Good afternoon, ladies and gentlemen, and welcome to Zumiez, Inc.'s Second Quarter Fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. Before we begin, I would 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. 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 would like to turn the call over to Mr. Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

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 sales for the third quarter to date before handing the call over to Chris, who will take you through our financial results in more detail. After that, we'll open up the call to your questions. Our second-quarter results reflect the strength of our business model, as we posted solid top-line growth and better-than-expected profitability in the face of tougher comparisons. Reflecting back upon the second quarter of 2020, our stores opened for roughly 73% of potential operating days as a result of the pandemic. Despite those closures, our total sales in Q2 of 2020 increased 10% over 2019 due to our ability to capitalize on strong sales trends and pent-up demand for more significant closures in the first quarter of 2020. Therefore, we were pleased that our second quarter of 2021 total sales grew 7% year-over-year and increased 18% on a two-year basis, all while driving strong full-price selling. On the expense side, spending returned to more normalized levels following last year's temporary cost savings actions and government subsidies, resulting in diluted earnings per share of $0.94, just $0.07 shy of last year's record, $1.01 and up over 160% from the second quarter of 2019. Our teams once again did a terrific job adapting to the current environment to fulfill the demand for our distinct merchandise offering. This year's results reflect the shift back to a more historical mix between our store and digital channels as our customers increasingly turn to physical shopping. This is a very positive development given their enriched brand experience that can be achieved through human-to-human connections.…

Thanks, Rick. Good afternoon, everyone. Given that our stores were closed for approximately 27% of the quarter last year due to the pandemic, I'll provide comparisons to both the prior year and the second quarter of fiscal 2019 where appropriate. Following my review of our second-quarter results, I'll provide an update on third quarter-to-date sales trends and our current perspective on the full year. Second-quarter net sales were $268.7 million, up 7.3% from $250.4 million in the second quarter of 2020, and up 17.6% from $228.4 million in the second quarter of 2019. The year-over-year increase in sales was primarily driven by the reopening of stores, our ability to capitalize on current trends, and the continued impact of domestic economic stimulus on the business during the second quarter. Compared with the second quarter of 2019, we saw comparable sales growth is 16.6% and the net addition of 15 stores. Our stores were open for approximately 96% of the potential operating days during the second quarter of 2021 compared to 73% in the second quarter of 2020 and 100% in the second quarter of 2019. From a regional perspective, North America's net sales were $237.5 million, an increase of 6.3% over 2020, and up 14.8% compared to the same period in 2019. Other international net sales, which consists of Europe and Australia, were $31.1 million up 15.7 from last year, and up 45.1% from 2 years ago. Excluding the impact of foreign currency translation, North America net sales increased 5.8% and other international net sales increased 7.6% compared with 2020. We experienced significant COVID-related store closures during the second quarter in Canada, Australia, and Europe, noting they were open for approximately 68%, 77%, and 88% of the available operating days respectively. During the quarter, the men's category was our largest growth…

Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Janine Stitcher with Jefferies. Your line is open.

Hi, good afternoon. Thanks for taking my question. You acknowledged this -- the challenging supply chain environment. I was just hoping you could elaborate more on what you're seeing, maybe break it up between your private brands and then what you're seeing from some of the third-party brands that you work with. Just speak to any areas where you feel like there are challenges in getting the product in and help us understand what you're currently seeing in the business. Thank you.

m: It's required us to work extremely close with our brands and our logistics vendors to navigate the different challenges that are out there, including how we think about raw material and commodity pricing, factory capacity, transportation capacity, transportation costs, labor shortages, country-by-country challenges, how this affects our timelines and receiving, and then obviously, the general inflation challenges that are tied to this. So, I think from an overall perspective, we feel like our teams have navigated this really well. Clearly, it has resulted in some delays in the product, but I think because we've been dealing with this for the amount of time we have, we've been planning to do it, and as we just talked about, we're really happy with the inventory levels. I mean, a year ago, our inventory was much lower than we wanted it to be as Q2 of 2020 was very strong in demand, and we're really happy we built those inventories back up. We think they are in a good spot, so yeah, it has impacted what we wanted to receive, but our teams have done a good job working around that with our vendors. And I think that's how we plan to address this moving forward. I think we continue to work with our brands on how we get through these challenges and really try to provide the best customer experience at the end of the day. I think as we look at the supply chain moving forward, we continue to expect there are going to be issued through the back half of this year. I think moving out of back-to-school we expect there to continue to be some challenges on the inbound side. Like I've laid out here. And I think we'll also start to see some of the challenges we…

Great. And then maybe just on the hard goods side of the business, just speak to what you're seeing there, just your views on what ending of the cycle we're in, I'm guessing that the negative trend is more just a function of comparisons from what you felt last year during the surge of COVID, but just any thoughts on where we are and maybe what you thought to fulfill on that. Thank you.

Sure, Janine. I think as we look at it here relative to skate hard goods cycle, what we're really -- we're seeing -- I think skate hard goods is a good example where because of the nature of the pandemic and the shutdowns and the closure of stores, and remote schooling and everyone being home, and in the lockdowns, skate, I think is one of those categories much like camping, that everything got -- a lot of volumes got pulled forward. And so, I think that's partly what we're seeing, and if it is, a tough comparison's coming across in skate hard goods, so having so much of that volume port - forward because of the pandemic. We'll have to see how this plays out next year. But again, I think the great thing I always like to remind everyone is that our business responded really well, and that despite the down-trended skate hard goods, which I think we could all expect at some point because it has been 3 years -- 3 plus years on this cycle, that our business responded well and we're running -- still running gains by just selling more apparel in this case. So, the predominant driver of our business, so it's been really good to see how the business responded. We are maintaining our wallet share of our customer's business. So, I think that's where our head is, Janine, as we're thinking we just saw this big pull-forward we'll see how this response next year to where we're at, but skate is when those great categories of business from an inventory perspective that I think we can manage relatively quickly in terms of our inventory position. So, I feel good about where we are on that side too.

Great. Thanks very much.

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is open.

Yes, hello, this is Richard Magnusen in for Jeff Van Sinderen. I thank you for taking our question. We know that the business is omnichannel, but what more can you tell us about the recent trends and in-store traffic, e-commerce, and delivery? And then are you seeing any significant changes in consumer behavior that could last longer as this COVID impacted environment plays out?

All right. Richard, let me start then I'll ask Chris to share some data with you, but again, just remind you our job is really about -- is about empowering our customers with choice on how they want to shop with us. And they get to choose their own journey in the Zumiez world. So, our one channel business model is really designed to meet our customer's needs locally. And then leverage the cost structure no matter where the sales are digital or physical. But that said, I am happy to tell you how thrilled I am. As I said in the script that our customers have chosen to return to our stores in a very, very strong way for their shopping. And I say that because I really believe we can get a richer brand experience when that's the case. All the Gen Z research work you see actually shows they preferred to shop in stores. So, we get them in our stores, in that we get that human-to-human connection, and the deeper -- a deep brand experience I think makes shopping at Zumiez a really powerful experience when they -- when our customers get to connect with our employees. So, with that, I'll let Chris share some data.

Yeah. Richard, I think this is something obviously we put a lot of thought into heading into the year. Just given the increase in online demand in 2020 when we had our stores close, and we kind of looked at it and said, you know, in 2020, we saw our web penetration for the year-ago from about 16% to 26%. And we kind of said, okay, we think it's going to be somewhere in between there. And to Rick's point, we're just ecstatic that we're just so much closer to 2019 levels, and as it relates to even the second quarter here, we were about 15% digitally originated and compared to the 27% last year. And so, I think you see some things in the model that are really favorable here. One of the things I talked about in gross margin was that we had leveraged web shipping by 170 basis points. What's interesting is if you go back to the last Q2, you'd see what's almost completely offsetting last year. So, I think it's a richer experience for our customers. It's financially a good experience for us as our customers, really, there in-store and gets the immediate fee of the product. So really excited to see those levels go back to 2019 and obviously we'll see how that plays out here in the back half of the year.

And lastly, Richard, just to -- just so we're -- I'm clear in the response on this is, this isn't just a U.S. issue. We've seen this across the broad swath of our businesses, including Europe, where we've seen a return more -- our mix returning more to our 2019 levels across our businesses. So it is, as your question intimated a global trend relative to how we're seeing and what we're seeing in our consumer's behavior. And again, I think it's probably unique relatively to our brand experience and the nature of our consumer base.

Okay. And then this is some -- regarding the supply chain situation. Again, are you seeing anything in terms of an effective alternative such as ships being routed to other ports? And then has the supply situation been causing you to pull hard on some sales? You referenced that a little bit, I thought maybe there's more detail there.

Yeah, I think from a supply chain perspective, we've tried to be as creative as possible to navigate lots of the different issues. There are situations where we have pulled dry forward, where we've tried to get it sooner to navigate this, and it really becomes a vendor-by-vendor discussion, depending on kind of the demand we have for the product, and what our expectations of selling patterns are going forward. So, I don't have a specific call out for you other than I think the teams have really tried to navigate this in lots of different ways from moving forward to potentially airfreighting things. All depending on the need for the product.

All right. Thank you. I'll get back in the queue.

Thank you. Our next question comes from the line of Jonathan Komp with Baird, your line is open.

Hi. Thank you. Maybe first just a follow-up on the question of the hard good. If I look at the last 3 or 4 years and then 2020, I believe hard goods accounted for more than all of the growth for the Company over that period. I wanted to just follow up and ask, do you think there is a risk that you go all the way back for hard goods? I don't know if you have a view there and related to that, are you seeing trends in other categories that you think could offset it if you do?

I'll go ahead and take a crack and will let Rick add anything if you'd like. From an overall perspective, I guess, John, this really falls back to our model of hard goods has been a huge growth driver. We've been super happy to have it. It's been a core part of our offering. And like all of the trends we see over long periods of time, categories have been flowing. And so, to the second part of your question, I was like, how far do we think it's going to go? I'm not really sure. I think that the best part of what we've got going is that we do have things offsetting it, and we are running overall gains. So yeah, we've seen hard goods decrease a little bit. We mentioned that Men has been our strongest category, we continue to have really strong results there, we've seen increases in footwear, and now we're seeing increases in accessories. So, I think all of those are really good signs as we flip to the back-to-school, we see growth across all three of those areas I just mentioned as well as our women's business. So, for me, the hard goods results are still pretty phenomenal over a multi-year of the stack. And now that we've seen a little bit of a pullback here in Q2 and into Q3, we're running big gains in the other areas. And that's great because that's the model and that's the diversification we hope to offer with what we're doing so that as things trend up or trend down, we have other things to offset them.

Yeah, that's really helpful. And then just as a follow-up, this may be theoretical, as you mentioned, predicting where the categories will trend towards, but could you just maybe comment on the relative product margin across your major categories, and if you do see hard goods fall back in favor of other categories, what that might mean for product margin?

Yeah, sure. And I'm happy to speak to that, and I think from a product margin perspective, we just could not be happier with a kind of where we stand. I think this is now year 6 of us running product margin gains. And if you look at the offering that we have, the apparel categories and accessories are typically our highest product margin and the snow or the hard goods business and the footwear are lower margins for us. Now, the beauty of this is as we look at the last 6 years, we've been able to grow margin both within departments as well as across the Company with these changes happening, right? So hard goods have grown in nature over the last few years. We've continued to grow our product margin. Another interesting piece to this is we've seen our private label penetration over the last five years decline as we've been in such a strong branded cycle, we continue to grow product margin. I'm really proud of our U.S. teams as well as our international teams because we've seen product margin growth internationally as well as those businesses that scaled. So, I think we have a lot of different mix things, maybe almost similar to my sales commentary, it's about how we drive the whole pool. There are challenges from time to time as we transition to, say, hard goods or footwear, which are typically not as high from a product margin perspective. But when our teams are really doing everything, they can, which is our focus at all times, we can drive product margin both categories across countries and still see overall results even if the mix is trending the wrong way.

Okay. Great. And just last one for me. As we think beyond 2021, any framework to think about the puts and takes for operating margin and your ability to hold on to a double-digit margin. Thank you.

Yeah. Thanks, John. And I'll have to be very high level here because we are -- we're not going to talk too much about 2022, but we script this even in our Q1 call that anniversarying what we saw in the first quarter of 2021 will be challenging as we move to 2022. Fortunately, we do view ourselves and continue to view ourselves as a growth retailer. And we have a lot of things. We're trying to do to offset some of the stimulus-related benefits we saw in the first quarter. I'm not going to talk specifically, other than we are expecting a step backward in the first quarter of 2022. But we're working hard to build a model and a plan for 2022 that would try to offset that to the greatest extent possible. Now, over the long term, getting to double-digit operating profit is where I think the business has been driving. If we go back and rewound to these same calls 4 or 5 years ago, we were in the mid-single-digits talking about getting to the high single-digits. And I'm really proud of what the teams have done. I think we've driven a lot of value for our shareholders and we've really built a strong model that can drive now into double-digits. And so, I think we're on track for that here in 2021, and I think we can build models that continue that focus into 2022 and beyond.

Okay. Thanks again.

Thank you. Our next question comes from the line of Mitch Kummetz with Pivotal Research. Your line is open.

Yeah. Thanks for taking my questions. Let me ask the question of the hard-good a little bit differently. If I look at your sales growth through the first half and even in Q -- you’re early Q3, if I look at on a two-year basis, we've seen the sequential deceleration of the growth. Is it fair to say that all of that is due to the softening of the hard goods category?

I mean, I am not sure I fully understand your question, Mitch. Are you --

Well, so Q1 sales were up 31% over 2 years ago, Q2 was up 18, I think Q3, you said you're trending something in the high single-digits. So, there's been this deceleration of the gross rate on a two-year basis. I'd be curious to know what those numbers were if you stripped out hard goods. I'm guessing you won't tell me that, but I don't know if you can qualitatively say that most of that deceleration has been due to a softening of hard goods -- skate hard goods?

Yeah, I think it's probably more complicated than that, too, because you have to look at where we were the years before, and I think this is something like -- let's just take Q3 as an example, where we've now run-up for the actin 2020, this would be our fifth year of pretty major growth on back-to-school. I mean, if I go back to August of 2017, we were up 7.4%, August 2018, we're up 9.5%, August 2019, and we’re at 7.1%. So, it's pretty significant multi-year stacks, and I think you have to balance that across where you are in the year. And as you know, I mean, you've been following this for a long time. Our peaks have been our biggest growth cycles really since 2016 and so we haven't had all those same peaks in the first couple quarters, and what we've seen now in the last couple of years is -- or at least in 2021, is pretty outsized growth in the first and second quarter. I think we have to see how that plays out. For me, Mitch, it's -- again, it's kind of how we drive that total growth. And yeah, hard goods are declining, but it's still -- on a multiyear perspective, I think we can --

No, I understand. I mean, probably -- part of why I asked the question is just to get a sense as to how the rest of the business is doing over the course of the last 2.5 quarters, if it's been holding pretty steady or if it's also been declining based on that trend. But we can maybe take that offline. Snow, if I recall correctly, was challenging in Europe last year due to some resort closures, COVID, a bunch of stuff. If we have a more normal snow season in Europe this year, I mean, Rick, you've been doing this longer than I have. Do you anticipate some pent-up demand there for both snows hard and soft goods?

I think, Mitch, that our -- I think the answer to your question is yes, we do if we have a more normal snow season in Europe. Now, the flip side of that is we had an outstanding snow season here in the U.S. So, I think there's always that balancing of the aspects of the two businesses of the two geographies. So, I think there will be some -- it depends upon -- these overall results depend upon how -- what kind of snow season we have here in the U.S. too. But for Europe, yes, I think that would -- I was thinking is it can't be much worse than it was a year ago. Not only to be clear, not only was there, not a lot of snow, people couldn't get there, but our stores are closed. Right. At the same time, including some stores that are really catered to that like an Innsbruck and Schwab being that really cater that still customer. So, you couldn't get much worse mid so I do think a decent snow year is going to be good. You better be beneficial for us in Europe.

Okay. And then lastly, just on the gross margins. Again, if I look at your gross margins versus 2 years ago, you're running up over 500 basis points for both Q1 and Q2. It sounds like -- and I guess that a lot of that has to do with full-price selling, given all the liens channel inventory, it doesn't sound like you expect the same sort of 2-year margin expansion in the back half. And I'm curious, is that because you're not expecting the full-price selling to continue to be as strong, or are there some other dynamics that you're factoring into your outlook?

Yeah. We talked about Q2 specifically, but the same play out in Q1. We had 530 basis points of increase in gross margin in the second quarter. If I break that down, 270 basis points are product margin itself. We had occupancy leverage of 170 basis points, and then an improvement in shrink. As we move to the back half of the year, I think that the reason why we're not forecasting the same level of growth is really a factor in a couple of areas. One, that product margin growth that we're talking about that we've seen in Q1 and now into Q2 actually really started in the back half of last year, and maybe even Q2 of last year. So, we saw a really strong product margin growth in Q3 and 4 last year. So, we're not forecasting that to be significant, and we've also run extremely strong shrink numbers throughout the pandemic and what we're really excited about is now in our first quarter really being primarily open. So, we've run good shrink numbers here through the second quarter, and so we don't have the benefit in Q3 and Q4 on the shrink side, either. That's probably why you're seeing a little bit less aggressive in the back half of the year on gross margin, but again, on a multiyear basis, really excited about the results.

Thanks, guys. Good luck.

Thanks, Mitch.

Thank you. [Operator Instructions]. I'm showing no further questions in the queue. I would now like to turn the call back over to Mr. Rick Brooks for closing remarks.

Right. Thank you. And again, thank you all for joining us on the call today. We're always happy to engage with you, so really appreciate it, and we'll look forward to talking to you in December for our Q3 results. Thank you, everybody.

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