Zumiez Inc. (ZUMZ) CEO Rick Brooks on Q4 2018 Results - Earnings Call Transcript

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About: Zumiez Inc. (ZUMZ)
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Earning Call Audio

Zumiez Inc. (NASDAQ:ZUMZ) Q4 2018 Results Earnings Conference Call March 14, 2019 5:00 PM ET

Company Participants

Rick Brooks - CEO

Chris Work - CFO

Conference Call Participants

Sharon Zackfia - William Blair

Jeff Van Sinderen - B. Riley

Mitch Kummetz - Pivotal Research

John Morris - D.A. Davidson

Jonathan Komp - Baird

Operator

Good afternoon ladies and gentlemen and welcome to the Zumiez Inc. Fourth Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

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

At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead sir.

Rick Brooks

Hello, and thank you, everyone, for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few brief remarks regarding our fourth quarter performance and I'll share some thoughts about the future before handing the call over to Chris who will take you through the numbers. After that, we'll open up the call to your questions.

For the third year in a row, we delivered strong results in the all important holiday quarter. Comparable sales increased 3.9%, which was above the high end of our initial guidance range of flat to up 2%.

As you recall, last year included the 53rd week and other adjustments that impacted sales and profitability that Chris will walk you through shortly. But on a comparable basis, we were very pleased with our performance.

The combination of our unique product assortment, product margin expansion fueled by strong full price selling, expense leverage and re-shaping of our business has led to a 21% fourth quarter compound annual growth rate in operating profit over the last three years. Earnings per share increased to $1.18 compared to our original projection of between $1.2 and $1.8.

The fourth quarter represented a strong finish to a very successful year. For 2018, comparable sales increased 5.6%, earnings per share reached $1.79, the highest level in our history and our cash position grew over 35% to $165 million.

Our ongoing success is a direct result of hard work of our teams - the hard work our teams have done positioning Zumiez over the last decade to serve and win with today’s empowered consumer. It starts with product and having the right product and brands that our customers are looking for.

For Zumiez, this means the distinct mix of leading and emerging brands that are not broadly distributed. We’ve been able to consistently achieve this bounce to the stronger relationships we forged with our branded partners. This includes clearly articulating Zumiez’s cultured-driven lifestyle brand position and showcasing our ability to connect with their target audience in authentic, engaging environment that is uniquely curated by our people.

Over the years, we spent significant time and resources improving our localized merchandise assortments to investment in our people and technology that enhances the customer experience of each touch point. Our sales teams many of whom are also our customers are in tune with the local and national trends that are important to our customers and can speak authentically to them.

The next factor critical to our success is speed. We’re already faster than most of our competitors due to our decision three years ago to shut down our e-commerce fulfillment centers and deliver all digital orders out of our stores. Not only did this concept of localized fulfillment mean we now have one cost structure to leverage, which we believe is making easier to expand operating margins and our current results and over the long-term, we can now get product into the customer’s hands faster by reducing the click-to-order processing time, cutting down the shipping business to the customer and also offering in-store pickup.

We're continuing to improve on executing this critical component of our retail model by reduced the number of split orders and improving order routing to reduce outbound cost and better leverage store payroll. Looking ahead, we're going to get faster in every aspect of serving and meeting customers’ needs than we are today.

This will be driven over the next few years by getting into our customers even more intimately to improve digital interactions and in-hand in-store experiences that reflect our strong cultural foundation.

Finally, we’ve taken our operating model and expanded it internationally in order to identify consumer trends that emerge locally and grow globally around the world and achieve the scale necessary to work together with our brand partners in serving our customers globally.

Our organic build out of Canada started in 2011 and the acquisition of Blue Tomato in 2012 and Fast Times in 2016 that have helped us to establish a strategic physical presence in seven countries across three continents with a digital platform that allows us to reach even further.

We are applying learnings and best practice from each of our markets to ensure that we are on top of the latest fashion trends and brand cycles. We can now launch anywhere in the world and quickly spread globally due to the proliferation of smart devices and social media.

Looking ahead to 2019 and beyond, we are confident that Zumiez’s enduring culture-driven lifestyle brand position and proven ability to adapt to industry change has company well positioned to not only with today's empowered consumer, but also win with the consumer of the next 5, 10 and 20 plus years as buying behaviors continue to evolve.

With that, I'll hand the call to Chris for his review of our financials. Chris?

Chris Work

Thanks Rick and good afternoon, everyone.

I'm going to start with a review of our fourth quarter and full-year 2018 results. I'll then provide an update on February sales before discussing our first quarter guidance and some perspective on how we're thinking about the full year.

For the 13-week fourth quarter, net sales decreased $3.7 million or 1.2% to $304.6 million compared to $308.2 million for the 14-week fourth quarter of 2017. Contributing to this decrease was a reduction in net sales of $12.6 million related to the shift in the retail calendar as well as an adjustment to deferred revenue related to our Stash loyalty program worth $3.8 million in the prior year, helping to partially offset these headwinds was positive comparable sales growth of 3.9% and the net addition of nine stores since the end of last year's fourth quarter.

During the 2018 fourth quarter, our comparable sales were driven by an increase in transaction volume as well as an increase in dollars per transaction. The increase in dollars per transaction resulted from higher average in retail, partially offset by lower units per transaction.

During the quarter, all of our categories comp positive, while our footwear category being the largest positive comping category followed by men's, accessories, hard goods and women's. We had no negative comping categories during the quarter.

From a regional perspective, North America net sales decreased 1.9% to $260.5 million. Other international net sales, which consist of Europe and Australia, increased 3.5% to $44.1 million. Excluding the impact of foreign currency translation, North America net sales decreased 1.6% and other international net sales grew 8.6% for the quarter.

Fourth quarter gross profit was $113.9 million, a decrease of $0.7 million or 0.6% compared to the fourth quarter 2017. Gross margin was 37.4% in the quarter, an increase of 20 basis points compared to 37.2% a year ago. The increase was primarily driven by 60 basis points improvement in product margin and 40 basis points improvement in inventory shrinkage.

These improvements were partially offset by an 80 basis points decrease related to the recognition of deferred revenue from our Stash loyalty program in the year ago period, which did not repeat this year.

SG&A expense was $76.2 million in the fourth quarter compared to $77.7 million a year ago. SG&A as a percentage of net sales was 25% compared to 25.2% in the prior year. The 20 basis point increase was primarily driven by 40 basis points of leverage in our store operating costs and 10 basis points of leverage in corporate cost. These improvements were offset by 30 basis points of de-leverage due to Stash loyalty program revenue adjustments booked in the prior year.

Operating income in the fourth quarter 2018 was $37.7 million or 12.4% of net sales and an increase of 2% compared with the prior-year operating income of $36.9 million or 12% of net sales in the fourth quarter 2017.

The prior-year fourth quarter benefited from the extra week with approximately $3.7 million in operating profit and Stash loyalty program revenue adjustment of approximately $3.8 million. Net income for the fourth quarter was $29.6 million or $1.18 per share compared to net income of $19.9 million or $0.80 per share for the fourth quarter of 2017.

Fourth quarter 2018 was positively impacted by approximately $4.3 million or $0.17 per share related to U.S. tax law changes. It's also important to note that 2017 fourth quarter EPS included the following impacts. The extra week of sales had a positive impact on 2017 of $0.10 per share. The Stash loyalty program revenue adjustment had a positive impact on 2017 of $0.10 per share.

2017 included a $3.4 million valuation allowance booked against certain deferred tax assets in Europe with negative 14% per share and a 2% or $0.02 per share positive impact of U.S. tax law changes effective January 1, 2018. The combined impact of these items improved 2017 net income and earnings per share by $2 million and $0.08 respectively.

Our effective tax rate for the fourth quarter 2017 was 22.6% compared with 46.3% in a year ago period. The decrease was due to reduction in the U.S. federal tax rate following the passage of tax reform in late 2017 and the prior-year impacted the valuation allowance in Europe discussed above.

Turning to the full year results, net sales for fiscal year 2018 were $978.6 million, an increase of $51.2 million or 5.5% from $927.4 million for fiscal 2017. Contributed to this increase was a positive comparable sales growth of 5.6% and the net addition of nine stores in fiscal 2018, partially offset by the extra week in fiscal 2017 and the previously mentioned Stash loyalty program from revenue adjustment.

By regions, North America net sales increased $41.6 million or 5% to $869.3 million. Other international net sales, which consist of Europe and Australia, increased $9.6 million or 9.7% to $9.3 million. Excluding the impact of foreign currency translation, North America net sales grew 5.1% and other international net sales grew 8.8% for the year.

2018 gross margin was 34.3%, an increase of 90 basis points from the prior year's gross margin of 33.4%. The increase was driven by leveraging of occupancy costs were 50 basis points, 40 basis points of improvement in inventory shrinkage and 20 basis points increase in product margin. These improvements were partially offset by a 20 basis point increase in shipping cost.

Annual SG&A expense was $274.9 million or 28.1% of net sales compared to $261.1 million or 28.2% of net sales in 2017. The decrease as a percent of net sales was driven by 40 basis points of leverage in our store cost, partially offset by 20 basis points increase in corporate cost.

Operating margin for fiscal 2018 was 6.2% compared to 5.2% in 2017. Our 2018 operating profit was $61.1 million, an increase of 25.3% from operating profit of $48.8 million in 2017. Full-year net income was $45.2 million or $1.79 per share compared to 2017 net income of $26.8 million or $1.08 per share.

Our effective income tax rate for fiscal 2018 was 27.5% compared to 44.6% for fiscal 2017. The change in the effective tax rate for fiscal 2018 compared to fiscal 2017 was primarily related to a decrease of $8.7 million related to the changes in U.S. Federal tax legislation that lower the U.S. Federal statutory rate from 35% to 21% effective January 1, 2018 as well as an additional $3.4 million or $0.14 per share related to the previously discussed valuation allowance recorded in 2017.

Turning to the balance sheet, cash and current marketable securities increased 35.6% to $165.3 million as of February 2, 2019, up from $121.9 million as of February 3, 2018. This increase was driven by $65.3 million in cash flow from operations, partially offset by $21 million of capital expenditures primarily related to new store growth and remodels.

During 2018, we added 13 store locations including five in North America, seven in Europe and one in Australia. As we've discussed, we've continually evaluating our physical store presence to ensure that we have the right number of stores in the right locations with an each trade area.

As a result in 2018, we closed four stores bringing our net store openings to nine for the year. We ended the year with 707 locations including 658 in North America, 41 in Europe and 8 in Australia. We ended fiscal 2018 with $129.3 million in inventory, up 2.7% from $125.8 million at the end of fiscal 2017. During fiscal 2018 we did not repurchase any shares of our common stock. As of February 2 2019 we had $75 million remaining in our stock repurchase authorization.

Now to our February sales results, total net sales for the four week period ended March 2, 2019 decreased 3.1% compared to the four week period ended March 3, 2018. Our comparable sales decreased 3.8% during the four week period ended March 2, 2019 compared to the comparable sales increase of 9.2% for the four week period into March 3rd, 2018.

The comparable sales decrease was driven by a decrease in transactions and a decrease in dollars per transaction, dollars per transaction decreased for the four week period due to a decrease in units per transaction partially offset by an increase in average unit retail.

During the four week period the accessories category was our highest positive comping category, followed by hard goods, men's was our largest negative comping category followed by women's and footwear.

Going forward we'll be discontinuing the reporting of monthly sales results. Our monthly results can include variability from items such as holiday timing, retail calendar shift and other marketing related activities that can lead to misinterpretation of business performance, with each of our quarterly earnings releases though throughout the year, we will plan and update you on quarter day comparable sales results, to provide directional information about business performance along with our guidance for the current quarter.

Looking at guidance for the first quarter of 2019, once again I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin and earnings growth, given the variety of internal and external factors that impact our performance.

With that in mind we currently expect the comparable sales will be between negative 2% and flat to the prior year for the first quarter of 2019, with total sales in the range of $202 million to $206 million.

Consolidated operating margins are expected to be between negative 2% and negative 1%. At the high end of our guidance, net loss per share would improve by approximately 30% from the first quarter of fiscal 2018. We anticipate that our loss per share will be between $0.13 and $0.07, negative $0.13 and negative $0.07, compared to negative $0.10 loss per year in the prior year first quarter.

Now I want to give you a few thoughts on how we're looking at 2019. We are building on our ten consecutive quarters of positive comparable sales growth with a two year annual comparable sales deck of 11.5%. As we look to 2019 and beyond we continue to believe that the investments we've made in our infrastructure creating a seamless sales experience for our customers our unique approach to merchandising as well as those investments we continue to make in the Zumiez's team, will drive long term top and bottom line growth.

With that in mind we anticipate that we will grow consolidated comparable sales in fiscal 2019 in the low single digit range. In fiscal 2018 we achieved peak product margins, improving from the previous High Point in 2017, despite a heavily branded cycle, resulting in the reduction of our private label share of 370 basis points, as we look to 2019 we anticipate that product margins will be flat to modestly accretive.

We continued to manage cost across the business with a mature concepts of North America focused on leveraging at a low single digit comparable sales growth; internationally we are focused on managing cost well within our current sales and unit growth rates and driving our concepts closer to breakeven reducing the impact of the losses on the overall business.

We are currently planning our business assuming an annual effective tax rate of approximately 27%, as compared to our prior year rate of 27.5%. Diluted earnings per share for the year is currently planned between $1.84 to $1.94 or 2.5% to 8.5% growth, year over year.

We are planning to open approximately 14 new stores in 2019, including 5 stores in North America, 7 stores in Europe and 2 stores in Australia. We expect capital expenditures for the full 2019 fiscal year to be between $21 million and $23 million compared to $21 million in 2018, the majority of the capital spend will be dedicated to new store openings and planned remodels.

We expect that depreciation and amortization will be approximately $26 million down slightly from the prior year. We are currently projecting our share count for the full year to be approximately 25.5 million shares. Any share repurchases during the year will reduce our share count from this estimate.

One final note, as I outlined a minute ago we ended 2018 with cash and cash equivalents of approximately $165 million and no debt. This represents our highest ending cash balance since 2011 and we remain encouraged by the business's ability to generate strong core operating profit growth and grow cash.

From a cash strategy perspective ,we remain focused on first utilizing our growing cash position to generate increased shareholder value within the entity through investments that lead to increased sales and margin or decrease in expenses. Beyond that we look for the right investments outside the core business that we believe culturally align with our belief have growth potential and will be accretive to our shareholders.

And lastly we are focused on returning value to our shareholders through share repurchases and/or dividends.

Now with that Operator, we would like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Sharon Zackfia with William Blair. Your line is now open.

Sharon Zackfia

I have a couple of questions. I guess weather has been talked about a lot for February, so if you can give us any context on what you might have seen with the weather and how you expect those first quarter downfall from a cadence perspective, that would be helpful.

And then secondarily on the SG&A growth rates, you know in terms of dollars, I think you grew at a mid single digit rates in 2018, Is that kind of the right cadence going forward? And I know there is some [indiscernible] quarter-to-quarter but just trying to ascertain what that leverage point is on the SG&A?

Rick Brooks

I think I'll start with the February results. Overall February was a little bit of a choppy month. It definitely started better and then finished better, we had a little bit of slowdown in the middle. So I think we did experience some challenges with weather, specifically some of the variability around the country and on the West Coast and I think that did impact the quarter, it got stronger as we moved through.

I think there is probably also some timing related to the tax refunds in there and how those dollars are coming across, that impacted the quarter so, a slower start to February our first week of March was better and kind of got off to where we are in the comp guidance today.

Obviously we're still confident that as we move through the quarter we are going to gain some of that traction back and we'll have better results for the remaining parts of March here and then into April, which will be consistent I think with what we’ve seen over the last six months, where the periods in between peaks have gotten a little bit softer and we've done better in the peaks and that's currently how we're planning the first quarter specifically around the peak of Easter in April.

From an SG&A perspective, I think as we move forward obviously we continue to try to manage this to the best of our ability, on a low single digit comp, our goal would be to, to try to get some leverage out of this but it is challenging when we have things like store wages being one of the big headwinds in our model and that obviously exists within SG&A, so we’re planning SG&A today to sort of grow on course with sales for 2019 and that’s reflected in the guidance that we laid out here earlier in our prepared remarks

Operator

And our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is now open.

Jeff Van Sinderen

Just a follow up on the - I think you said you are going to provide quarter to date comps, I wasn't sure if that starts now because I know you gave the February comp and you mentioned something on March a little bit, but is that something you are providing now or is that something we need to wait for the next, the next call?

Chris Work

Well Jeff, since you asked we will be happy to provide it. So our plan with monthly comps, just to kind of reiterate is, obviously we think that due to some of the variability they cause is, as well as kind of where the industry has gone, we just feel like it's probably time to start doing a monthly comps, that said we are very focused on providing some visibility.

So our thought process is with each of our earnings calls, which is typically happen about a month after the close of the period or the quarter, we will kind of release where we are quarter to date, and so as we said in our release here we’re; for February we're down a 3.8 comp, but for the five week period that's been completed we are down 2.8%.

So as I said on Sharon's question we have seen some improvement in the 1st week of March and that's giving us some confidence to get where we set the guidance here of negative two to flat.

Rick Brooks

And for me, Jeff I’d just add to that, that again as Chris has laid this out, that will mean that, investors will get to hear about the August period and the important back to school cycle in our - call the particularly right after in late August or early September, and then of course also, we’ll get to be able, as we disclose this third quarter results, I’ll get the chair with you Thanksgiving weekend, those results typically depending on the calendar, so I think those are important touch points for giving the quarter to date comps.

Jeff Van Sinderen

And then, if you can just touch maybe on the warmer weather markets, I'm just wondering are you seeing a difference in selling spring merchandise in the warmer weather markets, and also maybe if you have any concern about getting promotion out there just given you're not dealing whatsoever I think dealing with weather out there and sometimes it does get promotional?

Rick Brooks

Yes I mean, I think in regards to the weather, we definitely saw the strength of our business was away from the warmer weather areas, so we had some more challenging results on the West Coast here and as we think of markdowns and those types of things, I think we always feel like that's out there, that's not really our game, we have not been a big markdown retailer and so our focus is still selling a full price, I think we feel good about where our inventory position is and we feel good, With obviously the Easter holiday coming up.

That we will continue to kind of work in those areas where inventory was a little bit slower but I think we're still optimistic, we'll have a good start to spring and that Easter will be a good time for us.

Jeff Van Sinderen

And then if I could just squeeze in one more, anything you would like to add on your business performance in Europe and I guess what the outlook is there?

Rick Brooks

Sure, you know I'll go ahead and take that and you know I think from an overall perspective we've kind of laid out that Europe taken some pretty meaningful investment to this point, we think we are at a spot now where we can really leverage that investment here over the long term, we're pretty optimistic about the fact that we’ve opened now stores in four distinct countries, we have a very strong web platform that really reaches across Europe and as we look at this business really over the last six years of owning it.

It's a business that we made some investments in, we really drove to profitability in 2015, we had a tougher year in 2016, I should say we drove very close to profitability, we are close to breakeven in 2015, we had a tough year in 2016, but now we have two years of, kind of a high low single digit comp, and a low mid single digit comp.

So we have a couple of years of positive growth here which, I think is actually pretty impactful given the fact that Europe’s economy has not been as strong as U.S.’s economy, we have had some challenges with the Brexit impact on the market and I think there is still a lot of consolidation going on in Europe.

So we feel good about the path forward in the region. Obviously, as we said in our prepared remarks, our focus there is to plan, a good solid comp gains and expense growth pretty meaningfully below that because I think as I said earlier we have made some of those investments, and we can push this business closer to profitability and then ultimately over the hump and this could be something we could get profitable here in the next few years.

So, we are encouraged, our 2018 results were better than our 2017 results, not quite as much as we had hoped, but again I think directionally we feel like it’s going in the right direction, and the last couple of classes of stores we’ve opened have been pretty good classes of stores, so again I think we kind of, we are no longer testing in that market, we have a pretty good roadmap for what we're doing and we always got to continue to go and execute.

Operator

And our next question comes from the line of Mitch Kummetz with Pivotal Research. Your line is now open.

Mitch Kummetz

Let me just follow up on Jeff's question about Europe, it's because in your response I mean the business is not profitable yet. It sounds like you feel good about the path like where you are in terms of developing the countries, you're planning expense growth below comp growth, you're pushing closer, I just I guess what I wanted to, I mean is there a way you can just tell us what the EBIT is on that business? I just like to know how close to profitability you guys are and it doesn't sound like you can get there in 2019, so it maybe doesn't sound like you're that close, and is there anything, any more color you can give on actual kind of numbers around the profitability?

Chris Work

I'm going to hold on given that overall profitability. I mean this is not something that's losing tens of millions of dollars. This is a business that's losing millions of dollars and I think that it's a business that's continued to grow and as I said has needed some, needed investment to do that.

And so our focus now is leveraging that. We feel like this is a business that again will get closer to breakeven in 2019. I think we have a good chance here in the next two to three years to drive it over that hump. And so it's not significant in regards to overall losses but it is millions of dollars.

Mitch Kummetz

Got it.

Rick Brooks

And I'll just add to, Mitch, I'll just add to Chris' response that as I think about what we're doing in Europe, it's we are really building and replicating the omni channel platform that we built here in the U.S. So, to do that takes the investment of building out the physical presence in the market. And I will tell you that from a consumer behavior perspective, we are not seeing any significant differences between what happens when we build out this marketplace.

We're not only as Chris said had a few good years now of classes of stores in terms of the performance, but we also see that those stores drive the digital business in those markets to significantly higher than the average growth in other regions where we don't have our physical presence.

So all of the indicators are for us in this in our European business are that the consumer behavior around omni channel is they're all in place, they're all like we saw in the U.S. and like we've seen in Canada. And I feel that we're on the right track in terms of what we need to do.

And then from my broader perspective over the long term, building these platforms, think of what we're doing is building a platform business to serve again a customer is going to demand greater speed because brands emerge, can emerge anywhere in the world and for the first time ever become an all store buy from us around our global businesses in as soon as three years.

So what we're able to do if we can continue to do build out these platforms, is we'll be able to I think really revolutionize the way that we work with young brands so we can reinvent the supply chain it takes to deliver product and deliver products faster than anyone in the world to the major developed countries in the world.

So we think we can maximize sales around these efforts. So, if that again this is that virtuous wheel as we build markets as we gain scales, we can serve our brand partners better and deliver better value for everyone and most importantly the customers.

So just to put that in perspective, I mean it's going to take a while to be out of Europe. This is a, it's a big volume country and opportunity in front of us so it's going to take a while but again we've made a lot of key investments in technology, infrastructure, stores and we have a ways to go but I think we're on the right track and most importantly we're on the right track to serve what our customers are going to demand and I think demand even more of over the next five and ten years.

Mitch Kummetz

And then in terms of category trends, you obviously gave the months, and you start to notice some things I mean we now have two months of sort of negative men's and women's apparel although probably two terrible much to try to get rid off of. And accessories has been positive for several months now, hard goods have been positive for three months in a row. As you think about the categories, I know these things sort of ebb and flow over time, I mean how should we be thinking about that for fiscal 2019? Is there anything that we can kind of read into that from what we've seen over the last few months plus?

Chris Work

You know Mitch I would not read into a lot of it at this point. What I would actually comment on is I really actually think this is one of the strengths of our model. I mean you've been around the model for a long time and I think you have a good handle on it, but we look at these groupings of categories, Men's is at 41% of our sales, Women's is at 14% of our sales which has been a big movement for them over the last couple of years. If I look at it just a few years ago, Women's was down in the low 13% to 12% range and Men's was at 34%.

So we've seen a great apparel cycle over the last few years. Now, more recently we've seen footwear start to getting traction again and actually is reason to 17% of sales and so, you know for us, we always kind of have certain things rising and falling. We'd love to get them all going at the same time and from time to time we do, but this is kind of the strength of our business.

And I think you put that coupled with the factors we said in our prepared remarks, I mean 2018 represented our peak product margin after 2017 was our peak product margin before that. That coupled with private label decreasing almost 370 basis points as a percent of sales. And last year, it did the same thing.

So, private label penetration at the end of 2018 was around 13.5% and had been up over 20% just a couple of years ago. So, I think this shows the magnitude of the brand and cycle that we're in and at some point that will change, and I think we have a business that can react to that whether it goes back to kind of more of a plain private label value consumer or whether it goes to footwear or whether there is something accessories that pops. I think we're pretty happy with the makeup of the categories now they're performing and we're hoping we can get all of them up here in 2019.

Rick Brooks

And Mitch I would just add to that, again as Chris said you've known us for a long time that in prior years we wouldn’t see private label move up down, we would see margin movement of course, we would make that argument at that point in time, that will see volume move right as we move out of branded cycles we will see AURs move, we'll see basket size move.

I think what's amazing about the last couple of years is what I have seen a major reduction in private label we were through adding peak product margins is that the model - our model today is more resilient than I think it's ever been and I don't think in the past we couldn't do what we could deliver on the kind of thing delivering here would be, we would've done it differently but to drive in what's really is predominately branded cycle increase product margins or add private labels upon.

I'm really super proud of what our teams have done and how we are operating in a way that is delivering real value for our shareholders, our customers, I think all the way around in this model but it is more resilient I think and I would say agree with Chris it is more resilient in terms of how fast things are moving and how fast department trends shake around and adjust. I don't think there is no early read here for 2019 relative to what we're seeing here quarter to date.

Mitch Kummetz

And then lastly on the cash strategy, I mean you guys mentioned that there is still $75 million left on the authorization, you have got a big cash balance at year end, it sounds like share repurchases kind of towards the bottom end of how you would like to use your cash but at some point I mean again given whether you have any authorization of the cash balance, maybe where the stock is, does that move p in terms of priority or?

Rick Brooks

Well, I guess, we do list the buyback in other forms of dividends and other things return value to shareholders, it's a third thing, means first and foremost we're going to invest in the business and try to find ways to grow sales and product margin and reduce expenses.

Secondly, we're going to look outside of the business for growth vehicles that we think are the right cultural fit and yet have a good run rate for growth and are accretive for our shareholders.

And lastly we'll look at buybacks and dividends as it relates to the buyback overall this is a $75 million buyback that has the availability to use up until the end of our fiscal 2019 year, our board is something we review with our board, our board is focused on utilizing this as we think about how to utilize this, we believe in buying back our stock is a good investment and we think our stock today is a good investment.

That being said, we continue to be very opportunistic buyers and while again I think there is value in our stock today that historical volatility of our stock is showing that it can have some pretty wide wild swings and a lot of those are related to our own performance, but it being a smaller stock that is tied to macro trends and retail industry trends and other things that impact us.

So, we're going to try to be, I think, leave that variability create some pretty unique buying opportunities for us and we're going to try to be pretty opportunistic shareholders to maximize shareholder value.

Operator

And our next question comes from the line of John Morris with D.A. Davidson. Your line is now open.

John Morris

Really nice work on that fourth quarter, very impressive gross margin. But first I want to ask a little bit Rick I think this would be for you, the localization and thank you for the clarity there. How would we expect that to unfold in terms of a positive impact on the business through 2019, that you would compare in contrast to 2018? And is the trade area initiative different to that and if so maybe talk a little bit about that and kind of where you are?

Rick Brooks

I am going to give the higher level, I’ll let Chris add any specifics relative to the model because I know we have initiatives, these were planned into the models, so I am not going to get specific around the dollars, those were built in both the investments John as well as the benefits we thought we could drive.

Let me go put giving over to you about how we are thinking about these initiatives around localization and localization is bigger to be cleared in, localized fulfillment right we have a lot of localization initiatives our belief is that all consumers are local but yet want to be part of the local communities but connected to global audiences too.

So we always think about how global and local and local and global work together in this world and we are seeing again evidence of that of how fast brands move and local brands become global brands, that's all part of this concept of localization.

Now that relates to year-over-year initiatives, we are driving every year at improving like in our ability to include the speed to our customers, reduce cost in the process in the digital orders, and create just better experiences for our customers. We know the speed as we set in the script is super-important to our customer because they want the cool stuff, they want it fast.

So, we have a whole series of initiatives that we're working on and that is this front some of them relative to where we've been like on localized fulfillment that we expect to improve it again this year and I know those expectations are built into the numbers and the guidance that Chris shared and we'll be - to be to be clear this also different than trade area. Trade area even a bigger idea, we've been really working on localization within the concept that really a store and how we serve the customers around that store.

Trade area is going to take this to another level I think John and we are at the early phase of that. We really don't have a significant amount of I would say benefits planned in the budget at this point but think about that next two and three year. I think we're going to make some major adjustments in how we do our business.

We're going to be better as good as we are at localizing, in some areas we're going to get even better in terms of planning total demand and marketplace, trace area concept but it starts with really the clear definitions in unleashing our teams and really getting moving all in the same way so.

So trade areas actually I'd be a little bit different than what we talked about historically in terms of localization which really has focused on as we you focus on our communications around fulfillment because we can definitely demonstrates the benefits of fulfillment but there is a lot of moving pieces going on here and I think some of that is going to be tremendously impactful over the next three year.

Chris Work

And John I'll just quickly touch on to add to what Rick said really the areas that we're focusing on from a localization standpoint and where I think we've gotten some benefit here over the last few years that we have been doing and areas we'll continue to get better at and I really I through those kind of in probably four categories here first is really just trying to utilize labor right so when we had a fulfillment center we had a confined group of labor that was totally focused on just fulfilling online order. Today utilization our entire store footprint we are able to utilize that labor across the chain.

Now in some cases that is in low volume periods in stores that are minimum hours in which cases we believe there is no incremental cost to fulfilling this order. In fact most of the year we would put a lot of our web demand orders in that category. There are times in back to school and holiday and a few other peak periods where we have to input labor but labor leverages is really the first piece there.

The second piece is really on the shipping side by shipping from our stores we are closer to our consumers today for the vast majority of what we ship. That create some shipping savings and then the other piece that we have been working on over the last few years with some good success is splits are split, split shipments and that was something that we identified upfront was part of the challenge of going from a large fulfillment center to shipping from stores with multiunit orders will be split across multiple stores and we've been working harder and harder ways to bring that down, that split rate down.

And the last thing I would say, is I do think overtime there has been and will continue to be a product margin benefit to this.

We are harvesting inventory from our entire chain and as you can imaging we're trying to harvest investment for web demand from our lower volume stores because inherently the higher volume stores have more traffic. So I think there is product margin gain here.

Obviously these things are incredibly interwoven, right, the way that the web and the stores work together to serve the customer so it is challenging to break out the savings here but we know we're moving in the right direction based on the metrics that we're using and this is an area that's important to us because as you know minimal wage across the country is going up.

And so I think the teams are really good and creative to first and foremost serve the customer in the best format possible and secondly look to ways to maximize our expense structure. So, really encouraged by the results of the last three years. I think you're seeing in the fourth quarter growth that Rick talked about, the annual earnings growth that I talked really embedded in those results.

And then lastly I'd just add to trade areas as Rick said, we're at the early innings of this thing for sure. We are dealing more and more with it as we kind get our hand around it and I think this is another area that could really help us over the long term.

Again not significant impact planned in the 2019 guidance but as we think out beyond 2019 this is an area where we can really look at trade area by trade area with how are we performing in this trade area, how many stores we have in this trade area and what is our opportunity if we were to remove say these lowest performing store in a trade area to still reach that consumer and provide them value and like I said we're in the early innings today. We've been doing this a little bit with some of the stores that we've closed to-date and we're seen a good impact of what it means to the surround stores.

So we'll just continue to work through this concept but this will be really evaluating a group of stores together that operate as a trade area and we can find some benefit in how we maximize profitability within each trade area we operate.

Operator

And our next question comes from the line of Jonathan Komp with Baird. Your line is now open

Jonathan Komp

I just wanted to maybe ask a little more directly on the comps outlook what you're embedding in terms of thinking to get to low single digits for the year and just kind of the factors that are supporting your conference if you could talk a little bit more directly to some of the drivers and whether or not the drivers you see in that outlook are any different that given the last 10 quarters of this strength that you've seen?

Rick Brooks

Well I think I'll tell you first and foremost the biggest piece of confidence I have is this business has going for 40 years and comp positively for like 34 of the 40 years. So we have a strong history of comping in this business and being able to comp on comp. It's the fundamental pillar of how we think of running our business and compensating our people and all the things that tie with it.

So you know obviously domestically here we have a more mature business so we are focused on driving comp but those comps aren't going to be as strong as our international comp where we have younger business that's more new stores and growing website that we think we can drive a higher comp point.

So that being said all businesses at this point are planned to comp positively and the drivers of that are going to be continuing to do what we've done for decades now launching new brands, it's not going to be the 100 brands plus that we launched this year. It'll brands we've launched over the last few years that's providing a great store experience, great online experience through our sales teams and tying that all together through the things we just talked about in our last conversation of localized fulfillment and providing that great service to the customer quickly with speed that really tie it altogether.

So there's not one thing John we point to it’s really what we believe is the model and clearly we're looking at this at a more detailed level different regions and categories and things like that but our focus is really to plan all those things up and it's just a matter of who gets a little more of the five based on where they are at the growth curve

Jonathan Komp

A little bit of a different question but going back to margin I think it's encouraging to see the product margin at such high levels yet the operating margin is still quite a bit below the set number of years ago I may know international which you touched on explained a portion of that but I wanted to just ask when you look across the cost structure now that you've made significant number of investments if there is any opportunities or hard buckets of expenses that could potentially be a little bit more aggressive on taking a look at?

Rick Brooks

Is it a question are there any other investments that we want to take a look at?

Jonathan Komp

Sorry, no let me phrase it differently are there any other cost. buckets that you could look to optimize or gain additional efficiencies just given that your total operating margins are still quite a bit below peak despite product margins being so high?

Chris Work

Sure I think the short answer is there is lots of them we continue to really push up and down the business and I guess again I'll break this into kind of the two different businesses and our mature business here in North America we’ve got a very defined cost structure with a lower growth point in regards to a number of units.

So as I look at that business the real challenge is our what you’re hearing most retailers talk about minimum wage increases and wage inflation and shipping costs so those are going to be our biggest two challenges so we have a lot of initiatives in place to try to minimize those impacts localization and the way we handle online fulfillment is one of them, as is how we schedule how we plan where we put our best salespeople all of those things are initiatives that are out there for us right now.

From a shipping perspective we continue to work with our carriers and finding ways to optimize our shipping network where shipments is one way we do that but there are lots of other initiatives in place to try to reduce those things beyond those two big items obviously we continue to work with the landlords we are working up and down the P&L of trying to find efficiencies in this mature business because we understand that over a long period of time five years this is a business that with retail is probably going to be in that low single digit growth level.

And we are focused on growing earnings at that level and that means we have to rethink the way we’ve done the business, we have to rethink our cost structure and our teams are very focused on that within this mature business.

Internationally a little different ballgame, because obviously as we've said it's not a profitable business at this point but the growth point is higher the product margin opportunity is higher because we are operating at lower percent than the U.S. here. We have a much lower penetration of private label internationally so that's an opportunity.

And from a cost perspective we built out the infrastructure there. We have got the majority of our big expenses at this phase of the growth curve behind us and we are really focused on keeping expenses at a very low growth point.

While we grow sales and grow margins, so it's a different path there and as we look long term, this was a business six to seven years ago we were talking about getting operating profit as a percent of sales in the low teens. I think that's changed and I think that's changed across pretty much the entire retail footprint but it is a business that we think consolidated we can push to the high single digits.

And that's where our focus is, getting operating profit as a percent of sales to the high single digits and I think we execute on what we've laid out which again is kind of thinking about the mature business on a low single digit over a period of years and keeping expense growth below that and internationally growing much faster and managing expenses I think that's something that we can achieve.

Rick Brooks

And only thing I'd add Jonathan is that's exactly what we're doing the last couple of years is we're growing, why I think we've hit bottom from the operating profit percentage and we're now are starting to see that number grow.

So I think what you just heard Chris described you've seen come through in the numbers and as Chris said our goals continue to grow and profitability the business from operating profit perspective now of course if we have recession we'll go backwards and we'll see competitors go away across the globe and we expect coming out of the recession we're going to emerge even stronger with a stronger share position in the marketplace which will allow us to drive operating margin higher again in that case.

So, we're very, very focused as Chris has laid out here on these initiatives that drive our operating margin forward particularly in environment where we because of the transparency that consumers are having today is world on price and availability of product we think that's been one of the key things that drove it down and now it's our chance to our investors remain to go get that margin back and I think we've done that over the last couple of years and our goal is to continue to do that.

Operator

Thank you. And that concludes our question-and-answer session. So with that I'll turn the call back over to CEO, Mr. Rick Brooks, for closing remarks.

Rick Brooks

All right, thank you very much Andrew, appreciate that. And I just want to hear at the end of our fiscal year I just want to take surely take this opportunity to thank all of our teams and our sales teams, our whole office teams across the globe that have worked so hard on what I think was just a terrific year of results for Zumiez. And I also thank our investors for hanging in there with us through all these challenging times we have been through last couple of years and I can tell you we're very excited about looking forward over the next few years.

So we hope we can continue this result, continue driving our business forward. We intend to dominate our niche of retail, we think we're in a leading position to do that, and we are on - that is our mission as we look at over the next five and 10 years.

So, thank you everyone for your support. We greatly appreciate it and we look forward to talking to you at the end of the first quarter. Thank you.

Operator

Ladies and gentlemen, thank you participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.