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Edited Transcript of ZUMZ earnings conference call or presentation 6-Jun-19 9:00pm GMT

Q1 2019 Zumiez Inc Earnings Call

EVERETT Jun 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Zumiez Inc earnings conference call or presentation Thursday, June 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Codington Work

Zumiez Inc. - CFO

* Richard M. Brooks

Zumiez Inc. - CEO & Director

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Conference Call Participants

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* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* John Dygert Morris

D.A. Davidson & Co., Research Division - Research Analyst

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mitchel John Kummetz

Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. First Quarter Fiscal 2019 Earnings Conference Call. (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. Additionally, 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. Please go ahead, sir.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [2]

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Thank you. Hello, everyone, and thanks for joining us on the call today. With me today is Chris Work, our Chief Financial Officer.

I'll begin today's call with a few brief remarks regarding our first quarter performance, then I'll share some thoughts about the future, before handing the call over to Chris, who'll take you through the numbers. After that, we'll open up the call to your questions.

Fiscal 2019 is off to a good start. Following a challenging February, our business improved in March and accelerated further in April, driven in part by a later Easter. For the first quarter, comparable sales increased 3.3% on top of an 8.3% gain a year ago. This was well above our guidance range of down 2% to flat as sales trends were much stronger than we anticipated over the last 2 months of the quarter. Our recent performance reflects continued outstanding merchandise and customer-focused execution as well as the strength of our financial model that is built to scale through the challenging preference of today's empowered consumer, that has now delivered positive comparable sales for 11 consecutive quarters.

Before I hand the call over to Chris, let me reiterate the key elements of our strategy that we believe separate us from the competition as well as expand upon the primary factors contributing to the strength of our financial model. We have a relentless focus on our customer, which drives all that we do. This starts with having the right product and brands that our customers are looking for, made up of a distinct mix of leading and emerging brands that are not broadly distributed.

We've been able to consistently achieve this balance through the strong relations we've forged with our brand partners. This includes clearly articulating Zumiez' culture-driven lifestyle brand position and showcasing our ability to connect with the target audience in authentic, engaging environment that is uniquely curated by our people all the way down to the local level.

There are many brands important to our selection end customers that may serve only a handful of stores. Our customers want to express their individuality through many different avenues, which can drive unique assortments even at stores only miles away from each other. Over the years, we've spent significant time and resources improving our localized merchandise assortments through investments in our people and technology that enhance the customer experience at each touch point.

Our teams put a significant amount of effort into understanding our customers, not only today, but how they will continue to evolve and will be important to future generations. This thinking is embedded in our culture and is reflected in who we hire and how we operate. This past month, we again brought all our managers together for our annual managers retreat. It's a great event that teaches valuable skills through a multi-year training format that allows our managers to be better teachers and leaders.

It is our belief that this event sends our retail managers back to their stores with renewed energy and enthusiasm for the Zumiez brand and cultural experience. 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 critical -- the next factor critical to our success is speed. We're already faster than most of our competitors due to our decision over 3 years ago to shut down our e-commerce fulfillment center and deliver all digital orders out of our stores. Not only did this concept of localized fulfillment mean we now have only one cost structure to leverage, which we believe is making it easier to expand operating margins in our current results and over the long term, but we can now get product into customers' hands faster by reducing the order processing time, cutting down the shipping distance to the customer, and also offering in-store pickup.

Looking ahead, we are 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 to know our customers even more intimately through improved digital interactions and enhanced in-store experiences.

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

Our expansion has established a strategic physical presence in 7 countries across 3 continents, with a digital platform that allows us to reach even further. We are applying learnings and best practices from each of our markets to ensure that we are on top of the latest fashion trends and brand cycles, which can now launch from anywhere in the world and quickly spread globally due to the proliferation of smart devices and social media.

With regard to our financial model, we believe 2 key factors that contributed and will continue to contribute to our ability to drive long-term financial results: first, as a lifestyle retailer, we've built our business to be exceptionally nimble, continuously evolving with customer trends and preferences. The capabilities we have built continue to provide us with a defensible strategy in maintaining and growing share with our segment of the teen market that seeks to be unique and different.

The first quarter, again, has highlighted this for us as we saw a category shift in our business globally, with footwear and hardgoods leading the comparable sales trends, while men's and women's apparel have shown softer results. This is a meaningful change from 1 year ago when we saw the apparel categories driving our positive comparable sales.

Overall, the goal continues to be selling at full price and full margin, while listening to the customer with regard to the categories and brands they want to see at Zumiez. This focus has resulted in growth of comparable sales in 34 out of our 40 years and is something that we believe will continue to be an advantage into the future.

Secondly, as we transition into the digital age, we have done a tremendous amount of work, creating an operating model that positions Zumiez to win with today's empowered consumer by combining our digital and physical sales channel to work seamlessly in service of our customer.

With one inventory that is accessible from all customer touch points, integrated sales teams, aligned goals and value set, and localized fulfillment, we are well positioned to scale the business in today's integrated world.

This strategy paid dividends in 2018 as we increased operating profit by 25.3% on a 5.5% growth in revenue. And we've continued that trend into the first quarter of 2019, delivering diluted earnings per share of $0.03 versus our guidance for a loss between $0.13 and $0.07, and up from last year's $0.10 loss.

With our distinct approach to retailing, authentic brand positioning, a strong financial model and balance sheet, I'm confident that we are set up well to continue capturing market share and generating increased value for our shareholders in the near and long term.

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

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Christopher Codington Work, Zumiez Inc. - CFO [3]

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Thanks, Rick, and good afternoon, everyone. I'm going to start with a review of our first quarter, and then provide an update on May sales, before discussing our second quarter guidance and some perspective on the full year.

For first quarter, net sales increased 3.2% to $212.9 million compared to $206.3 million for the first quarter of 2018. Contributing to the increase were positive comparable sales growth of 3.3% and the net addition of 7 stores since the end of last year's first quarter, partially offset by a decrease of $2.7 million due to changes in foreign currency rates.

As we discussed in March, during our Q4 and fiscal 2018 results conference call, February sales started out slow, impacted both by delayed tax returns and an overall slowdown in retail, with comparable sales down 3.8% for the period. Looking at fiscal March and April 2019 combined to remove the impact of the Easter shift, the business rebounded for the last 2 months of the quarter, producing comparable sales growth of 6.4% over that time frame, compared to 7.9% over the same period last year.

During the 2019 first 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 unit retail, while units per transaction were flat to the prior year. During the quarter, the footwear category was our largest positive-comping category, followed by hardgoods and accessories. Women's was the largest negative-comping category followed by men's.

From a regional perspective, North America net sales increased $6.7 million or 3.7% to $188 million. Other international net sales, which consists of Europe and Australia, decreased $0.1 million or 0.2% to $25 million. Excluding the impact of foreign currency translation, North America net sales grew 4% and other international net sales grew 8.6% for the quarter.

First quarter gross profit was $66.5 million, an increase of $3.9 million or 6.2% compared to the first quarter of 2018. Gross margin was 31.2% in the quarter, an increase of 90 basis points compared to 30.3% a year ago. The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, 20 basis points decrease in shipping and fulfillment costs, and 10 basis point improvement in product margin.

SG&A expense was $65.5 million in the first quarter compared to $64.3 million a year ago. SG&A as a percentage of net sales was 30.7% compared to 31.1% in the prior year. The 40 basis point decrease was driven by leverage in our store operating costs.

Operating income in the first quarter of 2019 was $1 million or 0.5% of net sales compared with the prior year operating loss of $1.7 million or 0.8% of net sales for the first quarter of 2018. Net income for the first quarter was $0.8 million or $0.03 per share compared to net loss of $2.6 million or $0.10 per share for the first quarter of 2018.

Our effective tax rate for the first quarter of 2019 was 59.8% compared with a negative 36.6% in the year-ago period. The change in tax rate was primarily due to the exclusion of net losses in certain jurisdictions and the proportion of earnings or loss before income taxes across our jurisdictions. We continue to anticipate that our annual effective tax rate will be approximately 27%.

Turning to the balance sheet. Cash and current marketable securities increased 42.4% to $168 million as of May 4, 2019, up from $118 million as of May 5, 2018. This increase was driven by $79.1 million in cash flow from operations, partially offset by $20.1 million of capital expenditures primarily related to new store growth and remodels.

We ended first quarter 2019 with $136 million in inventory, up 6% from last year. Excluding the year-over-year impact of foreign currency translation, inventory grew 7.7% from the prior year, driven primarily by our recent sales trends, increased global store count, and the timing of inventory receipts during the quarter. Our overall aged inventory as a percentage of total inventory is down from this time last year.

During the first quarter, we did not repurchase any shares of our common stock. As of May 4, 2019, we had $75 million remaining on our stock repurchase authorization.

Now to our fiscal May sales results. Our comparable sales increased 2.4% during the 4-week period ended June 1, 2019, compared to the comparable sales increase of 7.5% for the 4-week period ended June 2, 2018. The comparable sales increase was driven by an increase in dollars per transaction, partially offset by a decrease in transactions. Dollars per transactions increased for the 4-week period due to an increase in average unit retail, partially offset by a decrease in units per transaction.

During the 4-week period, the hardgoods category was our highest positive-comping category followed by footwear. Men's was our largest negative-comping category followed by accessories and women's.

Looking at guidance for the second 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. Additionally, the following guidance for the quarter as well as the commentary on the year, do not contemplate the impact of changes in global tariffs. We are actively working with our vendors to minimize any potential impact on our customers.

With that in mind, we currently expect that comparable sales will increase between 0% and 2% for the second quarter of 2019 with total sales in the range of $220 million to $224 million. Consolidated operating margins are expected to be between 2.2% and 3.2%, and we anticipate earnings per share will be between $0.14 per share and $0.20 per share compared with last year's earnings of $0.17 per share.

Now I want to give you a few thoughts on how we're looking at 2019. We are now building on 11 consecutive quarters of positive comparable sales. 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 team will drive long-term top and bottom line growth.

With that in mind, we are reiterating our expectation of consolidated comparable sales growth in the low single-digit range for fiscal 2019. In fiscal 2018, we achieved peak product margins, improving from the previous high point in 2017 despite a heavily branded cycle, resulting in reduction of private label share of 370 basis points. In fiscal 2019, we now believe that product margins will be roughly flat, despite both category and country mix shifts across the business.

We continue to manage costs across the business. The mature concepts of North America are focused on leveraging at a low single-digit comparable sales point. Internationally, we are focused on managing costs well within our current sales and unit growth rates and driving our concepts closer to breakeven, reducing the impact of 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 full year are currently planned between $1.84 to $1.94 or 2.5% to 8.5% growth year-over-year. We are planning to open approximately 15 new stores in 2019, including 6 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 $20 million and $22 million compared to $21 million in 2018. The majority of our capital spend will be dedicated to new store opening and planned remodels.

We expect that depreciation and amortization excluding noncash lease expense 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.

And with that, operator, we would like to open the call up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Sharon Zackfia with William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [2]

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Congratulations on the continued positive comps. I guess a couple of questions. First, I mean, obviously, you had a good May relative to what we're hearing out there. I'm a little surprised, given the comparisons are a little easier throughout the remainder of the quarter that you had, I think, flat as the low end of the range for the rest of the quarter. So maybe if you could talk to that. And if there are any trends you're seeing that are worrisome coming out of May?

And then, secondarily, anything you could tell us about how you think weather might have impacted apparel? And clearly, it looks like you're having some shift towards different categories, but I have to imagine there was some sort of dampening impact, pardon the pun, on the apparel business recently.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [3]

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Let me start with that side, and I'll let Chris, Sharon, pick up on the guidance question.

So I'm going to just harken back to what some of the comments I made earlier here on the call about the strength of the model. And I think weather did probably have an impact, generally. But the great thing about our business is that we want to capture wallet share of our customer. And so we find ways to do it I think that a lot of retailers can't, and I think that's the really cool thing about what you're seeing about our Q1 results as well as the May results at this point, is there's clearly been a shift, and as we said in the call, that shift has been a shift across all of our global entities, which I think is, again, just further evidence that global trends, global cycles, they work together because of the power of media and social media today.

So I want to get a comp anyway I can get a comp, Sharon. You know me well enough on that front. So I'm happy to get it anyway we can, and I'm thrilled that our model allows us to do that. I think weather probably has been a factor, but retailers like to use weather excuse. I'm not saying we haven't in the past, but I'm going to go with that for right now that we're going to be happy with where we're at and we'll take the gains the way we can get them, good weather or bad weather.

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Christopher Codington Work, Zumiez Inc. - CFO [4]

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Yes. And in regards to the guidance and planning sales to that flat to positive 2% comp level, obviously, we're happy with how May started out, too. And our focus is always to drive a comp as Rick said. I think we look at June as there should be some potential opportunity there. June was softer for us last year. It was a 2.6% comp, but July was a 9% comp. And so we are kind of factoring in that July could be a little tougher. But again, we're focused on driving the comp year-over-year. And we're pretty happy with where we stand from an earnings perspective. Even having lost $0.17 last year -- or sorry, made $0.17 last year and guiding at the high end of our range to $0.20, I think it shows that even on a low comp point of positive 2%, we can still leverage the business in these low periods.

So overall, I think we're feeling pretty good. The flat on the back end, we develop a range. Our goal would always be to beat the range. But we're just kind of looking at how we compare those to last year, and where we think we can drive the comp.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [5]

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Just one follow-up. Do you have any back-to-school shifts that impact July?

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Christopher Codington Work, Zumiez Inc. - CFO [6]

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No. There are no significant back-to-school shifts. Obviously, we're still working through all the tax-free weekends and things like that, but what we know to date are there are no significant changes that would move from August into July.

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Operator [7]

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And our next question will come from the line of Jeff Van Sinderen with B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [8]

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Let me add my congratulations. Do you think -- and I feel like the weather is talked about too much, but do you think that the weather means that maybe there's some pent-up demand for apparel over the next few months? And then I know you micro merchandise and differ by store, but anything more you can share on the evolving picture in terms of brands you see leading the charge for you in the remainder of 2019? Any broad shift brewing this year versus last year on brands? And then can you update us on how you're thinking about your footwear business as back-to-school approaches?

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Richard M. Brooks, Zumiez Inc. - CEO & Director [9]

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Right. Great. Thank you, Jeff. Again, yes, I think that's the way weather cycles work. If you miss in one period, you tend to get some back. I don't believe you get as much back, frankly, when you miss the windows. And that's why I think already today, what you're seeing in the mall is a lot of pressure on, not in our store, to be clear, but a lot of pressure on the seasonal categories in terms of markdown rates. There's a lot of swimwear that's heavily marked down already in the mall.

Again, I think it's strength of our model. I think we think things -- about things a little bit differently. Our seasonal business can go, I think, longer than a lot of what retailers' seasonal business can run, in terms of through back-to-school in early September, so I think we have some advantages that others don't that we don't have to be quite as promotional in those regards. But my general take -- that's my general take on the weather, Jeff, is yes, you do get some back, but I don't think you ever get -- you don't ever get it all back is the problem.

As it relates to our brand positioning, as we look forward to particularly the back-to-school cycle, I think we're feeling great about where we're at with our brand partners. We're still continuing to launch a lot of new brands. But at the same time, I would tell you that the rotation we've seen here in Q1 and in May, where we've had new categories of product take the lead. This is -- we've seen this many, many times over the years that these are cycles we go through. Again, it's the strength of our model. It's why I'm happy with how nimble and fast we're able to move on these things.

And we can adjust really quickly like we have, relative to the skate hardgoods business here. And in footwear, as you know, we had a 5-year negative cycle. Now we're in a couple of year positive cycle. So I think footwear cycles tend to run in longer windows than fashion cycles, just because of the nature of the footwear business.

So we're going to go, as I said in response to Sharon's call, we're going to go wherever the sales gains are and we're going to go get them. And I think at back-to-school, we'll -- if we feel good with our hardgoods brands and I think we'll be able to provide a lot of value for our customers that want value also in the back-to-school window. So I think we're well positioned, and I like the way our team has planned it out.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [10]

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Okay. Great. And then if I could just add one more on, could you give us sort of a brief update on the international trends and the outlook there?

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Christopher Codington Work, Zumiez Inc. - CFO [11]

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Sure. Yes. We could -- as it relates to Europe and maybe I'll just touch high level on all of our international. Canada in Q1 was very strong in relation to the consolidated comp, was certainly a driver. Australia performed roughly in line with the consolidated comp, and Europe was generally flat. And as we think about Europe, I mean, I'll sort of reiterate some of the things I said from Q4, and then kind of give a quicker update on kind of where we stand today.

I mean, we still feel really good about where we stand in Europe. As we think about 2019, this was -- our Q1 was our toughest period of compares. So I think we performed pretty well in the first quarter, given kind of the circumstances. This is a business that we have -- we drove to kind of breakeven in 2015, and then kind of got a little bit tougher over the last few years, but we're starting to see it move in the right direction and 2018 was stronger than the year before it. So we continue to kind of push forward here.

As we relates to Q1, this was a business that even on a flat base comp was leveraging to the prior year. And I think that's something we're pretty excited about and shows how we're planning it to drive even in the tough times as well as in the good times where that can flow through. And for May, it was actually a driver of our comps. So it had pretty strong results in May.

So we're feeling good about where we stand in Europe. And I think the teams are well positioned and we have the right strategies in place. And we're excited to see how it performs as we move through the year.

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Operator [12]

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And our next question will come from the line of John Morris with D.A. Davidson.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [13]

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Congratulations on the really good beginning to the year here. I guess if I step back and look at it, Rick, so impressive with the delta on the comp, how much better it was relative to your plan. So I'm thinking kind of from a qualitative bigger picture standpoint, you must have been surprised. I'm wondering if you can give us a sense of where you were surprised on the out-performance. By category, we continue to see footwear and hardgoods or at least the category performance kind of continued directionally the same, overall. So I'm wondering if you step back and look from the big picture what -- where -- some things must have surprised you, whether it was geographically or certain more specific areas from a product perspective. And I'm wondering if you can kind of shed some light there relative to the plan.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [14]

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Yes. I think I'll talk about probably more from the sense of timing, and I'll let Chris add his comments too, John. I think we, pretty much from a category perspective, it played out as we thought it would and -- with the adjustment around, obviously, I mean, we were prepared for footwear to continue to run the way it was. The speed that skate changed, that skate hardgoods became a driver, was pretty remarkable, but our teams did a great job -- again, skate is a very, actually, quick turn business for us. So we are able to work with our brand partners and really get back in the business that we started to blow through products so quickly. So that's that nimbleness when we talk about the model that we really -- is really pretty remarkable.

Now -- and likewise, with apparel running down, we were also nimble on that side because so much of the business is printables. So I think that's how we can end the quarter with inventory being so incredibly clean, in terms of even a big transition period like this. What did surprise me in Q1, I don't think -- when we talked to you in March that we realized the bounce back was going to be as big in the weeks after our call, and then in -- with the Easter shift. We really had a good, strong, relatively speaking, March post the call, and a really good, really strong, April.

So that's, I guess, was -- I'll give the credit to our teams, both in-store and our product teams for -- and our marketing teams, for the drive and the push there and -- but we just -- we were surprised by the strength that we hadn't anticipated, considering how tough February was, as Chris said, relative to what we think was weather-delayed tax refund. So all those things kind of rolled in, but it just got consistently better. And so that would be my surprise, John, not in the sense of surprise relative to product, but just in relative to the strength of the bounce back from the February results.

Chris, you have anything else?

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Christopher Codington Work, Zumiez Inc. - CFO [15]

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No. Nothing additional on my side.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [16]

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Okay.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [17]

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Well, that gives really good perspective, Rick. Maybe -- okay, so talk about tariffs quickly here. I mean, I think we've all heard too much about it. Remind us what you're thinking about in terms of China and the sourcing? I think -- well, maybe just revisit for us how much of the total product assortment, whether it's you or third party, is coming from China? And I hate to ask now about Mexico, but if you have any kind of a read for us on what maybe -- what percentage may be exposed for Mexico. And then how -- is there any evolution in your thinking of how best to handle those kinds of pressures, kind of the mechanisms or the handles that you'll pull to deal with it?

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Christopher Codington Work, Zumiez Inc. - CFO [18]

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Sure, John. I'll go ahead and take this call. And as you know, this is one that all retailers, and we are definitely aligned with them, are following very closely. Retail pays sort of a disproportionate amount of tariffs as it reads today anyway. But this is a global society. And our estimates and everything we've read is there are large percentages of apparel are being made in China. And footwear, I should say, and globally, it's predominantly all of footwear and a large percentage of apparel.

So this is a challenge for all of us. We continue to monitor this really closely. So let me kind of start with where we stand today with the tariff situation in regards to what our exposure has been to date, actual exposure for raised tariffs. About 7.9% of our U.S. sales and 6.5% of our consolidated sales are coming from China and have been -- we will have already seen increased tariffs, and that really relates to hats, beanies, belts, backpacks, wallets, other accessories, things like that in those categories.

So like all retailers, we've been working to reduce this. To date, the increased tariffs haven't had a material impact on our product offerings, pricing structure, but if this is expanded, it's a much more difficult situation for us. So to get to your question of kind of what is our exposure today, in Q3 last year, we talked to you about where we were at and said from a both branded and private label combined, about 60% of our product, domestically, was coming out of China. That today, in the first quarter, was down to about 45%. So you can see there's been a pretty concentrated effort, both on our parts and our brands' parts, to diminish that risk, but that's still a big portion of our domestic offering here.

So it's something we are working actively to manage here. So we do expect if the additional tariffs are levied on the next group here or the next list, that will be impactful to us, but 45% is sort of the exposure today. In regards to Mexico, this is a scenario that we believe is a good place to move things specifically from a speed perspective. And again, kind of putting the customer at the center, having product there and being able to get it quickly is an important part. About 12% of our product in the first quarter was sourced out of Mexico.

So again, we're monitoring that as well. From a how-we-handle, it's going to be a case-by-case situation. We're working with our vendors and our buying team and sourcing teams are actively managing this. Overall, we believe there will be an increased cost to the consumer. I think that's, generally, where it's going, how much and where that's going to play out from a pass-along perspective have all got to be determined and something that will probably depend on a category by category, brand by brand basis, all depending on what's happening within the market.

So we're working -- a lot of time put behind it, and we'll kind of see where it goes.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [19]

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Well, that's great progress on China and great results here to start to the year. Good luck going forward.

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Operator [20]

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And our next question will come from the line of Mitch Kummetz with Pivotal Research Group.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [21]

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I've got a few. So first on the guidance. Chris, help me understand. So you guys beat the midpoint of your guide in Q1 by, I think, $0.13, but you're not raising the range for the full year. I'm just hoping you can kind of reconcile that for me.

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Christopher Codington Work, Zumiez Inc. - CFO [22]

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Sure. Yes. I think, for us, we gave a pretty wide range on annual guidance. And it's not -- it has not been our pattern to give annual guidance, but we thought it was important, given the state of retail and where we're at today, and we have pretty good confidence on the trajectory of the business. So we laid out $1.84 to $1.94, which was 2.5% to 8.5% earnings growth.

We have about 21% of our year behind us. And as we've said on the call, we're really happy with our current position, but we've got a long way to go. So at this point, we definitely feel comfortable with the high end of our range as far as for annual guidance, but there's a lot of uncertainty out there and we've got a long way to go. So I think for us, we felt like, okay, we're very happy with Q1. As I said, we feel comfortable with the high end of the guidance. And as we move through the year, we'll continue to update you if we have any new thoughts on where we're going to end the year. But with 21% behind us, we didn't think it was time to revisit those numbers.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [23]

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Got it. And then on the -- on Q2, on your margin guide, looks like the midpoint of your margin guide's down a little bit from last year. Maybe you could kind of walk us through some of the puts and takes on the margins in Q2. And I'm wondering if some of the category mix shift to hardgoods is hurting on the margins a little bit.

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Christopher Codington Work, Zumiez Inc. - CFO [24]

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Sure. Yes. And specifically with product margin for our Q2 guidance, whether you're on the high end or the low end, there is a little bit of pressure on product margin. And I'll tell you it's really 2 factors that are laying into that, the first being product mix and you mentioned it. Obviously, footwear and hardgoods have not been our historical higher-margin categories. They've been on the lower side. So as those 2 gain share within the business, there is a little bit of pressure.

That being said, we've run margin gains in those areas, and I think that's a testament to our buying teams and the work they're putting in. The other piece that's pressure on margin is our international business is growing at a faster rate than our domestic business. And obviously, that's planned. You know the majority of our store growth is there and there's a lot of opportunity there. But the growth rates are higher there and our international business runs at a lower product margin. And that's something we think is an opportunity over the long term, but it's a more fragmented market. There's a lot of distributors in the market and that leads to just a lower overall product -- or product margin.

So yes, I think those are the 2 factors that are leading to it. I think where we're really happy is on a 2% comp, we're showing $0.20 of earnings compared to the $0.17 where we were a year before. So there is growth on the low-margin -- or on the low comp, despite having some product margin pressure.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [25]

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Okay. And then, lastly, Rick, a question for you. On branded apparel, I know you guys sell -- I mean, you sell some large national kind of heritage brands. And then, obviously, you sell a lot of smaller, more sort of local unique brands. And I'm wondering as you look at the apparel performance of late in the quarter, are you seeing much of a difference kind of if you sort of split the business along those lines? Is one side trending better or worse than the other?

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Richard M. Brooks, Zumiez Inc. - CEO & Director [26]

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The heritage brands, let's ignore the big footwear brands as a general comment. And the heritage brands just aren't a significant part of our business is the headline. So that, I think, should answer your question, Mitch. It's really being driven by trend, by the trend brands, and then by the new brands.

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Operator [27]

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(Operator Instructions) And our next question will come from the line of Jonathan Komp with Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Just wanted to ask one follow-up on the -- some of the comments around the hardgoods performance. So I just wanted to maybe understand what drove the performance there. And was there anything that was unique or that we shouldn't expect to continue? I'm just curious for more color there.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [29]

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Jonathan, we have been on a multi-year negative cycle around skate hardgoods. And I wish I could tell you, we have been racking our brains at all of our businesses around the globe, and ask everyone what was the trigger that turned skate hardgoods on. And we don't really know. All I -- all we know is that virtually almost simultaneously, that category of business just took off. And this is the nature of modern trends. I think we hit the bottom, and we just have seen this major uptick in it. I think skate hardgoods cycles tend to be multi-year cycles is our experience.

I should indicate, as we often do, you can see it when we give annual mix, is skate hardgoods' mix of our business was actually near a 10-year low, I believe. And so we have a lot of room for growth relative to mix share gain of our business, I think, over the next few years as these cycles play out.

So I wish I could give you a catalyst and say, oh, this was it. This drove it. It just all clicked on and it clicked on in every -- virtually every category of the department. So it was across the board components, cruisers, long boards, pretty much gains across the board in all geographies. This is the nature and the power, I think, of being -- of having global trend cycles, and why we want to be there to take advantage of those global trend cycles.

So it's pretty remarkable, and -- but this is again, the nature of the business. We expect -- it's not like we haven't seen this in years past. We have seen these cycles. That's why skate hardgoods is our peak at -- in '15 of just about, I think, of where our mix was. And now we've seen that reshape in a couple of few tough years, and now it's coming back at it. So this is the nature of our business. And again, I think great businesses go where the dollars are, and that's what we're doing.

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Christopher Codington Work, Zumiez Inc. - CFO [30]

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And Jon, just to add some color to Rick's comment. We were about 14% when we peaked in hardgoods in 2015. And in 2018, we landed at about 10%. So you can see there is quite a bit of growth potential for the category, and we were obviously excited about the results.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Okay. Maybe just one follow-up. Is there a seasonality to that business at all? Just as we think near term?

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Richard M. Brooks, Zumiez Inc. - CEO & Director [32]

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Yes. There is some, but it's a consistent business year-round. Obviously, typically, the spring tends to be a strong cycle to skate hardgoods. It is still a significant part of back-to-school. Particularly, will sell decks for kids going to college, right? That aspect of it and -- it's clearly still strong. It moves up and down on the perspective. And then of course, at holidays, it's a gift-giving item. And so we'll see it be a factor for us in the holiday relative to gift-giving.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Okay. Understood. And then maybe just a broader view. I know you implied some targets in the near term and for the year, for margin. But how are you thinking about kind of the leverage points on either gross margin or overall operating margin, kind of tied to same-store sales and the levels that you need today?

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Christopher Codington Work, Zumiez Inc. - CFO [34]

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Yes. I mean, I think it's going to be broken into 2 factors. As we think about kind of our North America business, which is relatively mature at this point is not a large unit grower by any means. We are looking at kind of that low single-digit and trying to find ways to leverage on it. And I think that's why you're seeing us able to do it at our guidance level and because we're very focused on seeing gross margin grow as a percent of sales and seeing SG&A grow at a rate less than sales. And so that's yielding pretty good results here in North America.

And on an international perspective, the overall revenue growth is higher, both a function of the comp as well as unit growth across both Europe and Australia. And then it comes down to really managing expenses in a growth model. And if you can do that, you see pretty significant flow-through of those incremental sales. So I think that's what we're seeing. And as we think about kind of what that means from a leverage point, you can see on that low single-digit comp, we're looking at 8.5% earnings growth on the top side. So certainly managing it, I think, pretty well with those types of ratios and something that we think we can do over the long term here.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [35]

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Jon, I'd just add to Chris' comments that we believe that we have still a lot of opportunity around optimization. And when we talk about it, we always talk about localization and optimization as a combo. And the 2 things work together. We can be better, faster, and localize fulfillments -- great example of this. We can be better, faster, in serving customers, and actually optimize performance in doing it from a cost perspective.

So we think that -- I know the North American team has many initiatives around this combination thought of how do you localize and optimize your business simultaneously, serve customers better, and reduce your cost structures? So we're going to continue that drive and that's why I think why Chris feels pretty good about where we're at. I think we have some opportunity, and I think we actually -- we have some multi-year opportunities in this regard.

So that's part of what we're reaping the benefits of something we've done, and we're going to continue executing against new ideas here this year, and in the next couple of years.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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And maybe just last one if I could. Any thoughts on the buyback? And maybe any perspective on why you didn't take care of some of the -- or take advantage of some of the market volatility to buy any stock?

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Christopher Codington Work, Zumiez Inc. - CFO [37]

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Sure. Yes. I mean as we said in our prepared remarks, we have a $75 million buyback outstanding. We regularly review this with our Board and have a pretty clear strategy with how we're operating. I mean, we still believe that buying back our stock is a very good investment. It's a good investment in ourselves that I think will pay dividends over the long term to our shareholders.

That said, we continue to be very opportunistic buyers. We believe there's a lot of value and -- but there's also a lot of historical volatility in our stock. And we should -- the stock has shown that there can be a wide -- wide swings. So those things, coupled with just being a smaller stock that gets tied to the wave of some of the macro retail trends, we're going to be pretty opportunistic buyers. And I think if we can do that right over the long term, we can really maximize shareholder value.

So our strategy is really focused on that. We work really closely with our Board on a quarterly basis, if not more often discussing it, and we'll find our spots.

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Operator [38]

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(Operator Instructions) And I'm showing no further questions at this time.

So now it is my pleasure to hand the conference back over to Mr. Rick Brooks, Chief Executive Officer, for any closing comments or remarks.

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Richard M. Brooks, Zumiez Inc. - CEO & Director [39]

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All right. Thank you, Brian. And again, I just always as I like to, say thanks for all your interest in Zumiez. We will always appreciate the opportunity to talk with our shareholders and investors.

So thank you again, and we'll look forward to talking with you post Labor Day for the second quarter results. Thanks, everybody.

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Operator [40]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day.