Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Fourth 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 the 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 will now turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead.

Hello and thank you everyone for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few brief remarks regarding our fourth quarter performance. Then I'll share some thoughts on how we're thinking about the current operating environment before I hand the call to Chris who will take you through the numbers. After that, we'll open up the call to your questions. We delivered our fourth consecutive successful holiday quarter concluding the year in which we drove sales over $1 billion, delivered the highest earnings per share in the history of our company. Fourth quarter comparable sales increased 6.4% compared to our original guidance of 2% to 4% marking our 14th consecutive quarter of positive gains. This comes on top of the 3.9% increase a year ago, a 7.5% gain the year before that and a 5.1% gain the year before that. Solid full-priced and full margin selling in each of our geographic regions, combined with the benefits from numerous expense savings initiatives we've implemented throughout our organization drove a 25% increase in earnings per share to a $1.48, $0.16 above the high-end of our original guidance range. For the full year, comparable sales increased 4.9% on top of 5.6% last year and 5.9% the year before that, while diluted earnings per share improved 46% or $0.83 to $2.62. Our success in progressively increase in sales with double-digit growth and profitability in recent years underscores the power of our business model, our relentless attention to serving our customers, the strength of our people and our strategic initiatives put in place over the last decade. During the last few years, earnings calls, I've discussed Zumiez’s short-term results are directly attributable to the execution of the long-term consumer centric growth strategy…

Thanks, Rick and good afternoon everyone. I'm going to start with a review our fourth quarter and full year 2019 results. I'll then provide an update on our February sales trends before discussing our first quarter guidance and some perspective on how we're thinking about the full year. Fourth quarter net sales increased $24.2 million or 79 – 7.9% to $328.8 million from $304.6 million in the fourth quarter of 2018, contributing to this increase were positive comparable sales growth of 6.4%, the net addition of 11 stores since the end of last year's fourth quarter and an adjustment to deferred revenue related to our STASH loyalty program where $2 million partially offset by a decrease of 1.1 million due to changes in foreign currency rates. During the 2019 fourth quarter, our comparable sales were driven by an increase in transaction volume as well as an increase in dollars per transaction. The increase in dollars per transaction resulted from higher units per transaction, partially offset by a decrease in average unit retail. During the quarter, the hard goods category was our largest positive comping category, followed by men's, accessories and footwear. Women's was our only negative comping category. From a regional perspective, North American net sales increased $20.4 million or 7.8% to $280.9 million. Other international net sales, which consists of Europe and Australia increased $3.8 million or 8.5% to $47.9 million. Excluding the impact of foreign currency translation, North American net sales grew 7.7% and other international net sales grew 11.6% for the quarter. Fourth quarter gross profit was $128.3 million an increase of $14.4 million or 12.6% compared to the fourth quarter of 2018. Gross margin was 39% in the quarter, an increase of 160 basis points compared to 37.4% a year ago. The margin improvement was driven…

Thank you, sir. [Operator Instructions] I see our first question comes from Janine Stichter from Jefferies. Please go ahead.

Hi, good evening. Thanks for taking my question. So first on coronavirus; I know there's probably not too much you can say, but if you could just give us any sense of the line of visibility you might have into the product pipeline and potential supply chain disruptions, that would be really helpful? And then I have a follow-up just on the broader business.

Alright, let me start. And I'll kind of maybe give you a little bit of sense, Janine, how we're responding in the market today. And then I'll ask Chris to give you a little bit more detail about the potential impacts to the business. So as you said in the comments, we – this has continued to be a really fluid situation and of course what we're seeing every day is that there's more change and the change is happening much more quickly. And the health and welfare of our customers and employees is what we're really laser focused and is the most important thing for us as we think about the impact. Like others we are actively following the guidance of the CDC and local health authorities. We have set up internal teams both here and in Europe to address all the scenarios across our entities. And to date, we are not aware of any confirmed cases within our company, but we have taken a number of steps. And let me just give you a few examples of what those steps – examples of what those steps include. First, we've eliminated all non-essential travel. We've canceled or postponed all large internal meetings. We've changed cleaning protocols across the entire company and we're allowing people to work from home where that is applicable to their role in their function. So with that is kind of the top headlines. Let me turn it over to Chris who will give you a little bit more sense about how we think or what we think the potential impacts may be. Chris?

Yes. Thanks, Rick. In regards to results and how it's impacting the business, we really kind of break this down into two sections. I think you have to look at the supply chain perspective and then obviously the customer demand perspective. So let me start with supply chain. We are working really closely with our brand partners as well as our vendors that we use for our own private label merchandise to monitor the supply chain. We're being really cognizant of what changes need to be made. As we've communicated to you over the last few quarters we've worked pretty hard to reduce our alliance on China, obviously due to the tariff issues and other aspects. And we currently saw Q4 receipts right around 40%, which was down from about 42% or 43% at the end of Q3 and down from almost 60% a couple of years ago. That said it's truly a global economy and we are aware of instances in our supply chain, there is strain from the lack of raw materials coming out of some of these impacted areas. Overall, we do expect some level of slow down but we're working through it. As you saw from the results we just released in our prepared remarks, our inventory growth at the end of the year did factor some of that hit. As we started to see this hitting China in January, we made a strategic decision to try to pull forward some inventory into the year and probably had a favorable impact in February as well. We're working closely with our brand partners and supplementing where needed. We're also aware of cost pressures as things get back up and running and we expect to see some potential cost challenges due to demand in both air freight and…

That's really helpful color. And I just want to ask about the hardgoods business, it’s been really strong for a few quarters now. Just give us some thoughts around what's behind that? And then any mix shift we should be aware of because I believe that's a little bit of a lower margin category? Thank you.

Alright. Again, I'd be happy to address the hardgoods business for you and Janine in particularly again, I wish I could tell you what it was that triggered it. We have racked our brains over the last year. You'll remember it was about this time last year we started really seeing our hardgoods – our skate hardgoods business really take-off and across to be clear, we saw it take off across all of our global businesses. So Australia, Canada, the U.S., Europe, almost coming down to the same week, saw skate hardgoods really started growing pretty dramatically. So we've looked at while we've add to what the trend was and there was some trigger point, which is sometimes we'll see that, but the answer that we really don't – we really couldn't identify one across all the businesses. So for me, this represents is just, you’ll remember that we had four years of negative skate hardgoods business. To me it was just a switch in the cycle and the generation of the consumer. And that's again why we saw this take off across all of our business platforms and just really accelerate. Now, for – again as suppose to just focusing on the hardgoods category itself, I guess I'd like to back up and look at the question a bit bigger too. Because why we're thrilled about hardgoods we also have other business got softer in the process. So for me this is actual – this is actually what is usually how our business works and why we're not going to – we never really talk about physical brands within departments of categories relative to the results. It's because the business model itself, this is what's supposed to happen in our business model. We actually anticipate and expect that we're…

Yes, absolutely. I'll try to put some quantification to what Rick saying and I think it is really important. I know Rick laid out some of the prior year comps in our prepared remarks, but I think when you think about this over a multiyear period, I mean this is really, since the back half of 2016 we've been running really strong results. In 2016 the real turning point for us started in men's and then women's apparel. And apparel drove those comps and while we were roughly flattish in 2016, 2017 was a 5.9% comp; 2018 was a 5.6% comp and now 2019 is a 4.9% comp. So that gives you a 16.3%, three-year stack. And if I think about that stack really the first couple of years we’re really apparel driven and we saw apparel drive to almost are actually over 50% of the business when I took men's and women's apparel together. What you'll see here when we report our 10-K and our category performance is, you'll see this year was heavily driven by hardgoods and now footwear as well. So I think what's interesting in that is, it just speaks to what Rick saying with hardgoods grabbing almost 300 basis points of share of total sales and footwear another 100 basis points and the donor is really being the apparel side and it speaks to the magnitude of what Rick's talking about. At the end of the day, what's most important for us is driving comp and we've seen this over time, we've seen these categories move-up and down as the consumer preferences change. And we see that within our Top 10 and Top 20 brands. And we've talked about this really as part of this call every year that we expect to see 20% or 30% turnover in our brands. 2019 was no different than years prior. One other thing about the last couple of years is, it’s been a heavily branded cycle and we've seen the concentration of our Top 20 brands continue to concentrate, meaning there are higher percentage of our overall sales. That being said, history will tell us at some point we'll de-concentrate and that moves in waves. And so neither thing is really a bad thing to our business. It's really just what the customer wants and we're happy to move with them and overall we really measure ourselves on those overall comp numbers. So...

Private-label?

In private-label also declined as a percent of the business. And I think that's something that we called out as far as what we're really excited about is we've seen margin actually increase here. 2019 was again, our peak performance. This is like the third year in a row that we've seen margin grow to our peak performance despite the fact that private-label decreased another 200% as a share of the business. Now we don't see that as a negative on our private label business. Actually what we see more is the focus on the branded side of our business. So we'll go in these ways. I'm sure we'll be in a way at some point in the future where the brand style may not be as important as maybe a look and private-label could play at a higher penetration point. So we'll continue to push that and go where the customer takes us.

Helpful color. Thanks a lot.

Thank you. I show next question comes from Jeff Van Sinderen from B. Riley FBR. Please go ahead.

Hi everyone. I know you mentioned Austria, but what are you seeing more broadly in Europe in the last couple of weeks if you can comment on that?

Yes. Jeff, I'll go ahead and take that. I think when we think about Europe overall, and let me – let me take a step back and just talk about Europe for 2019 and kind of where we stand today. And then I'll briefly touch on what we've seen here most recently out of Europe. So we've talked about this over prior calls. I mean really to grow Europe to what is today and take a meaningful investment. And you guys know this is something we've been talking about for many calls now, and we believe that investment has really put us in a place to capitalize on the European marketplace. We’re including a real strong network of stores and webs in five distinct countries now as well as a web platform that reaches all across Europe. We at this point think we are probably the largest lifestyle retailer in Europe. 2019 represent a really solid year in Europe full-price selling and we continue to be really pleased with the trajectory of what we're doing, including our stores in Germany and Switzerland, which we would classify as kind of maturing markets. Still have some room for growth. But we've been in the markets for few years, performed at high single digit comps. Our stores in the Netherlands, which is really a new market to us in 2018 saw mid-teen comps. Austria, which was our most mature market performed very strongly. We're really happy with the results there. And we opened our first stores and Finland and have been really happy with our store in Finland. So I take all of that plus the fact that we're seeing really strong category growth across all departments. And I think it kind of leads to us that we're really taking a meaningful step…

Okay. That’s helpful. And then I'm going to give you a little bit of a what-if question. If traffic were to fall-off substantially in your brick and mortar stores due to COVID-19, how are you thinking about managing promotional levels in that sort of a scenario? And then would you expect e-comm to be a substantial offsetting factor if brick and mortar gets it?

Alright. I'm reluctant Jeff, as you might imagine to address a hypothetical scenario like this but because of the situation, let's just give you a few headline thoughts I think about how we're thinking about it. So we – as we said in the comments relative to the coronavirus, we are trying to model and anticipate different scenarios of impact on the business. And as Chris said, supply chain is probably the area we're least worried about. We think we can manage through that. In some cases where we may see product pushed out, it could actually turn out to be an advantage for us frankly in terms of giving us some flexibility around receipt dates with product or cancellation dates with products. So we may actually gain flexibility around our [indiscernible] because of delays. So now we're not anticipating that at this point, but these are the things we are gaming as we look at the process that give us flexibility and we have such diversity in our brand, overall brand diversity who shifts us when they ship us. We're of course talking as Chris said with vendors about this, that I think on the supply side that diversity gives us a lot of ability to manage the process. But much more difficult side is the traffic side of the business, which is really the heart I think of your question, should traffic fall-off significantly in the business? And that of course is a much more difficult thing to manage our way through, I'm concerned about two things there, of course as we said, the beginning, not only the safety for customers and our staffs, but also what it means for our staffs, we have a lot of our employees out there. So I think these are areas we have to really think our way through. And again, that we're planning and trying to do some contingency modeling around what that would mean for the business. So, now that all being said we have not experienced that in fact, as Chris said, we're seeing we're seeing pretty solid results through five weeks with a competence of 6% and actually accelerated week one of March. But we are monitoring what's happening. I don't know whether if there's a lot of schools are out, whether that let pay play to our advantage over a period of weeks or not, those are all things I think we'd have to, we're just going to have to see how that plays out and – but that's a wild card, but if that is the card that plays, Jeff and I think we have a lot more to worry about overall relative to what it means for global recession than just traffic in Zumiez stores.

Right, fair enough. Thanks for taking my questions and best of luck for the rest of the quarter.

Thanks.

Thank you. Next question comes from Jonathan Komp from Baird. Please, go ahead.

Yes. Hi. Thank you. If I could maybe ask another broader, more historical question tied to more of the economic sensitivity and just given the nervousness that's out there. I know back in 2007, you had very strong comp trends and pretty quickly you reversed to very negative comp trends. And I'm just curious if you're looking back to that period, if there's anything that stands out in terms of factors you're watching or monitoring is this sort of tells if you will or even just how you're planning the business today for a range of potential outcomes that you are uncertain as they are.

Yes. I'm glad to just talk a little bit about Jon. We have thought about this relative to 2007, 2008. It is different, though is what I would tell you is the headline on that aspect of your question. In 2007, again based upon that, we know we have a highly, we're in a consumer discretionary marketplace. Our products are discretionary relative to consumer cycles. And in 2007, we were – in the fall of 2007 we saw, I think a drop in our business earlier than most than a lot of retailers did at that point in time. And we didn't realize at the time, but as we went back later and looked at it, what we saw was that we were really getting killed in areas like Nevada and Phoenix, and Southern California. And it became clear to us, of course, with hindsight that those were the earliest, hardest hit housing markets. So we tended to lead, I think into recession. And I had in my experience over the years here at Zumiez and now even my 27th year here, that we've tended to be an earlier indicator going into recession as opposed to a laggard. We're not seeing that this time. This is what's [indiscernible], I think it's because of the nature of the coronavirus in that it's impacting everyone in real time at the same time. And so I think we're more – going to be more in alignment, in fact at this point we seem to be a bit more resilient. I think that what I'm hearing about what maybe some other retailers are at in the marketplace. So now what that holds up or not it's a whole different question, but we are looking as we've talked about here about what are the potential…

That's really a helpful perspective. Thank you. And then maybe one follow-up for Chris, the G&A dollars you held, very tight in 2019 and drove a lot of leverage. Just how should we think about your ability to control the costs as tightly in 2020 whether looking at dollar growth or the leverage points, just how you're thinking about the year?

Yes, I mean, let me kind of start with what I put out there for the year-to-date thought in our prepared remarks. We are planning 2020 SG&A to grow at a slightly higher rate than 2019. As we've mentioned, 2019 was aided by some pretty meaningful expense savings and planning throughout the year. As we kind of go-forward, our models right now are built with the U.S. and Canada, North America really focused on localization of our sales efforts and optimization of our cost structure and so growing and really planning SG&A on that low-single digit comp point, where our maturity markets like Europe and Australia have a higher comp point, higher sales growth point. But we're really focused on the investment in SG&A and cost being below that point, which drives to kind of where we are today. We do expect to have SG&A and our model grow slower than sales and that's what we’ve put out there for the year. If we are to slip into a more recessionary challenges or really fall-off on the business, as Rick said, I mean, it is challenging. One thing you've seen about this model over the last few years is that, as we grow sales ahead of sort of our leverage point, we see significant flow through to the bottom line. That being said, when we drop below that low single digit point, we will see challenges based on the fixed cost nature of our business. Now I think our model has set up much better than others and the fact of how we have set our fixed cost business to work across both channels, I mean this is a without having a fulfillment center was allowing our web fulfillment to be fulfilled by our employees in store, these are the types of things that I think really do help leverage our fixed cost, because you're just taking those fixed dollars over more sales. So clearly it's a variable cost in our model, whether its units received and shipping, credit card we will obviously have – we still have set our incentive levels at a target to meet certain hurdles. So those types of things could be adjusted in a downturn, but we have heavy fixed costs related to our rent and labor and many of our corporate costs. So we're managing against those two factors. And, we still think on the low-single digit that we put out there, we should be able to provide some leverage for the business and grow earnings and grow operating profit, but if we are to slip below that, we would expect to see some challenges in the model.

Okay, great. Thank you. Best of luck.

Thanks.

[Operator Instructions] Our next question comes from Mitch Kummetz from Pivotal Research. Please go ahead.

Yes. Thanks for taking my questions. Let me start with footwear, it's most negative comp for the month of February. I know that what you guys reported in the last quarter, it was negative in November and you kind of said don't read too much into that, it will turn positive, which it did. So tell me that I'm not supposed to read too much in the February being negative, why not so much, what are you seeing on the forward side?

Let me start now let Chris address it in a little bit more Mitch. But I'm going to go right back to the comments I had earlier relative to mean is, we actually don't care. Frankly, our goal is to drive result, why footwear was negative in the month of February, we drove a 5.8 comp and it got stronger in the week of – the first week of March. So from my perspective, the business is the business, our job is to execute the model, our business model, and to go with where customers want to go and own our proportion of wallet share with our customers. So I just want to emphasize that point, because we've been through these cycles many times. We've had negative footwear cycles many times. We've had positive footwear cycles many times and to most of those, we've been successful in running gains. So I just want to make sure that that's the headline here. Chris, you want to talk a little bit more?

Yes. The only thing I would just add to that and Mitch, you did took a little bit of my thunder there, because I was going to tell you the same thing, I told you after November, because as we think about footwear, we really look at footwear in the peak selling periods, right. And December was one of those and we saw it actually rebound pretty nicely across December and into January. As I think about footwear, as you would imagine, the summer and the back to school period are some of our larger portion. So, as Rick said, are really focusing on the overall model and we're not getting too tied up and where footwear is here in February, I think it's something we'll continue to monitor and we'll see how it ends up as we close out Q1 and move into the more important time period here in Q2 as a percentage of the overall business.

Okay. Couple of other questions, first on – it's kind of a hypothetical too, but if traffic did fall off a lot, do you guys have any recourse in terms of your lease structures, I don't even know to what extent you guys have percentage of rent to do leases, what’s the percentage of rent, I mean – how can you, is there anything that you can kind of help out on that side?

Sure. I mean, I think what I would say is, yes we do have stores that are on percentage of rent. It is not the largest portion by any means of our occupancy portfolio. We have looked at our real estate portfolio over the year with a real risk based approach and we've been doing this for a good portion of this last decade. Trying to look at the portfolio and as we've said in the past, not have one more store than we need to. And so what that means is we manage a lot of the portfolio with pretty short deals. So we have really thought through this and said, okay, we know every trade area has like a key center in the market, that's one we want to invest in, that's one we want to be in for a long term. Those trade areas with multiple stores in the market, we're going to be pretty cautious with the B and C and D centers. Now I will tell you those centers have actually performed pretty well for us over this last cycle of 14 quarters that we've been up. I think that's for a variety of reasons, including our teams that are there, our buyer's ability to put product in them and also fulfilling from stores, I think it had a impact as we've been able to make those stores look better in the amount of inventory we've been able to put in there, because it's dual use inventory. So I think we feel good about where we're at. But with the real estate portfolio, we are really looking at that bottom 10%, 20% of our stores really on short-deals and maybe even reaching beyond that as I think about kind of where we're at right now. I mean we really, the vast majority of our stores are all four wall contribution, definitely, I mean more of them are our four wall cash flow. We have our lowest 20%, we can get out of about 80% of those in the next three years and almost 90% of them in the next five years. So like I said, we're managing pretty short-term deals. And as it relates to kind of our ability to work with landlords, we'll continue to work with them in a fair and honest way as the deals come up. And in many of these cases we've been able to get some rent concessions and in the more favorable locations, sometimes it goes the other way. So we'll keep working with them and kind of see where this goes.

I’ll just add Mitch is that, I think our relationships with them, we have very strong relationships with all the major landlords. And if traffic declines, the landlords have a, probably a bigger problem than any individual retailer does. So I think we would all have the same interests to work towards what's best for our mutual customers. And again, I think landlords understand that we've been a high-performer for them, of course high-performers can afford to pay a bit more in rent, because of that and landlords are also, as you know, closely watching the financial health of their retailers. So they also understand about Zumiez, is that we were the healthiest retailers out there, we're good at long-term planning, long-term thinking and that they understand we factor into their long-term position across their entire portfolio too. So I think it gives a – I respect our landlords. We always have a good conversation, discussions, always fair and tough as you might guess, but yet we both see the strength in each other and so I'm always cautiously optimistic about that, when you have that kind of relationship, you find good answers.

And then one lastly, Rick, just kind of a big picture question for you, any thoughts on what social distancing might mean in terms of wallet share? Are kids going to stop going to movies, concerts, restaurants before they stop going to the mall and even if they stopped going to the mall, will they spend – continue to spend on footwear and apparel versus other things because they can do it online and maybe they can't do some of the other things online any thoughts on that?

Yes, I do have thoughts on that, Mitch. In the answer to the question, I don't – there is no, there isn't one answer to your question would be, what I would tell you there's going to be a different answers to the question for each retailer, each type of business, each type of consumer business in terms of what the retailer means to the consumer grouping. So we think we have a very strong community aspect to what we do as a retailer. And so where our stores are actually become hubs for these like-minded young people who want to individuate and think about expressing their identity, they have relationships with our salespeople. And I'm sure you've seen that in our stores, that these are our many customers come in for the – into our stores because they have fun being there, fun working with our teams. So I think this answer will be something different for each retailer. And it gets back to kind of power to position and power that each retail brand has and what they're doing for their customer. So how that plays out, I'm not sure across retail, but I will tell you this, that I'm much more confident in our positioning relative to what we're doing for our customers evidenced by the fact, that they've been willing to spend more dollars with us and spend more dollars at full price. In my mind, that is the measure that shows, that demonstrates a retailer is winning in their marketplace because customers go with their dollars on things they find valuable in their life, where value is being added. Now, if I would just sell generic low price clothing I would be – I wouldn't feel very confident about where I'm at right now. And so for us, I think our brand needs to something a little deeper, there's a tighter connectivity to it. I think we as we – Chris shared with what happened here in Seattle, we would see some volume move to the digital side, but I think we'd probably see also see at the same time less drop off and we'll then work with our teams about what the social distance they mean and how far do we stand from customers in the stores, but yet still have a fun time. Those are the kinds of things our teams are working on.

All right. Great, thanks guys.

Thank you. I am showing no further questions in the queue at this time. I'd like to turn the call back over to Rick Brooks, CEO for closing remarks. Please go ahead.

All right. Thank you very much. As always, I just want to make sure I say to everyone, thanks for your interest in Zumiez and the time here talking about what's going on in our business today. And lastly, I just want to make sure that I say everyone to stay safe and stay healthy and with that we'll look forward to talk with you again when we release Q1 results in June. Thanks everybody.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.