Good afternoon, ladies and gentlemen. And welcome to the Zumiez Inc. Second Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in 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. 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, sir.

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 second quarter. Then I'll share some thoughts on back-to-school and the rest of the year before handing the call over to Chris who will take you through the numbers. After that, we'll open up the call to your questions. Amidst the most difficult operating conditions the company has ever faced, we delivered better than anticipated results. To put some context around our recent performance, when the second quarter started in May, we had only 65 stores open, which is just 9% of our entire store base. By the end of May, that number increased to 492 stores or 68% of our store base. By the end of June, we hit our peak with 691 stores or 96% of our store base open. Then in July, as a result of governmental orders, we closed a total of 69 stores in California and Australia, and ended the second quarter with 645 stores or 90% open. For the quarter, our stores were open for 73% of potential operating days. Despite stores being open 27% fewer days than a year ago, second quarter 2020 revenue increased 9.6%, as stores that were open combined with digital activity comped up 37.3%. Our top-line performance was highlighted by robust full price selling across all geographies as demand for our distinct and differentiated merchandise assortments and the continued efforts of our teams drove much stronger results than we had anticipated. By geography, we experienced stronger growth in our international markets with Canada, Europe and Australia, all showing significant comparable sales gains and double-digit total sales growth, despite closures in the period. As we discussed on our Q1…

Thanks, Rick. And good afternoon, everyone. I'm going to start with a few high level comments on the financial strength of the business, review our second quarter and then provide an update on the quarter-to-date sales through Labor Day before discussing a few updates on the full year. We entered fiscal 2020 in a strong financial position with cash and marketable securities over $250 million and coming off the highest earnings per share in the history of our company. This resulted from years of commitment and hard work by our teams, coupled with strong financial planning. Now, for the closure and subsequent reopen, we have continued to see the strength of our one channel model with our teams working diligently to serve the customer. The business ended the second quarter in a strong financial position. Cash and current marketable securities increased 58.6% to $299.1 million as of August 1, 2020, compared to $188.6 million as of August 3, 2019. The increase in cash and marketable securities was driven by cash generated through operations, including deferment and reductions of $41.5 million dollars composed of landlord payments, lower inventory levels, extended vendor terms, and deferred payroll tax payments, in addition to net income improvements related to abatement, credits, and expense reductions. This increase was partially offset by $13.4 million of share repurchases through the company's stock buyback program prior to our stores closing due to COVID-19 and other planned capital expenditures. As of August 1, 2020, we have no debt on the balance sheet and continue to maintain our full unused credit line of $35 million. We ended the second quarter of 2020 with $126.7 million in inventory, compared with $151.1 million of inventory last year, a decrease of $24.4 million or 16.1%. During the first quarter, our merchandising teams cancelled or…

[Operator Instructions] Our first question comes from Sharon Zackfia with William Blair. Your line is now open.

I guess a question on the inventory position. I know -- I think it was, Chris, that you said you thought you were in a good position, but it looks pretty down even relative to the sales you indicated for back-to-school. So I mean, are there pockets of scarcity in your inventory at this point? How well-positioned are you to chase sales if it's a prolonged back-to-school. And then just curious on your thoughts on store development beyond 2020, considering your rebounding and doing much, much better than most others in this environment?

Sure, Sharon. Happy to start with the inventory, and then we'll tackle the store question. From an inventory perspective, as I mentioned in the prepared remarks, it's been obviously a roller coaster of a year. As the first quarter hit us and the store closures, we -- our buying teams worked very diligently to work with our vendors to push out products, canceling over $100 million of purchase orders. And then once we opened in the latter part of April and into May, we started to really see elevated results from where our expectations were. And that put them in the opposite situation of really chasing. And then I think you couple that with where we have been from getting the supply chain up and running, created quite a few challenges as we moved through the period. So a really great testament to our buying teams of reacting and bringing product in and our distribution and operations teams and moving it through the channel. And ultimately, our store teams in executing on how they did with our customers, both physically in-store and digitally, but it was not without challenges. And so, I think as we look at inventory and we look at how we ended the quarter, we would definitely say we were lighter than we wanted to be. I would tell you, inventory is very clean. So when I say we execute inventory in a good position, we feel very good about the makeup of our inventory, but we certainly would have liked to have had more of it specifically in categories like hardgoods and footwear, which were probably two of our more challenging areas. I think this also gets into kind of the supply chain and how we're working through that. And I know there's been a lot…

And Sharon, the second part of your question relative to our store footprint and thinking about store development beyond 2020, I think to really address that question, I want to break it into two parts. And so let's talk about the U.S. market, and then we'll talk about our international markets. So I think it will help us understand a little bit about the differences between both markets and the challenges and opportunities in each market. So in the U.S., you know that we -- I think it's pretty clear to most people today that we probably have too many retailers in the market, too much retail space, and we also probably have too many malls. So we -- as you know, we obviously believe for a long time, that's really -- this is being driven by the empowered consumer and the power that they now have through complete transparency of inventory, availability of the digital-first strategy, right, that consumers have in searching and finding product. So we expect to see that this consumer-driven cycle is going to really drive the consolidation of retailers. We simply -- most retailers simply don't need as many locations. And it's also struggling -- it's what's causing malls to struggle and setting some mall survival. Now we also think that the pandemic has really accelerated both of these cycles. I think it’s quite evident looking at the current marketplace that that's probably true. But we believe in the long run that the rationalization around retail and malls is going to be good for us and will drive -- that would be what will drive -- really help us drive share consolidation for us as we're positioned I really believe to win our segment of this consumer world. So I’ll have Chris to share a few more thoughts around the U.S. market, and then I'll talk about the international market.

Sure. I think what I'll try to do is just kind of talk about the strategy of real estate and how we think about store units. And we've said for quite some time, we really don't want to have one more unit than we need to in any given geographic area. And so, we're definitely moving towards the trade area concept, looking at stores and web to serve our customer and believe that they definitely work together. And so from a strategy perspective, I mean, there's definitely the short-term here in regards to where we stand with COVID and working with our landlord partners and I can tell you we've worked really closely to manage through what's a difficult time for both of us. And as we mentioned on our Q1 call, we did hold back on significant portions of our April, our May rents, and even in some cases our June rent as we work through this process. We're not going to give a lot of detailed color on where we stand with each landlord and the amount of abatements or deferrals, other than some of the high-level commentary we gave as part of our prepared remarks around how much deferral is on -- of all of our deferrals, leases, the inventory balance, the payroll and our AP as well as we gave some color around occupancy and how it’s hitting P&L from a leverage perspective. But what I can say is we've worked very hard with our landlord partners to find compromises that I think are working for both sides. And we have quite a few of the process done and behind us, but we also have quite a few agreements that we've got to get documented and still complete in front of us. So we continue to…

Thanks, Chris. So -- and just summarizing all that, Sharon, relative to U.S., as it relates to, again, your question around store development, we really see the U.S. more as reflecting how a market is going to be rationalized, both in terms of the number of malls that will be in the marketplace as well as retailer store footprint and then how we're going to optimize our business to capture share in the U.S. marketplace and to grow earnings through the concept of trade area execution. Now the international marketplace, I think it's a bit different. On the international real estate side, there's no doubt that the empowered consumer is -- that is a universal trend today driven by smart technology. That's still driving on global marketplaces, in our international marketplaces. That's still driving retailer consolidation. Now on the mall side, they're generally pretty rationalized in terms of the mall world in our international marketplaces today. So we don't expect to look at the mall world outside of the U.S. and say there needs to be a great amount of rationalization. In fact, I think, to a certain extent, we believe that the malls international markets reflect and represent the future of how maybe U.S. malls are going to look, right, relative to not only rationalizing the square footage, but relative to what the different kinds of tenant mix might look like in U.S. malls as they go through the rationalization process. For us, though, because we are seeing consolidation of retailers in international markets, we think that creates an opportunity for us that there is going to be space opportunities created in good quality centers. So first, Sharon, we think this is a growth opportunity for us in our international markets. For future expansion, because there are just going to be those opportunities, we think there could be some really high-quality, low-cost potential opportunities for us to grow our presence in these markets. And of course, growing our presence isn't just about the physical world. It's about the concept of how we execute omni to serve customers in these marketplaces. So that's where it gets to the right scale in each market. To tip over, so we can execute the omni platform, which gives a whole additional boost to operating performance, both on the sales line and on the profit line as we do this. So I really think we have a big opportunity for profitable growth in our international markets over the next few years, Sharon. And of course, we will, as always, make sure we manage that growth, our culture and brand positioning right at the forefront of our thinking. But we're certainly well-positioned, I think, better positioned than any of our competitors to execute on those opportunities over the next few years.

Our next question comes from Janine Stichter with Jefferies. Your line is now open.

Want to dig a little bit more into back-to-school? It sounds like you expect the sales trend to pick up in 3Q a bit from where it is currently. Maybe can you provide some regional color on what you've seen in regions or districts that have already gone back-to-school, those that have gone back in-person, that would be helpful color?

Sure. Yes, I'm happy to provide some color. And I think this is where really understanding back-to-school has become increasingly challenging this year, obviously, just with the delayed Labor Day, delayed back-to-school, the impact of digital versus in-person schooling and just trying to understand where the health of our consumer is from -- or the financial health of our consumer, I should say. So we did prepare some thoughts on this and kind of what we're seeing. And what I'll try to do is lay that out. I will disclose, most of this is just domestic, as this is really where the bigger part of our business is and back-to-school. So as we look through that, I would tell you, like we said in our prepared remarks, our results have generally gotten better each week with last week or the fifth week of the period being positive, overall. By channel, we talked about comparable sales and where they're at in our prepared remarks. And we've seen -- while we see all categories down-skate, hardgoods has still been up, which is a good thing. We did see some softness on the Labor Day weekend as compared to last year. But again, this is incredibly challenged to analyze because of the move out. So let me kind of try to phrase up from what we're seeing from the type of go back. So we've done some survey work across our -- all of our stores. And based on that survey work, what we're seeing is about 50% of our schools are going back with some sort of hybrid, about 40% of our schools are going back 100% remote, and about 8% of our schools are going back in-person with just a couple of percent that didn't come back. So as we look…

Great. That's incredibly helpful detail. And then just a follow-up on footwear. Can you elaborate a little bit more on the weakness? Is that just the inventory challenges you referenced or is it more of a back-to-school business typically? Or is there some change in trends? Any color there would be helpful.

Yes. Janine, I'll start and let Chris add any comments he might have. I mean, some of this is going to be trend-related. Remember, we are on a multiyear run on footwear prior to this. Just a couple of years ago, we had a long build up in our footwear cycle. And some of this is clearly a result of the pandemic and the supply chain discussions that Chris talked about. So I'm not -- it's always -- is usually the case. There's multiple factors I think that drive where we're at now. Footwear has been more difficult other than some categories prior to the pandemic. But we clearly have seen the supply chain impacts of again I think just how difficult the footwear industry is to manage because of this. Everyone has to take more risk in footwear because of the sizing that takes place in the footwear market. So -- but for us, I guess, the key thing in my mind is, I'll remind you what I always say about where we're at and how our business model works. Despite the challenges in footwear we managed what I think are pretty remarkably good results. And as Chris said, no matter how third or fourth quarter turn out this year, the one thing I'm totally confident on is that I think we're going to outperform all of our competitors on a relative basis and most especially retail for that matter. So the reason to that is because our business is now dynamic with the number of brands we carry, of emerging brands we're carrying that become growth brands in our world, the number of departments and categories that we expose to our consumers, the lifestyles we represent across the marketplace. So one thing I'm confident on, no matter what…

Our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.

Terrific work in Q2. Can you speak more about what you're seeing in the California market with closures? Did you see business there shift to digital? And then what have you seen in markets in California that have reopened?

Yes. Sure, Jeff. Well, as we pointed out in our prepared remarks, right, we reopened the vast majority of our California stores in the second quarter only to close them again in the beginning of second week of July and ended July with those stores closed and then on into August as well. What we can tell you is that California was a big piece of our drop in sales, both in July and August, and really back-to-school to date and the numbers that we talked about. It was one of the key drivers, representing probably about 1/3 of our decline overall on a consolidated level. So we definitely saw some pain there, even once we allocated the web sales there. Now we did see web sales go up and have pretty much seen that everywhere where we have closed, just like we did when we did the math closures in Q1 where in stores close, we start to see spikes in those regions in volume. And then more recently, we've opened a fair amount of those California stores with the exception of LA County and a few others. So we have seen a good rebound there as expected with the reopening. So we'll see how that plays out as we move through Q3, but it was definitely a big impact on our -- the end of Q2 and our back-to-school to-date.

And I'd just add to Chris' comments, Jeff, that, of course, I'm sure you're aware most of California is going to be a virtual back-to-school. So again, as we think about the impact of California, we're thinking that how schools go back is going to be reflective of how we capture whatever back-to-school turns out to be. So if it lengthens out and is prolonged, we think those are probably more likely the markets where we'll see that back-to-school stretched out.

That's right.

Okay. And then could you touch on the rent withheld question, how you're thinking about that and maybe speak more about what level or magnitude of rent reductions we should think about as renewals come up, given kind of the tough spot that landlords are in?

Sure. Well, let me talk about just the cash position overall and what we tried to lay out in this call, I mean we are incredibly happy with where we're at from a financial strength position. Obviously, the -- we entered the year in a good spot with really good planning and hard work to get there. And we've -- our teams have just managed incredibly well here through the first 6 months of the year to get us to where we are, which is at $299 million in cash with no debt. That being said, we did want to disclose that we have just over $40 million in deferments and other costs that are there on the balance sheet that we think are real. So as we think about the cash balance, we try to rationalize it, it's probably somewhat something closer to $260 million in a more rationalized environment. And that's made up of not just deferrals, but the inventory position, which, as we mentioned, we are lighter on inventory than we'd like to. We would maybe not buy all of that inventory back, but we certainly would like to get a good portion of it, AP deferrals that we laid out as well as some payroll deferrals that we're taking advantage of. So as we plan to move through the year, we do expect a lot of that to have been paid out. In regards to the rent situation, we're not going to get into a lot of detail other than to say that we are working with our landlords really closely. And this is a tough situation for them and for us. And we're trying to work with this in the best scenario for both of us. And so in some cases, that has led to deferment, in some cases, there's abatement. And in some cases, these will be things that we continue to work with as we evaluate centers into the future. And I don't think that's different than what we've seen over the last 5 to 10 years in the portfolio. Some malls are definitely winners in marketplaces and some malls are more challenged. And we have to work together to optimize them and get them to the right cost structure to make them work. So I think we'll keep seeing that play out in this market. And we'll -- and I think over the long-term, this is an area that we think we can benefit from our ability to maximize our store real estate with our 1-channel philosophy.

Our next question comes from Mitch Kummetz with Pivotal Research. Your line is now open.

Thanks for taking my questions. I guess I got a few of them. So I think we'll go through these pretty quickly. So Chris, on 3Q to-date, I know you guys are down 14%. Can you say what percent of 3Q is normally in the books after 37 days of the quarter? Is it like 55%, 60% given the importance of back-to-school?

Yes. Given the delay of where we are now, it's in that range, it's closer to that 60% that we are through the Labor Day weekend that we reported.

Got it. And then on gross margin, I think in your prepared remarks, you mentioned that product margins should be up year-over-year, maybe not as strong as it was in 2Q. But could you maybe speak more broadly about gross margin? Do you expect that to be up or down? I would imagine that if the sales are down in 3Q, that could put some pressure on occupancy and if digital continues to outperform, maybe that puts a little pressure on shipping. So could you kind of maybe work through those components?

Yes, absolutely. And I think this is really interesting how this has worked out because obviously, we -- with a 9% sales gain in the second quarter, we saw a pretty strong gross margin benefit, up 250 basis points. You're right, we talked about product margin being 170 basis points, which was a benefit. We also, at that level, see pretty good leverage across occupancy and some of our distribution costs. We also saw some benefits on shrinkage. And then we talked about web shipping being an offset to that, up 160 basis points although it leveraged as a percent of digital sales, which is an important callout because while we are seeing some elevation in gross margin because of the mix to web, on the flip side, it's leveraging across digital sales, which is important with how we measure the business. So I think as we move into Q3, we are expecting product margins to be up, albeit although not what we saw in Q2, as you indicated. How we see gross margin is going to be more tied to the mix of the business and where sales overall go. And I think that's where -- to your part of your question or what you commented and what your question is if sales are down, that will provide some challenge on the gross margin side. We do expect web to be -- have a higher penetration of total sales in the third quarter. We have seen that through the back-to-school period we reported. And so that will also put some pressure on gross margin. But at the end of the day, if we can continue to leverage that expense, we do think it could still be a benefit to our overall bottom line. So we're trying to really manage through this. It's pretty variable, as you pointed out to the sales number. But if we can grow sales, we definitely think we still have opportunity to grow gross margin.

Got it. And then lastly, on hardgoods. I know that was your strongest performing category in the quarter, that's been the case for a few quarters now at least. Is there any way you can say how strong -- I mean, was the growth -- year-over-year growth there, a multiple of the next best category? I mean there's been a lot of chatter about sort of equipment in general, whether it's bikes or you name it being particularly strong this summer. So I guess, maybe a two-parter. Maybe just maybe can you speak a little bit more to the growth of hardgoods? And then secondly, sort of how do you think that business into the back half as weather changes the skate typically fall off? Or do you kind of see this maybe morphing into maybe a strong snow hardgoods business? Just give a little more color on that.

Let me start, Mitch, and then I'll ask Chris to follow up with some other -- maybe some more details to your question. But we tend to look at these department-driven cycles as it tend to be multiyear cycles. So we had a multiyear cycle around footwear starting 4, 5 years ago that ran for a few years. So we're currently in year 2 of the skate hardgoods cycle. And now the question would be, do you think that the impact of the pandemic is accelerating the cycle, which is, I think, kind of embedded in your question there relative to what we've seen in other outdoor activities, right, that are taking place. And I'm not sure that we actually know the answer to that question. I think we think there are really multiple drivers to what's going on in the skate cycle today. And it first starts with the fact that we had 4 or 5 years of down trending in skate hardgoods. So we're kind of levelizing out would be what the first thing I'd tell you relative to consumer demand. The second thing we see and we believe is true is that there are a significant number of women, more women buying skate hardgoods and skate products than ever before. And that's clearly what we hear from all of our teams across the country that has clearly been a difference in this cycle, that there are just more women out there, which is a pretty awesome thing to see. And we also believe that part of what we're experiencing now and the uptrend of the skate lifestyle and the skate hardgoods business is that it's more deeply embedded generationally now than it's ever been. So this is a case where the young woman or young man may…

Yes. So I'm going to stay away from talking about just comp numbers just because what we like to do when we talk about categories is to get to the total year. I think what's important to point out and we have disclosed is if we think about hardgoods in general, in 2018, it was 10% of the business. And in 2019, it was 13% of the business. So you can see the impact it had in year 1. And while we need to see how Q3 and Q4 plays out, the impact has been pretty substantial for this year as well, is really our only positive comping category, there is some significance there. So again, I'll stay away from totally quantifying other than to say the kind of growth we've seen from '18 to '19 looks possible in '20 as well.

And I guess I'd just add in. Chris, you can just confirm this for me. But Mitch, I think the size of our comps in skate hardgoods were significant. I don't think there's a big difference between their magnitude relative to other. They're obviously larger, but to the magnitude to other comps, I'm not sure there's a big difference between '19 and '20 really now.

Yes, that's right.

[Operator Instructions] Our next question comes from Jonathan Komp with Baird. Your line is now open.

This is Steve Nowotarski on for Jon. I guess my first one is just looking out, how are you thinking about the shape of holiday this year? I know some retailers have talked about maybe having a more extended season, having orders pulled forward, and especially as it pertains to maybe concerns about capacity with shipping and everything. So just any thoughts around the shape of holiday this year?

Yes. I mean, I think it kind of ties in with how we're thinking about the rest of Q3 and Q4. We just have to stay super nimble. So we're very kind of focused on all the different trends you've laid out as far as volume spreading out and what that might mean around the peak of like a Black Friday weekend, we're focused on what the in-store experience is going to be from a fact of like, will we have metering? Or will we have challenges getting people in our doors? How we'll communicate to them? And we're honestly focused on things even like if, let's say, that schools go back-to-school more uniformly in January, what would that mean to our business? So we have a lot of different scenarios we're playing through, which kind of comes back to what we've talked about earlier of just being nimble. And so I think there's a lot of unknowns. I tried to list some of them earlier. I think the other piece that -- obviously, we have a pending election as well, and we'll see what that means to the fourth quarter. So we see a lot of potential for upside. We see some potential challenges. And we're just going to do our best to navigate through that and see where we can drive this while also really taking advantage of opportunities that are out there for us. I mean I think that's something else that Rick talked about in his prepared remarks, it's super important to where we're at. We've set ourselves up pretty well from a balance sheet perspective. And while we are very cognizant of whatever challenges can be ahead and ensuring that we can emerge from that in a position of financial strength, we also want to be smart about where potential investments could help us accelerate in this cycle. And we know that from the '08 and '09 recession, we learned a lot and some of our best investments we made over the last decade emerged from that cycle.

And I'd just add, Steve, we do have a number of tactical things that we're trying to address that we hope will help us get -- as Chris said, build flexibility around the challenges we think we're going to see in the holiday cycle again around, does it get stretched out? What happens to peaks in the marketplace? What happens to digital web penetration? Does it go -- how much greater will it be? And what does that mean to the B2C shipping issues and all the challenges that come around that? So we have some tactical things we're working around that we think can help in all those things. We're not going to share all those at this level. But we hope that we can do things tactically that will help us bridge, that give us the ability to meet consumer expectations and consumer demand.

And maybe one more just -- obviously, it's been really impressive, your ability to manage costs this year. I guess looking out maybe higher level into next year and beyond. How are you thinking about the cost cuts in terms of kind of the permanent structural changes versus kind of more one-time items this year at a higher level?

Yes. Thanks. I think this is one of the challenges we're going to have heading into 2021 and probably most retailers will as they think about their business. I mean we are very proud of how we've been able to manage through this. I think our teams have done a phenomenal job of -- we built the 2020 budget, and we rebuilt it. We've done tons of different scenario planning. We have kind of written the highs and lows and try to navigate through this. But as we think about moving back into 2021, there are -- the period the stores were closed, and we think there will be some sales we can recapture, but there's a significant amount of cost that we've had to manage out. And there are things that are really important to us in our overall philosophy. So as we think about moving into 2021, what we expect to have happen is there will be a step-up in our cost structure and specifically within SG&A, as a result of kind of driving the business back and not having some of the savings of whether they're rent abatements or saving credit -- payroll credits or reduced operating hours in malls or reduction of travel or some of our national events. And then starting to layer those back in, where they make sense. And I think one of the things we're figuring out here over the back 6 months of this year is what that looks like. And something will definitely be coming back to you guys with most likely during our Q4 call, but maybe even a little bit in our Q3 call of trying to outline some of that because it is going to be important to make sure we're aligned in that modeling because we…

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Brooks for closing remarks.

Alright. Thank you. And I just want to close today's call with a big thank you to all of our teams around the world. And our brand partners, too, for all their hard work through 2020. And we really appreciate an amazing effort by everyone to really help us serve our mutual customers everywhere we do business. So thank you, everybody. And we look forward, again, to talking to all of you when we do release the third quarter earnings in December. Thanks, everybody.

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