate in Canada we are meeting at the objectives as we planned or overall financial metrics.

So from that perspective we’re really pleased with how we’re doing it’s playing out on the maturation scale we expected it to and we’re delivering the results we expected to based upon again those primary considerations of different and different cost structure with higher revenue base for new stores. And again we will need to see these are still early reach and we did see this continue to play-out out over the next couple of years as we mature the base up there. We continue we expect to have, how many stores Chris this year will be?

Chris Work

We’ll open our seven stores which would give us 35 total.

Rick Brooks

35, and I think it’s somewhere across those -- what was estimated Chris?

Chris Work

Yes it’s probably about 10% of the U.S. business and we plan another 600-700 stores so we look at that in the 60 and 70 store range.

Rick Brooks

So we have the ways to go Alex with that and I guess I would tell you that maybe we’re bucking the trend relative to what a lot of other retailers have done because we’re pretty happy at this point and we’re hitting the high level metrics in aggregate for the classes that we thought for where we thought we’ll be at this point in time.

Alex Pham - Mizuho Securities

Great. Very helpful, thanks.

Operator

And your last question comes from the line of Lee Giordano with CRT Capital. Please proceed.

Lee Giordano - CRT Capital

Thank you, guys. Good afternoon. I was hoping you could talk a little more about Blue Tomato and the performance you’re seeing there in those stores and online and then what your ultimate goal might be for Blue Tomato overtime as far as store count? Thanks.

Rick Brooks

Alright. Alright, just wait a couple of minutes here Lee. Okay. As you obviously saw from the numbers Chris shared in the prepared comments I mean we had a good quarter, first quarter with Blue Tomato and I think as we’ve said every quarter that Blue Tomamto has been part of Zumiez’s family is that we have comped up every quarter that Blue Tomato has in the almost two years that it’s been part of the Zumiez business. So we are taking our look at Europe in the very long-term perspective like we try to take with everything we want to do our expansion in Europe with good quality focus on building over the long-term. So we are thinking about what we’re doing over the five and 10 year window. We don’t think it’s probably going to really substantially moving the needle for our business Lee till we get out in another four years, five years, so we built the base of the scale of our business in Europe.

So I can tell you again the team at Blue Tomato is just fantastic and incredibly culture line with what we do, how we do things, it’s been a great partnership. And as you know we work in this empowered world and as far as Zumiez’s value set and they are running the business. Yes, we’re monitoring we’re tracking, we’re green on goals but the guys there are doing it like they’ve done it since the beginning of that business. So, at this point, I would tell you obviously it did hit the astronomical kind of trends is running out the point of time we bought it and that’s why the earnout has been reversed. But we’re pretty happy with where we are at and we’re learning a lot. And as we said in previous calls we’re experimenting with store formats buying out what’s going to be right for each kind of market in the countries we are currently working and we are learning a lot from those experiments but at this point it’s a small, very small part of the business and we’re in general happy with the performance.

As it relates the longer term view of breaking out what the store count is, we just aren’t prepared to go there yet and the fundamental reason is why we believe Europe, the market in Europe is very big, for what we do, in fact the second biggest in the world after the U.S., we’re just not prepared to do it, because we need to do this work, we need to do the quality work we’re doing now over the next couple of years prepare for more growth, when we’re four or five years from now, so that we’re going to do it the right way, so I need to learn more, because I’m going to tell you Lee, we were happy with where we’re at again kind of like I just set the canvas about what point in time we’re at, where we thought we’d be, we’re still feeling pretty darn good but the quality of the full Canadian team is excellent. I think they’re the best partner we could have partnered up with in Europe, but we need to do the work and we need to do it here over the next few years before we’re going to look at really fully sizing the market, and so we’re not going to set any long-term target at this point other than to say it’s a big marketplace and we need to prove that we’d be successful and build it country by country by country, and we have a ways to go to prove that yet.

Lee Giordano - CRT Capital

Thank you.

Operator

And this concludes the question-and-answer session. I will now turn the call over to Brook Marks for closing remarks.

Rick Brooks

Alright, well thank you everybody we really appreciate your time and spending with us here in first quarter and we’ll look forward to talking with you as we get to the end of our second quarter, and thanks to you all.

Operator

Ladies and gentlemen, this concludes the presentation for today’s conference. You may now all disconnect and have a wonderful day.

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Source: Zumiez's (ZUMZ) CEO Rick Brooks on Q1 2014 Results - Earnings Call Transcript
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