Zumiez Inc. (NASDAQ:ZUMZ) Q3 2022 Earnings Call Transcript December 1, 2022
Zumiez Inc. beats earnings expectations. Reported EPS is $0.36, expectations were $0.17.
Operator: Good afternoon, ladies and gentlemen and welcome to the Zumiez Inc. Third Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in a 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’s business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call are not based on historical facts and 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’s filings with the SEC. At this time, I’d like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks?
Richard 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 remarks about the third quarter before handing the call to Chris, who will take you through our financial results and outlook in more detail. After that, we’ll open the call to your questions. The economic headwinds we discussed at the end of the second quarter continue to impact our business in the third quarter. Compared to the year ago period when consumers were flushed with record levels of savings to the US stimulus and child tax credit measures, we’ve seen a dramatic shift in consumer sediment across the retail landscape. As inflation levels remain elevated, we continue to see a pullback in our consumers discretionary spending.
This industry wide softness has led to an increasingly promotional domestic environment with consumers appearing to trade down to less expensive options. In addition to these challenges, our international concepts are also faced with a major headwind this quarter as they saw their very solid currency neutral growth completely offset by unfavorable foreign currency movement. These demanded currency dynamics along with inflation driven cost and expense pressures made for a very difficult operating environment compared to the year ago period. We spoke to you at the end of the second quarter, we assume that these difficult trends impacting the broader retail sector would continue to intensify into the third quarter, remain flexible and agile as a quarter progressed, focusing on the areas of the business that we can control to help offset some of the ongoing pressure.
Where our results were down significantly year-over-year, we able to deliver sales and EPS results that were better than our most recent outlook provided in early September. Some bright spots during the period included, we exceeded our sales expectations this quarter as the back-to-school season played out slightly better than expected in the US. We saw sales growth of 13.8% year-over-year in our European and Australian markets on a currency neutral basis. And while negative currency fluctuations mass this on reported basis, we are pleased to see the continued efforts of our teams operating our international concepts. Product margins decreased only 40 basis points compared to the year ago period, despite an increasingly promotional retail environment and increased mixed pressure as our international entities continue to grow in share.
Overall expense management was strong with majority of our loss to prior year, driven by the top line sales decline. Our model chooses to be highly sensitive to sales fluctuation with sales increases showing a large flow through to the bottom line, and a reverse impact during a sales downturn. Inventory was managed well with an overall foreign exchange adjusted increase of only 6.3%, driven primarily by our international entities with larger store growth. While US inventory was up only 1.3%. Earnings per share of $0.36 in the third quarter was higher than our guidance driven primarily by flow through on incremental sales. And substantial work was completed on our long-term initiatives, including the opening of 35 new stores since this same time last year, with nearly half of those stores further in our international expansion.
Looking ahead, we expect continued top and bottom line pressure because a current economic environment and remain cautious in our near-term outlook that Chris will share shortly. While our business trajectory is softened in the short-term, we remain very confident in the long-term outlook for Zumiez. As manager team, we remain focused on building and positioning the business for long-term sustainable growth. For over 40 years, Zumiez has endured multiple business and fashion cycles emerging each time a stronger and more profitable company. For example, in 2008 and 2009, we saw annual comparable sales down 6.5% and 10%, respectively only to be followed by comparable sales increases of 11.9%, 8.7%, and 5% over 2010, 2011, and 2012, respectively.
This outcome to run the most challenging economic periods in recent memory should inspire confidence in the resiliency of our flexible customer-centric strategy and a strong brand and culture that’ll position Zumiez well for driving shorter value once the economic environment becomes more favorable. As we like to say periods of significant change create opportunities and companies have the right people, strategies and resources in place can take advantage of times like this to advance their brand and their business. Obviously, the operating environment in 2022 has proven to be one of the more difficult periods in our industry, but the original philosophies, goals, and ideals on which we built this business remain the same and will serve us as well today as they did during the last major economic downturn.
With that, I’ll turn the call to Chris who’ll discuss financials. Chris?
Christopher Work: Thanks Rick, and good afternoon everyone. I’m going to start with a review of our third quarter results. I’ll then provide an update on our fourth quarter to date sales trends before providing some perspective on how we’re thinking about the remainder of the year. Third quarter net sales were $237.6 million down 17.9% from $289.5 million in the third quarter of 2021. The year-over-year decrease in sales was primarily driven by the benefits from domestic stimulus in the prior year, as well as increased macroeconomic headwinds as inflation weighted on consumer discretionary spending during the current year quarter. Growth was also negatively impacted by 200 basis points related to unfavorable changes in foreign currency.
From a regional perspective, North America net sales were $206.3 million, a decrease in 19.9% from 2021. Other international net sales, which consists of Europe and Australia, were $31.3 million down 2.3% from last year. Excluding the impact of foreign currency translation in North America net sales decreased 19.6% and other international net sales increased 13.8% compared with 2021. From a category perspective, all categories were down in comparable sales from the prior year during the quarter, with men’s being our most negative, followed by hardgoods, women’s accessories and footwear. Third quarter gross profit with $82 million compared to $114.7 million in the third quarter of last year. Gross margin as a percentage of sales was 34.5% for the quarter compared to 39.6% in the third quarter of 2021.
The 510 basis point decrease in gross margin was primarily due to lower sales in the quarter, driving deleverage in our fixed cost, as well as rate increases in several areas. Store occupancy costs deleveraged by 250 basis points on lower sales volumes. Web shipping costs increased by a 100 basis points. Distribution center costs deleveraged by 70 basis points. Buying and private label costs deleveraged by 40 basis points. Product margins decreased by 40 basis points and shrink increased by 30 basis points in the quarter. SG&A expense was $71.5 million or 30.1% of net sales in the third quarter compared to 74.8 million or 25.8% of net sales a year ago. The 430 basis point increase in SG&A expenses as the percent of net sales resulted from the following: 220 basis points in our store wages tied to both deleverage on lower sales as well as wage rate increases; 120 basis points related to other store operating costs, primarily impacted by lower sales levels; 90 basis points in non-store wages and 30 basis points in corporate costs.
These increases were partially offset by a 70 basis point decrease in annual incentive compensation. Operating income in the third quarter of 2022 was $10.4 million or 4.4% of net sales compared with $39.8 million or 13.8% of net sales last year. Net income for the third quarter was $6.9 million or $0.36 per diluted share. This compares to net income of $30.7 million or $1.25 per diluted share for the third quarter of 2021. Our effective tax rate for the third quarter of 2022 is 27.9% compared with 25.5% a year ago period. The tax rate in the quarter is inflated due primarily to the allocation of income across entities and the exclusion of net losses in certain jurisdictions. Turning to the balance sheet. The business ended the quarter in a strong financial position.
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We had cash and current remarkable securities of $141.1 million as of October 29th, 2022 compared to $338.1 million as of October 30th, 2021. The $197 million decrease in cash and current remarkable securities over the trailing 12 months was driven primarily by share repurchases of $183.1 million, resulting in reduction of our shares outstanding over the last year of 17.5%. We also had capital expenditures of $24.7 million, partially offset by cash generated through operations of $26.6 million. As of October 29th, 2022, we had no debt on the balance sheet and continue to maintain our full unused credit facilities. We ended the quarter with $177.2 million in inventory, up 1.2% compared with $175.1 million last year. On a constant currency basis, our inventory levels were up 6.3% from last year.
Overall, while slightly more aged our North America inventory is healthy and continues to sell the favorable margin. Internationally, our inventory is more current than the same time last year, and we have seen margins improved during the quarter. Total sales for the 31-day — no, sorry — now to our fourth quarter to date results. Total sales for the 31-day period ended November 29th, 2022 decreased 23.9% compared to the same 31-day period in the prior year ended November 30th, 2021. Comparable sales for the 31-day period ended November 29th, 2022 were down 24.8% from the comparable period in the prior year. From a regional perspective, net sales for our North America business for the 31-day period into November 29th, 2022 decreased 27.7% over the comparable period last year.
Meanwhile, our international business decreased 4% versus last year. Excluding the impact of foreign currency translation, North America net sales decreased 27.4% and under other international sales increased 7.7% compared with 2021. From a category perspective, all categories were down in comparable sales for the fourth quarter to date, men’s with our largest negative category followed by hardgoods, accessories, women and footwear. With respect to our outlook, 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 that in mind, we are currently expecting the total sales for the fourth quarter of fiscal 2022 will be between $258 million and $265 million.
Consolidate operating profit as a percent of sales for the fourth quarter is expected to be between 3.4% and 4.7%, and we anticipate diluted earnings per share will be roughly $0.36 to $0.51. Now I want to give you a few updated thoughts on how fourth quarter guidance rolls into our fiscal 2022 results. With the first three quarters of 2022 behind us, we remain cautious in how we’re looking at the full year given the operating environment and the current headwinds we are facing. Inclusive of the fourth quarter guidance, we anticipate the total sales will be down in the 20% to 21% range in fiscal 2022 compared to 2021. In fiscal 2021, we achieve peak product margins once again representing our six-year in a row product margin expansion. As we have moved through the first three quarters of the year, we have closely managed inventory and seen only a modest decline in product margin despite inflationary pressures, a promotional environment and mixed pressures between categories and across countries.
We continue to believe we will see some product margin erosion in the fourth quarter and are planning the fourth quarter to be down approximately 50 basis points from the prior year at our current guidance. We continue to manage costs across the business. However, with our current sales projections, we are anticipating deleverage across the fixed cost of the business. We currently anticipate the fiscal 2022 operating margin will be between 2.6% and 3% based upon the drop in sales, inflationary cost pressures and the return to normal for items like mall hours, travel, and training and events. Diluted earnings per share for the full year is currently planned to decrease less than operating profit related to the share we purchased earlier in the year.
We currently anticipate 2022 diluted earnings per share to be between $0.85 and $1. We are currently planning our business assuming an annual effective tax rate of approximately 33%. We are planning to open approximately 33 new stores during the year, including approximately 16 stores in North America, 13 stores in Europe, and four stores in Australia. And we expect capital expenditures for the full 2022 fiscal year to be between $27 million and $29 million compared to $16 million in 2021 with most of the increased tied to the additional stores in 2022. We expect that depreciation and amortization, excluding non-cash lease expense, would be approximately $20.8 million, down 3% from the prior year. And we are currently projecting our share count for the full year to be approximately 19.4 million diluted shares.
With that operator, we’d like to open the call up for questions.
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