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Zumiez, Inc. (ZUMZ)

Q2 2012 Earnings Call

August 30, 2012 5:00 p.m. EDT


Rick Brooks – President and CEO

Chris Work – CFO


Betty Chen – Wedbush Securities

Sharon Zackfia – William Blair & Co.

Edward Yruma - KeyBanc Capital Markets

Mitch Kummetz – R. W. Baird

Stephanie Wissink – Piper Jaffray

Christian Buss – Credit Suisse

Brian Czenszak - Janney Capital Markets

Dorothy Lakner – Caris & Co.

Pamela Quitiliano – Oppenheimer

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Andrew Burns – D.A. Davidson

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Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated fiscal 2012 second quarter earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today’s 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 Inc.'s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call are not based on historical facts, are subject to risks and uncertainties, and actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ materially than the information that will be discussed is available in Zumiez's filings with the SEC.

And now, I would like to turn the call over to Mr. Rick Brooks, Zumiez Chief Financial Officer.

Rick Brooks

Thank you and welcome everyone. I'd like to start the call by introducing our new CFO, Chris Work. As you've likely seen from our press release last week, Chris has been with Zumiez for about five years, and as a result, has had the time to fully embrace the Zumiez's culture. Chris has been a key contributor to our financial operations and more recently played a major leadership role in the Blue Tomato acquisition.

I want to point out that this is our first internal promote to our executive team in many years. This promotion reflects our core values and our focus on developing our team and talent in the organization over the past few years. I look forward to all of you getting to meet him over the next few months.

Now, let's begin with our comments. I'll begin with thoughts about back-to-school followed by highlights about Blue Tomato, and then we'll discuss the Q2 results. After that, Chris will review our financial and operating highlights for the second quarter. After our prepared remarks, we'll open the call up to your questions.

Earlier today in our press release we announced the sales result for August with a 3.7% comparable store sales growth. As we've discussed over the past couple of years, the back-to-school season continued to shift later into the season. This year is no exception. The first three weeks produced essentially flat comps followed by high concentration of sales in the final week of the period, and while the back-to-school season is not over, when all is said and done, I expect results will once again show that we are a key destination for our customers' back-to-school fashion needs. I should also point out that the first two weeks of September represent for us nearly one-third of the entire back-to-school business. At the end of August, approximately 40% of schools in our store base had yet to start the academic year.

We're not only seeing the shift in sales moving later each year, but also that the back-to-school sales are becoming a smaller portion of our annual sales, a trend we've now seen since 2009. Part of the annual decrease is offset by the strength in our non-peak season results due to the increasing speed that the omni-channel consumer can find what they are looking for and complete their purchase in real-time throughout the year.

As you know, we closed our acquisition of Blue Tomato on July 4, 2012 for a total purchase price of EUR59.5 million. We're thrilled with this new addition and it's complementary to Zumiez geographic footprint and a logical and consistent extension to our operating philosophies. We're in early days of our combined business together, but Blue Tomato is continuing to show year-over-year growth and is well-positioned heading into the important winter and holiday season. I should point out that Blue Tomato has a higher concentration of sales in the fourth quarter than Zumiez operations, which is consistent with predominantly e-commerce business.

The addition of Blue Tomato added a compelling mix of e-commerce expertise and an expanded geographic footprint to our North American business. Although the business represents a small portion of our overall sales and earnings currently, the potential for this business both online and through growth in bricks-and-mortar have us excited about the future. We're now working together to build upon their existing business plans to form a joint view on growth, including the many ways we can leverage our independent strengths to improve not only Blue Tomato results, but all facets of the company. Having a foundation of shared values and culture positions us well for many years of future success together.

Now let me speak to the second quarter. We delivered solid organic results again in the second quarter with sales up 20% over the second quarter of last year with strong comparable store sales gains and productive new stores. At the same time, excluding the one-time expenses related to the relocation of our web fulfillment and home office and costs related to the acquisition of Blue Tomato, operating margins continued to improve, driving better-than-expected bottom line results. This quarter results are reflective once again of the strong execution by all of our teams.

We continued to stay focused on the key business drivers we’ve been talking to you about all year, higher store productivity, domestic new store growth, greater penetration in e-commerce, and international expansion. I'm pleased to report that this quarter produced positive momentum in each of these areas. Our highly differentiated product assortments and exceptional in-store experience continues to attract and engage our core consumer, evidenced by the continued strong comparable store sales growth.

Empowering our managers to impact and lead their teams on a daily basis is not only what makes our company culture unique, it's a critical top line growth driver. Currently we continue to invest in our team members, feeding their potential by promoting from within, and recognizing that our passionate team is essential to our growth as a company and as a leader in our space.

We opened 15 new domestic stores in the second quarter, working towards our long-term goal of 600 to 700 domestic locations. As I mentioned before, the ultimate store count in the US is a moving target and we regularly evaluate our current and potential store portfolio to ensure that we’re building the correct number of units to maximize productivity in an omni-channel world. Today our total US store count is at 463.

In Canada the second quarter marked our first full quarter with comparable store sales results in this market and this back-to-school season is a first comparable busy season, although only for a few stores. Overall, Canada is performing on plan for the quarter and year to date. We continue to show progress and we have confidence in our long-term strategy in Canada where we see the potential for 60 to 70 stores.

As we take these important steps towards building upon our position as a global action sports business, our commitment to our product, culture and operating philosophy has never been more important. We are dedicated to continuing to invest in our people, our infrastructure, and in those things that make the shopping experience in our stores both in person and online extraordinary. This relentless commitment to our fundamental principles is what got us here today and this will continue to drive this business going forward.

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