Zumiez Inc. (NASDAQ:ZUMZ) Q4 2023 Earnings Call Transcript

Zumiez Inc. (NASDAQ:ZUMZ) Q4 2023 Earnings Call Transcript March 14, 2024

Zumiez Inc. misses on earnings expectations. Reported EPS is $-1.73301 EPS, expectations were $0.26. ZUMZ isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. And welcome to the Zumiez Inc. Fourth Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 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 in Zumiez filings with the SEC. At this time, I’d like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?

Rick Brooks: Hello, everyone, and thanks you for joining us on today’s call. With me today is Chris Work, our Chief Financial Officer. I’ll begin with a few remarks about our fourth quarter and full year performance before discussing some of our strategic priorities for 2024. Chris will then take you through the financials and our outlook for the coming year. After that, we’ll open the call to your questions. The fourth quarter represented an encouraging finish to what was a challenging year. As was the case throughout fiscal 2023, we faced headwinds in the fourth quarter, including highly promotional activity across the soft lines retail sector and an increasingly selective consumer pressured by the multiyear inflationary impact on discretionary income.

That said, our men’s business turned positive in November and growth accelerated in both December and January. Overall, momentum built throughout the quarter with total sales trends improving month-to-month, culminating January turning to positive comparable sales, fueling fourth quarter sales and adjusted EPS that were both above the high-end of our guidance ranges. Many ways, the fourth quarter monthly sales trends were a microcosm of the trend we’ve seen throughout the year. To recap our improving trend line, year-over-year total sales were down 17% in first quarter, down 12% in the second quarter, down 9% in the third quarter and down less than 4% in the fourth quarter, excluding the benefit of the 53rd week, which drove sales slightly positive for the quarter.

As we enter 2024, we have continued to see some areas of strength in our business. While total sales trends for February were not yet positive, we did see sequential strength as we moved through the month and noted that the primary headwind was tied to seasonal snow sales in Europe, that turned negative in February after being significantly positive in January due to the timing of promotions. For October through February, Europe snow sales were down low single-digits despite significant variability across periods that pushed our seasonal snow comparable sales positive in January and negative in February. To be clear, 2023 was a disappointing year overall, and we’re not satisfied with our results. With two years of meaningful negative comparable sales trends, the business has deleveraged significantly, and we experienced the first annual net loss in our history this last year.

As we look to 2024, we expect the macro climate to remain a headwind in the near-term, as Chris will detail in our outlook. However, we are optimistic that the work we are doing will inflect our trend line positive. Overall, we will focus on items within our control to grow sales and drive the business back to profitability. To that end, we plan to take specific actions to adjust portions of our strategy in the new year. I’ll quickly take you through the most significant changes, starting with a shift in focus for the European business. The last few years have been particularly challenging for profitability in the European market. The business was close to achieving breakeven in 2019 before the onset of the pandemic. However, the longer and stricter pandemic area closures in Europe, combined with the inflationary impact to the consumer and instability in the region in the year since, have resulted in earnings declines for our European business since 2020.

To correct this negative trend, we are pivoting our focus away from store expansion to enhancing the productivity of the existing European business. With a solid foundation of nearly 90 stores across nine countries and a pan European web business, we believe we have adequate penetration today in the relevant European markets to unlock the potential for the concept and to create value as we work through what has been a difficult cycle. By focusing on increasing the productivity of our current business in Europe, we’ll improve our near-term profitability and cash flow. We’re also creating a profitable platform for long-term growth in the future. We have seen positive signs such as double-digits comparable sales growth in Germany, the Netherlands, Norway and Sweden during the year, which gives us confidence that we can achieve profitability in Europe as we’ve done in other international markets like Canada and Australia.

There is no doubt that trends emerge locally and grow globally. Remaining relevant in these markets is a significant advantage to Zumiez over the long-term and serving both our customers and our brand partners. This heightened emphasis on profitability extends beyond Europe. In 2023, we closed 20 underperforming North American stores and expect to close an additional 20 to 25 locations in 2024, should results continue to be challenged. As a result, we have reduced field and corporate staffing levels to align with reduced store count. We are also further optimizing store labor through several initiatives, including adjustments to staffing models at lower volume stores. We have made structural changes to reducing shipping and logistic costs company-wide and continue to implement other cost savings opportunities in many areas throughout the organization.

While we heighten our focus on profitability company-wide, we’re also making investments to ensure we continue to win with customers, including injecting assortments with newness. In 2023, we launched nearly 200 new brands, almost double a typical year and we expect this newness with relevant and desired brands to continue to attract a broader customer set into 2024 and beyond. We’re already seeing our new brands launched in the last couple of years represent a larger portion of our sales than we’ve historically seen, which we believe is an indication that they are resonating with our customers. We’re also growing our private label brands. Private label represented approximately 23% of sales in 2023 compared to 18% in 2022 and 13% in 2021, which is a testament to our teams in capturing both the trend and value customer and provides another significant runway for growth.

And we’re maintaining our best-in-class service in stores and on the web, with continued investment in training and technology that combined are aimed at enhancing our relationship with customers and connecting with them in a more personalized and relevant way. After two challenging years, we’re ending 2024 with a strong balance sheet and over $170 million in cash that will allow us to weather the current environment. Before I close the call and turn the call over to Chris, I’d like to thank our teams and our brand partners for their efforts and partnerships in 2023. Our talented and dedicated people have been a bright spot, have we navigated recent challenges and will be the driving force behind the company’s return to sustainable growth in the quarters and years ahead.

I remain confident in our ability to serve our customers and drive back to profitability and positive cash flow and look forward to updating you on our progress in the quarters ahead. With that, I’ll turn the call over to Chris to discuss the financials.

Chris Work: Thanks, Rick, and good afternoon, everyone. I’m going to start with a review of the fourth quarter and full-year 2023 results. I’ll then provide an update on our first quarter to date sales trends before providing some perspective on the full year. Net sales for the fourth quarter of 2023, which was a 14-week period, increased 0.6% to $281.8 million, compared to $280.1 million in the fourth quarter of 2022, which was a 13-week period. Comparable sales were down 3.9%. The decrease in comparable sales was driven by continued inflationary pressure on the consumer, continued challenges and competition for the discretionary dollar and tougher trends in certain categories of our business. From a regional perspective, comparing the 14-week period in the current year to the 13-week period in the prior year, North America net sales were $212.4 million, a decrease of 3.4% from 2022.

Other international net sales, which consist of Europe and Australia, were $69.4 million, up 15.2% from last year. Excluding the impact of foreign currency translation, North America net sales decreased 3.4% and other international net sales increased 12.3% compared with 2022. Comparable sales for North America were down 5.4% and comparable sales for other international were up 0.9% for the 14 weeks ended February 3, 2024. From a category perspective, men’s was the only category with positive comparable sales for the quarter, while all other categories were down from the prior year. Women’s was our most negative category, followed by accessories, hardgoods and footwear. The decrease in comparable sales was driven by a decrease in transactions, partially offset by an increase in dollars per transaction.

Dollars per transaction were up for the quarter, driven by an increase in units per traction and an increase in average unit retail. Fourth quarter gross profit was $96.7 million compared to $95.3 million in the fourth quarter of last year. Gross profit was 34.3% of sales for the quarter compared with 34% in the fourth quarter of 2022. The 30 basis point increase in gross margin was primarily driven by 70 basis points of benefit in shipping costs related to better outbound shipping rates, 60 basis points positive impact related to a mix shift away service and related shipping revenue in the prior year results, which carried a negative margin during the prior year quarter and 30 basis points of leverage in store occupancy costs related to a reduction in total expense year-over-year combined with the modest increase in sales related to the 53rd week.

These benefits were offset by a 110 basis point reduction in product margin due to discounted selling to manage aged inventory, which was generally in line with our expectations and a 20 basis points of deleverage in fixed and other costs included in gross margin. SG&A expense for the fourth quarter of 2023 was $129.4 million or 45.9% of net sales for fiscal 2023 compared with $80.1 million or 28.6% of net sales in 2022. This includes a $41.1 million non-cash goodwill impairment charge that resulted from our decision to slow growth in Europe and focus on profitability. This change in our modeling had a direct impact on the future cash flow projections of our Blue Tomato business that have been tied to increased store growth and improved performance as we grow the business.

The 1,730 basis point increase in SG&A expenses as a percent of net sales was driven by the following: 1,440 basis point increase driven by the impairment of goodwill in Europe, 140 basis point increase related to store wages deleveraging on the decrease in comparable sales as well as wage rate increases, 70 basis point increase in non-wage store operating costs, 50 basis point increase in other corporate costs and 30 basis point increase in non-store wages. Operating loss in the fourth quarter inclusive of the $41.1 million goodwill impairment charge was $32.8 million or 11.6% of net sales compared with operating profit of $15.2 million or 5.4% of net sales last year. Net loss for the fourth quarter was $33.5 million or $1.73 per share. This includes a goodwill impairment charge, which on an after-tax basis was $41.1 million or $2.13 per share.

In the year ago period, we reported net income of $11.4 million or $0.59 per diluted share. We had tax expense in the current quarter despite our pretax operating loss due to the distribution of pretax income across our different tax jurisdictions. This compares to an effective tax rate of 29.2% in the fourth quarter last year. Looking at our full year results, net sales for the 53 weeks of fiscal 2023 were $875.5 million, a decrease of 8.6% from $958.4 million in 2022. Comparable sales for the full year were down 10.6%. The decrease in comparable sales was related to continued inflationary pressures on the consumer, continued challenges of competition for the discretionary dollar and tougher trends in certain categories of our business. From a regional perspective, North America net sales were $697.6 million, a decrease of 13.1% from 2022.

Other international net sales were $177.9 million, up 14% from last year. Excluding the impact of foreign currency translation, North America net sales decreased 12.9% and other international net sales increased 11.8% compared with 2022. Comparable sales for North America were down 13.5% and comparable sales for other international were up 3.4% for the 53-week year ended February 3, 2024. From a category perspective, all categories were down from the prior year in comparable sales. Footwear was our most negative category followed by women’s, accessories, hardgoods and men’s. The decrease in net sales included a decrease in transactions, partially offset by an increase in dollars per transaction. The increase in dollars per transaction was driven by an increase in average unit retail, partially offset by a decrease in units per transaction.

2023 gross margin was 32.1% compared with 33.9% in 2022. The 180 basis point decrease was driven by deleverage on our fixed costs as well as rate increases in several areas. The key areas driving the decline were 130 basis points of deleverage in store occupancy costs, and a 70 basis point decline in product margin. These decreases were partially offset by 20 basis points of efficiencies in distribution costs. SG&A expense was $345.7 million or 39.5% of net sales for fiscal 2023 compared with $293.6 million or 30.7% of net sales in 2022. This includes the $41.1 million of goodwill impairment mentioned in our quarterly update. The 880 basis point increase as a percentage of net sales was driven by 470 basis points due to the non-cash goodwill impairment, 180 basis points increase related to store wages delaying on the decrease in comparable sales as well as wage rate increases, 110 basis point increase in non-wage-related store operating costs, and 80 basis points in non-wage-related corporate costs and 60 basis points in non-store wage costs, which include the benefit in the prior year of 40 basis points related to a $3.6 million European government stimulus payment.

These increases were partially offset by a 20 basis point decrease in training and events. Operating loss in 2023 was $64.8 million or 7.4% of net sales, inclusive of the $41.1 million goodwill impairment charge compared with operating income of $31.1 million or 3.2% of net sales last year. Full year net loss was $62.6 million or $3.25 per share, including the non-cash goodwill impairment charge booked in the fourth quarter of 2023 were $41.1 million or $2.13 per share. This is compared to net income of $21 million or $1.08 per diluted share in 2022. Turning to the balance sheet. The business ended the year in a strong financial position. We had cash and current marketable securities of $171.6 million as of February 3, 2021, compared to $173.5 million as of January 28, 2023.

The slight decrease in cash and current marketable securities over the last year was driven primarily by capital expenditures of $20.4 million, partially offset by cash flow from operations of $14.8 million. As of February 3, 2024, we have no debt on the balance sheet and continue to maintain our full unused credit facility. We ended the year with $128.8 million in inventory, down 4.4% compared with $134.8 million last year. On a constant currency basis, our inventory levels were down 4.1% from the last year, with decreases in both our North America and European businesses. Given the sales backdrop, we are happy with our ending inventory balance for 2023 and expect to continue to bring newness in as we move through 2024. Looking forward to 2024, it is important to remind everyone that 2023 was a 53-week year, while 2024 is a 52-week year.

With the calendar shift, we expect sales and profit movement between quarters across 2024 creating comparability challenges year-over-year in our commentary. As such, we will provide actual comparable sales to like periods as we move through the year, which will represent a better measure of current performance. Additionally, with the closures in 2023 and anticipated closures in 2024, we expect our store count will be down year-over-year on a quarter-to-quarter basis, which will negatively impact total sales growth while having more muted impact on earnings due to the performance of those closures. Now to our first quarter-to-date results. Total net sales for the 4-week fiscal period ended March 2, 2024 ended decreased 3.1% compared to the 4-week fiscal period ended February 25, 2023.

Our comparable sales decreased 6.2% during the 4-week period in March 2, 2024 from the comparable weeks in the prior year. From a regional perspective, North America net sales for the 4-week period ended March 2, 2024, increased 2% over the 4-week period ended February 25, 2023, while our other international business decreased 18.6%. Excluding the impact of foreign currency translation, North America net sales increased 2.1% and other international sales decreased 18.5% compared with 2023. Comparable sales for North America decreased 2.6% for the 4-week period ended March 2, 2024, compared to the same weeks in the prior year, while comparable sales for our other international business declined 17.8%. From a category perspective, the men’s category was our largest positive comparable sales growth category followed by footwear.

The hardgoods category was our largest decline in comparable sales, followed by accessories and women’s. The comparable sales decrease was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased for the 4-week period due to an increase in unit transaction, partially offset by a decrease in average unit retail. With respect to our outlook for the first quarter of fiscal 2024, I want to remind 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 our sales results in early fiscal 2024 showing a small step back from our Q4 trends, we entered 2024 with some caution.

While we are optimistic that we could see continued improvement in the business as fiscal March to date sales have trended better with new spring receipts, we are planning more conservatively anticipating total sales for the first quarter between $167 million and $172 million. We expect that our first quarter 2024 product margins will be down year-over-year against the current backdrop but an improvement from our Q4 run rate. We believe that the first quarter of 2024 will see a continued negative impact on product margin related to a mix shift away from service and related shipping revenue in the prior year results. While the product margin impact of this mix shift is negative, the overall impact to gross profit is negligible. We do not anticipate this mix shift will have a material impact beyond our first quarter of 2024.

Consolidated operating loss as a percentage of sales for the first quarter is expected to be between negative 15% and negative 17%, and we anticipate our loss per share will be between $1.09 and $1.19 compared to a loss of $0.96 in the prior year. As we consider the outlook for the full-year 2024, there remains uncertainty and volatility in the macro environment. Given this, we will refrain from giving specific annual financial guidance, but I do want to add some context around how we currently believe the business will trend throughout the year. We have experienced several negative sales trends over the past two years, driven by the pandemic, inflation, competition for the discretionary dollar, negative brand trends and general global instability.

Given the magnitude of the multiyear decline, we believe that we are beginning to see the impact of those negative business trends moderate, and our current results are showing that new trends are taking hold. This includes our men’s category being positive across Q4 and into February. At this time, we believe we can build upon these trends throughout 2024 and see total sales growth for the full year. After two years of difficult performance in product margin, we believe that with a more stable sales environment, we will grow product margin in 2024. With sales growth in 2024, we anticipate that we’ll leverage SG&A costs year-over-year beyond the benefit we will receive of moving past the $41.1 million goodwill impairment charge we recorded in the fourth quarter of 2023.

With the previously mentioned assumptions, we believe we’ll return to positive operating margins for the full year. While effective tax rates are likely to fluctuate significantly by quarter, we anticipate that our full year effective tax rate will be roughly 40% in fiscal 2024. We are planning to open 10 new stores during the year, including three in North America, three in Europe and four stores in Australia. This is down from 19 stores in 2023 and 32 stores in 2022 as we focus on optimizing our current footprint. We expect our capital expenditures for 2024 to be between $14 million and $16 million compared to $20.4 million in fiscal 2023 and $25.6 million in fiscal 2022. The reduction is primarily due to fewer planned store openings. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $23 million and consistent with the prior year.

We are currently projecting our diluted share count for the full year to be approximately 19.8 million shares. And with that, operator, we’d like to open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Corey Tarlowe with Jefferies.

Corey Tarlowe: Great. Thanks, and good afternoon. As it relates to Europe, where are you seeing green shoots? And then where are you seeing opportunities to improve as we look ahead and you assess the viability of certain regions or areas in which you’re currently present as you think about the go-forward outlay for that region for your business?

Rick Brooks: All right. I’ll start, Corey, and then Chris can add on to — add on his comments, too. I think there really — what’s important in this conversation is the pivot in Europe or we can store growth because obviously, we are growing sales in Europe over the last few years, but sales have been challenged relative to our expectations for the sales growth that we expect to see in Europe and helping new markets is an expensive proposition. So what you’re really seeing us do here is say we need to really refocus our team’s efforts on going back and giving them the time and the bandwidth to go back and really focus on building out profitability in our existing markets. And that’s our focus. And as we commented in the script, we’ve seen some good results, particularly in Germany last year, which is our, I think, our biggest market in terms of unit count in Europe.

We had a double-digit gain in the year. We made significant progress relative to profitability in that market, but we have more progress to make, Corey. And I guess that’s what you’re seeing us say here is we’re going to put a positive growth, build a profitable base and then reconsider where we go from there. So this is more about basis. It’s about the fundamentals and tactics. And we have markets that are profitable in Europe, to be clear. But this is about getting all moving in the right direction, getting back that what our teams look like in every location, driving better product margins across the business, controlling and managing expenses more effectively by not again, reducing the cost of entering new markets as an example. And so we’re back to basics.

And I would tell you much the same thing about here in our North American business, too. So I think it was more about perspective of — we have opportunity there, and we have opportunity to grow the profitability on a 4-wall basis across those markets and we know our web business in Europe. So it’s really about the pivot, slowing growth, focusing on building a profitable base, doing and executing the basics and putting all of our efforts into that.

Corey Tarlowe: Great. And then I have 2 more, if I can. On North America, the men’s business seems to have made a turn. How do you think about the prospects for that to potentially drive maybe perhaps a more widespread momentum across the other categories of the business now that you’ve seen the turn there. And then just briefly on store count on the, I believe it’s 10 openings that you’re anticipating, what would be the net number for the full year?

Rick Brooks: All right. Great. I’ll take the first part. And again, I’ll let Chris add on as he like. So North American business, the good news — this is — I have good news for you in North America is the improvement in our North American business is directly related to the comments we made in the script earlier. Our private label business is dead on, I think, the trends we’re doing really fun, creative things there. Multiple trends are working for us in private label. And private label is growing in absolute dollars. Despite the overall sales decline, we’re not declining in private label on a relative basis, not a gain share on a relative basis. It’s a gain in absolute dollars in our business in private label. So we have a lot of momentum there.

And I think we’re on the early edge, I think we’ve been not just on those trends, but we’ve been leading the trend cycles that we’re seeing out in the market. So that is a huge driver for private label. It also has, I think, a positive benefit of women’s that we’ll see play out over time in terms of what we’re doing on the women’s side with our private label brands. And again, it’s both about the freshness we can offer the consumer and being on those trends, building those trends for our customer as well as the value proposition we have by the move, the ability we have with private label to do bundling and things like that for customers to provide more value for them beyond just cheap prices. That’s never been our strategy. The second thing on men’s that’s really, I think, again, directly correlated to the results we’re seeing, and we commented on this in the script, too, is that the emerging brands in ’22 and ’23, and I will tell you, particularly in ’23, the brands we launched in ’23.

And in some cases, the brands we launched in the back half of 2023 are gaining significant share in our business that have been doing so month over month and better, deeper penetration in Q4 than Q3. And so this is the newness when we talk about injecting newness into the business, this is what we’re talking about. And we’re seeing it resonate and that these trends that we’re seeing are the exact things that are driving our positive trend in the men’s business. So as we think about that, with new brands, Corey, what we’ll look to do there in terms of broadening of the categories is we’ll look to do exactly that, which is how can we take a [indiscernible] brand and get them into accessories and different accessories categories. How can we partner with [indiscernible] with these brands to help drive more sales for them?