00:05 Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Fourth 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. 00:18 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. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez's filings with the SEC. 00:53 At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks.

01:00 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 fourth quarter, then I'll share some thoughts on the past year and what it means for Zumiez going forward, before handing the call over to Chris, who will take you through the financials and some thoughts on the coming year. After that, we'll open up the call to your questions. 01:22 When we announced in early January that total sales for the combined November and December period increased 9%, fueled by another strong holiday season. We indicated that we expected trends to slow over the remaining month of the fourth quarter. This is due to several factors including a tough comparison for the stimulus fueled spending in January of 2021, store traffic likely being impacted this year by the fast spreading Omicron COVID variant, and the fact that we started to see some sales patterns that resembled pre-pandemic seasons with volume focused around peak periods. We're also cognizant of other potential issues such as inventory shortages from global supply chain disruptions and added pressure on the consumer spending from rising inflation. 02:06 As you saw from our earnings release issued earlier today, our full fourth quarter results fell short of our expectations, as these headwinds combined to create a more challenging finish to what was overall a pretty phenomenal fiscal year. Overall, net sales increased 4.6% year-over-year for the fourth quarter to a record $346.7 million and diluted earnings per share reached a $1.70, which was also a quarterly record. While the prior-year stimulus payments and current market conditions made it difficult to lap last year's January, our performance to close out the fourth quarter does not diminish…

07:20 Thanks, Rick and good afternoon, everyone. I'm going to start with a review of our fourth quarter and full year 2021 results. I'll then provide an update on our first quarter-to-date sales trends, before providing some perspective on how we're thinking about the full year. 07:31 Fourth quarter net sales were $346.7 million, up 4.6% from $331.5 million in the fourth quarter of 2020 and up 5.5% from $328.8 million in the fourth quarter of 2019. The year-over-year increase in sales was primarily driven by our ability to capitalize on current trends, the reopening of stores compared to the short-term store closures related to COVID 19 pandemic in the prior year, and a more normalized holiday season in our U.S. business. 08:00 Our stores were open for approximately 99% of the potential operating days during the fourth quarter of 2021 compared to approximately 94% in the fourth quarter of 2020 and a 100% in the fourth quarter of 2019. From a regional perspective, North America net sales were $287 million, an increase of 0.6% over 2020 and up 2.2% compared with the same period in 2019. Other international net sales, which consist of Europe and Australia were $59.6 million, up 28.8% from last year and up 24.6% from two years ago. Excluding the impact of foreign currency translation, North America net sales increased 0.6% and other international net sales increased 36.9% compared with 2020. 08:44 We continue to experience temporary COVID related closures in Europe which was open for approximately 94% of the potential operating days during the fourth quarter of this year. During the quarter, the men's category was our largest growth category, followed by footwear, accessories and women's. Hardgoods was our only negative category for the quarter. 09:01 Fourth quarter gross profit was $133.9 million compared to…

22:32 Thank you. [Operator Instructions] Our first question comes from Sharon Zackfia with William Blair. You may proceed with your question.

22:48 Hi. Good afternoon. I'm guessing, you'll get a lot of questions on the current environment. So, I'll avoid that and leave that to everyone else, but I did want to ask about the outlook for store growth. I think if I'm not mistaken, this will be your fastest store growth since 2015. So, and I think that also holds for North America as well as obviously the consolidated global growth. Can you talk about what you're seeing there that gives you the confidence to grow and reaccelerate at that pace? And is this kind of a new pace for Zumiez for the foreseeable future, kind of moving into what I would call more mid-single digit expansion versus what had been kind of more modest growth over the past several years?

23:32 Thank you, Sharon. I'll start and let Chris follow. So, the store growth really -- let's start with the U.S. and I think we'll touch on -- let’s start with North America, and then touch on Europe and Australia separately because they're a bit different than what we're seeing in the U.S. So, you’ve really seen in the U.S., Sharon, is a lot of our trade area work or analysis of markets across the country how we're applying our knowledge of what's happening in those markets relative to our sales data and our STASH data, our loyalty program for our customers. And what we're seeing is market opportunity in a number of markets across the country where we believe we have an opportunity to add units to better serve customers, we believe, not only in the physical world, but also that we think that's a positive for our digital business too. That's first. 24:25 The second item in North America is really also about opportunity. We have seen substantial savings in lease costs, in rent occupancy costs over the last few years. We are now -- we've always had a list of I think roughly 40 locations that we wanted to be in, but we either couldn't -- we didn't believe we could afford the deals that the landlords had for us, or that we couldn't find a good location that we would want in those centers. I think those things become a little easier to navigate now. So, we've been adding some locations in what I think are some of the better centers across the U.S. And because now we can find opportunity that works for our landlords and works for us and also meets our criteria for the quality of location as well as economics. So, in…

27:23 No, I think the only thing I would add is just as we reflected back to going backwards. Some of the stores we opened in ‘08, ‘09 were some of the best stores we've opened. And so, we thought when Rick talks about opportunities, I just kind of reinforce, we continue to work with our landlords. I think this is a really good time for us to be adding stores that we think can really propel us over the next decade.

27:47 And then just a question, Chris on your outlook for the year. I mean, it does kind of sounds like you're expecting a tale of two halves. I guess, it's hard to have confidence on anything, given the dynamic environment that we're in, but I mean what, what gives you all the belief that much of what you're seeing right now is related to year ago stimulus and/or Ukraine versus something maybe more long lasting with the consumer pulling back?

28:22 Yeah. I think it's a really good question, Sharon and obviously, one we’ve spent a lot of time talking about internally and I think to really think through this you have to kind of look at how we performed last year and when we’ve see the stimulus and it's not just Q1 of 2021 albeit that was our -- the largest stimulus we saw, I think we are in multiple times in 2020 when the stimulus was put out there that we feel like we performed outsized to our peer group. And I think that speaks to the model on what we have. I mean we are a full price, full margin retailer. I think we believe there is a discretionary nature to us that when our customer has additional cash to spend, I think we will benefit outsized that and so I think if we look back to last year's Q1, as you're well aware, we were up over 100% compared to 2020. But maybe more importantly we were up 31% compared to 2019 which looking at normal growth curves. Those was pretty outsized growth. So, as we got through these first five weeks and we looked at kind of where we've laid out, which we said on the call was down 1.9%. I think what we saw is, we saw some softness to start February which kind of mirrored what we saw in January as we anniversaried last year's stimulus and then it started to get actually a little bit stronger as we’ve moved through the back half of February with week four starting really strong and then it got really tough, right. 30:02 When we started to see some of the global events that have emerged in Ukraine and that's continued through the first week of…

31:26 And again I think that kind of mirrors in my mind Sharon, what we experienced in 2021 which we definitely got the large stimulus-fueled spending in Q1 and a little bit in Q2. And then we saw normalized holidays -- our back-to-school and on holiday season and again I'm -- I guess I would just add to Chris's commentary that I still believe strongly that our brand has never been stronger than it is today. I think we're really doing a great job of meeting the needs of our consumer and I'd say, likewise, about our culture, I think our people are amazing and that we're aligned and focused on the things we're doing so ultimately those always the most important things in my mind that gives me the confidence that if outside of radically changed environment I think will more than get our fair share in those peak windows.

32:18 Okay. Great. Thank you.

32:22 Thank you. Our next question comes from Mitch Kummetz with Seaport. You may proceed with your question.

32:27 Yeah. Thanks for taking my questions. I've got a few of them. So, I want to start housekeeping, I know the K is coming out shortly. And you'll give the hardgoods penetration in the K, I was hoping you might be able to provide that on the call today?

32:44 Sure. Happy to do that. Just as a mix of all of our categories, I'll just lay them all out, Men's apparel was 43%, accessories was 17%, footwear was 13%, our women's apparel was 11% and the hardgoods was 15%.

33:03 Okay. That's helpful. Thank you. And then also, Chris, can you maybe speak to the Blue Tomato profitability. I mean, it would be great if you can give us like an EBIT number or a margin percentage, but I assume it was unprofitable for the year. Could you maybe elaborate on that and it sounds like, I know, Ukraine is an issue? Obviously, for that business, but it sounds like you're pretty positive on Europe in general for ‘22. So how do you think that of that business sort of progressing through the year versus either ‘21 or ‘19 or however you want to talk about it?

33:40 Sure. Yeah. And I guess I'd just start Mitch with, we're super proud of our Europe team, not only for their 2021 results but for their results over the last few years under a really challenging backdrop. And Rick mentioned earlier Sharon real estate question around our confidence and expansion for Europe and I think that's directly tied to what we're seeing in the stores that we're opening today and I think our thought process that's gone into where we open and how our classes of stores are planned has just gotten better and better over the last 10 years and our teams have been able to go out and execute, which I think is great. 34:20 As it relates to 2021 specifically, I think we continue to have pretty meaningful closures in 2021. I mean, we were closed to 60% of the days in Q1, 12$% in Q2. We got opened in Q3 and we're thinking we are in a good spot heading into holiday and then had 6% of our days closed in Q4. So, this compared to 25% in 2020. So, as we looked at the year overall, we were down, we were open more in 2021 than 2020, but still a massive amount unplanned. And I think despite that we saw sales in Europe up over 21%. Now we were down 6% to our budget but the closures for the year were almost 20%. So, I think when I look at that mix, what that tells me is that as we did close, we were able to capture more of the volume online. We were able to capture when we were open. And I think it continues to show our brand strength across Europe is, I think we've got a really good customer there and…

38:14 Okay, I appreciate that color. And then lastly, I think you said for the year, I know you're not giving official guidance but you did provide some color. I think you said sales down low singles. I think you said EBIT down double-digits. I feel like maybe there was a low double, but anyhow, I think when I do the math around that, I come up with like an operating margin of around 12% for the year, which is obviously down year-over-year, but still way up from 2019, I think, up nearly 400 basis points or so, maybe a little less than that from 2019. Is there any way you can kind of walk us through the margin bridge from '19 to '22? I mean, I imagine a lot of that is product margins, some of that's occupancy leverage. Is there any way to maybe kind of talk about some of those bigger puts and takes and maybe the stickiness of them?

39:05 Sure. I'll try to do my best and I might speak to a little different time period because the way we are thinking about it, obviously, 2021 was up about 350 basis points to 2020, and the guidance we gave today is probably a little softer than what you put out there or what you just quoted, but let's say we go backwards 200 basis points. And I think if you kind of look at that, that has actually got us in the -- not quite in the teens but in the solid double-digits operating profit as a percent of sales. Again, if we go back to where we were in 2016 when we were sitting at 4.6% of operating profit as a percent of sales and talking to you about getting back to high-single digits and then moving into double digits, I think we've been able to kind of accomplish what we've been looking -- what we were looking for. And obviously, this year was pretty outsized with the stimulus, but still being in the double-digits, we feel really good about the trajectory we're on and I appreciate you calling out just the growth over '19 because I think that's really real. 40:17 Now when I think about the puts and takes, I think what's been sticky and -- as we have been able to grow product margin not only here domestically but internationally as well. And as we look at '21 to '22 as a comparison, we are expecting to hold product margin. And what that means is actually, there probably will be some growth because we're expecting to have some mix challenge. And by that, I mean, our international entities are growing at a little faster clip than our North America entity and they are at…

43:36 Yeah. Mitch, I'd just add to Chris' thoughts, too, about the part of what we've been able to do, I think, over that longer time period, again, is build this one channel model. But the most important part of that is it's so much better for our customers because we are faster in every sense, in every way, how they can see product, they can see local availability through our local assortments, right? And we can also Zumiez deliveries come into play because we can deliver it quick when they need it and with a great brand experience. So, this goes back a lot to culture and brand, what we're doing for our customers and how we're empowering our people to do it by localizing the experience for our customers, connecting our customers, our people even more together. 44:17 And I think those things, also for the long term, are really built not only a more optimized business model but a better experience for our customers.

44:26 All right, guys. Thanks, and good luck.

44:28 Thanks, Mitch.

44:31 Thank you. Our next question comes from Corey Tarlowe with Jefferies. You may proceed with your question.

44:38 Good afternoon and thank you for taking my questions. My first question has to do with trends that you're witnessing from a product perspective. What have you observed in terms of trends by product category that resonated with your customers in the fourth quarter and into the first quarter?

44:58 All right. I'll start, Corey, and let Chris add in. I would tell you, again, we shared with you the top fourth quarter performing departments. And shoes, I think, was the first one. And that may seem surprising in today's constrained inventory position for shoes, but our shoe business has been quite good. And I really appreciate the support of our shoe partners in helping us work through the challenges that we've had in supply chain on the shoe business and that's continued. And I think as Chris gave some color there on sales so far here through this quarter. But -- and I think there's a potential opportunity for us based on better inventory as we look forward. 45:39 The flip side of that has been the difficulty around skate hardgoods. And again, that is not a -- this is not anything new for our business. It's a portfolio approach of how we manage departments across the business. So, we ran gains last year with substantial loss of skate hard goods throughout the year. I think the good news for us on that front is we expect that those skate hard good losses are going to minimize here as we go forward this year because we're simply going to lap them. And we're looking at kind of targeting where skate hardgoods will get back to historical levels relative to mix of sales. So, we expect that we'll see some relief of the pressure from the negative skate hardgoods. 46:16 And then from that, I think we have a number of good trends that are working in our favor. Men's and women's and apparel, long bottoms, shorts, the entire business, I think, is very strong. And of course, our graphic tee business. We constantly are working on that, bringing new brands in, playing with that area. And that will be a function of, again, new brand launches, which I believe we still launched 100 new brands last year despite the challenges of working through the difficult environment that we're in. So, I think our teams did a really great job there of continuing to cover new and interesting brands, local brands to serve our customers. 46:55 So I think, as always, it's about the business model again, Corey, about our diversity of brands, our diversity of departments and categories, covering the entire lifestyle. And then we'll have to manage our way through the -- to continued supply chain challenges, right? And that's a factor working closely with our partners. Now Chris, do you have anything else you want to add there?

47:17 No, I think you covered it.

47:18 All right.

47:20 That's great. And just to follow up on that last part about the supply chain challenges that you are witnessing. What's embedded in the first quarter earnings guide in terms of freight headwinds? And then how should we be thinking about this headwind throughout the upcoming fiscal year? And what mitigation strategies do you have in place?

47:42 I'll go ahead and take a crack and then let Rick add anything. And I think when I think about supply chain, obviously, it also correlates so closely with inventory management. And I think when I -- we're really happy with how we've ended the year from an inventory perspective. We were down about 4%, which I don't think it's common across all of our peer set, but we felt like it was really important as we were just cautious in what's out there. And we have a good business in which a large portion of what we're doing is screenables and we can chase that. So, I think our buying teams, I give them a lot of credit. I think they planned out pretty well how to think about the business and where we need to invest, where we need to bring things in early, where we can maybe be a little more cautious and see what the sales results are telling us. 48:30 And so I think our teams have just done a really great job managing through the supply chain. And I like to remind investors, we've been doing -- we've had supply chain challenges really now for 18 months to 24 months. I mean, this has really started even when we closed in the Q1 of 2020. So, our teams have done a really good job managing through this, knowing when to bring product in. And as we think through the first quarter, this is really no different. I mean, clearly, there's areas of the business where they've made a little more impacted but I think our teams have managed through that really well. 49:04 In regards to the different pushes and pulls that we can do, on the inbound side, it all starts with working with our brands and just having really solid relationships. And we have -- we've got really great brands and our teams have good relationships so I think we've been able to navigate that. On the business-to-consumer side, it's also been challenged. Obviously, there's a lot written about cost and that. But I think we've got good business partners there and we just continue to try to innovate as well. As you know, we are even delivering some of our product ourselves. 49:39 And again, it kind of ties into Rick's comment just a second ago about how we've managed the one cost structure. I mean, this is really about a better customer experience. And so, we've been able to increase the speed of delivery and do it with a Zumiez employee smiling face. And so, I think from a supply chain perspective, we continue to work through a lot of different things to enhance what we're doing. And there's obviously some inflation packed into the plan that we put out there today, but we're trying to manage that to the greatest extent possible.

50:14 Yes. The only thing I'd add, Corey, is just, again, as I think Chris said in an earlier comment is, this is our fifth or sixth year of product margin -- peak product margin results. So that doesn't happen by accident, right? And a lot of those years, we were having private label declines in our private label and still driving peak product margins. So, I think what this looks at is the dedication and the focus we have on the organization to always be driving inventory turns better and making sure that we're managing inventory as best as we can in this. And of course, in many respects, the better you manage inventory, the fewer markdowns you have, the less you have to move inventory around. Gets back to localizing assortments, this concept of trade area. 50:54 I hope you start seeing that over a period of years, these are the consistent things that has been driving our ability to improve product margins across our entire business. And by the way, we're seeing those product margin gains in our international entities, too. Chris, right there, at a lower starting point than we are here in the U.S. We're driving gains across all these entities. So again, I think of it, too, as our commitment to just working on this and getting better. And it also effectively derisks our business to a large extent as we manage and improve turns.

51:26 That's great. And then if I could just squeeze one final question in. What's your outlook for the promotional environment? It sounds like you're expecting product margins to stay flat, I believe. But most other retailers, it seems, are embedding a little bit more of a cautious outlook as it relates to promotions, at least throughout the remainder of this year. I would be curious to hear your thoughts there. Thanks.

51:57 Yeah. I mean, I'll take a crack at starting here. I think from an overall outlook perspective, we are trying to -- our outlook is to plan to maintain product margins. And I think that comes into the planning that Rick just talked about and how we think about our brands. I mean, we do believe we sell brands that are full-priced brands. And our game has never been discounting or marking off the entire store. Our strategy has been, let's bring in really cool, unique brands that can sell at full price and let's support them in what they're doing so their brand equity stays high. And so that's why I think you see us manage inventory pretty tightly and why we're able to plan the business the way we are. 52:40 The other piece, I'd say with that is it's not an accident that we've had product margin gains for the last six years. I think our teams have been really smart in about how we source and build product and how we work with brands to be able to do that over the long term. And so again, I think it's a testament to our buying teams and our sales teams overall and just being able to build that plan to continue to drive growth over the last six years.

53:06 And I don't have a lot to add to Chris' comments. I mean, we never really want to mark down product, period. And that doesn't mean we don't provide value for our customers, and that's where our private label comes into play, how we assemble packages, what's in those packages of offerings as we run promotions. But those are about value for our customers but at full margin for us to effectively and using our products to drive a high-margin sales still. 53:32 And the last thing I'll add to this comment is, again as Chris said, the -- our success isn't by accident. We have a number of initiatives that we have in play looking forward. And so, we're going to continue to drive at this hard because we think it's fundamentally doing a great business. We have to be faster in all respects of meeting consumer demand. And so, we're looking at ways to improve speed throughout our supply chain. And there's a number of initiatives, I think, that we have in play over the next few years that's going to address that even more.

54:01 Great. Thank you very much and best of luck.

54:05 Thanks.

54:07 Thank you. [Operator Instructions] Our next question comes from Jeff Van Sinderen with B. Riley. You may proceed with your question.

54:19 Hi, there. This is actually Katherine Knop for Jeff today. I just have a couple of questions for you guys. First, can you speak a little bit more about how you're managing labor cost pressures and what are you doing to mitigate those pressures?

54:37 Sure. I'll speak to the labor side. I mean, this is obviously -- I'll start with store labor specifically. This has been a really crazy cycle because of the closure period and the influx of our customers when they feel safe and maybe less traffic when they don't feel safe. And then you have domestically here, the minimum wage expansion across the country and what that means from what we refer to as compression or meaning, how does the minimum wage change move up the ladder of your different positions as pay rates increase? So, all of those things have created quite a bit of challenge over the last few years. I think it's driven us to really think more about how our scheduling works and how we staff stores and trying to do that delicate balance of serving the customer and being there for the traffic while also trying to manage costs and it hasn't been easy. And like a lot of retailers, we have seen an increase in rate over that time period because of the cost of labor. 55:44 So I think the best way you can manage it is to really be -- have a strong plan around your staffing strategy. But also, that's part of why we're seeing cost increases too and across the business. So, we're definitely seeing that. We're seeing it on the corporate side of our business as well. And so, we've had to kind of manage through that. And I think what it comes down to is just really looking at the entire model and trying to figure out what are your puts and takes. And we know that labor is an area of growth, and it has been for a period of years and is probably expected to be at least in the near term. And then we have to manage our other areas of costs. So, I think our teams are really good at trying to find those offsets while still investing in our people and trying to keep that value over the long term because we've said for quite some time, this business is about brand and culture and the backbone of it is our people. And so, it's definitely a pressure and a challenge, but I think our teams are really engaged in trying to navigate through it.

56:51 Great. Thanks. And then one final question from me. What are your plans to pass through price increases to customers? I mean, how do you guys see that impacting overall sales?

57:04 Sure. I'll take a crack here and let Rick jump in. I think price to customers is really what the market will support. And I think what we try to do is to really think about where are we seeing price increases? Where is it fair to pass prices through? And we just have a diligent process to let that happen where we think it can. And I think in this environment, as a consumer and as a CFO of a company, I think we're kind of getting used to it, right, because the costs are going up. 57:43 And I think our brand is supporting it because you can tell we were able to grow product margin. And I think that growth is inclusive of taking prices up to be able to navigate this. It's really hard to talk about the overall percent we've increased because this is a category by category, department by department analysis. Some areas, we are taking prices up. Some areas are probably staying a little more stagnant. It just really depends on what the cost structure is behind it that supports it. But we have seen overall price increases across the business, and our strategy will be to continue to manage that based on what our inbound supply chain and brand costs are.

58:24 Yeah. And I'd just add to that, Katherine, that again, as Chris said, there's always puts and takes, right? As other areas, we can get better and more efficient in what we're doing. And then again, I'll tell you, I think of it a bit differently. We have to, of course, look at what our cost inputs are on product and all of the cost increases and how those puts and takes are playing out. But I also think about this in terms of wallet share of our customer because we expect no matter what the mix of business is, we should maintain and always try to grow the wallet share of our customer base. 58:56 So even in an environment where the average unit price may be going up, we may see unit declines in that world and -- but we'll still drive dollar [indiscernible] increases and overall sales gains. And I think that's what you've seen us do this last year. So, when you think about this concept of again, you still have to have great product. You still have to have that unique product that people can't get anywhere else. And if we do that and do that well, that's what our brand is about, provide that with great people, we'll maintain and grow wallet share over time. And that's been our track record. Of course, we've been through other experiences like this in the cycle of our business back to the dot-com bubble and that major unit growth phase in the late '90s, early 2000s. We've been through these cycles, right, the run-up in spending into '07 and '08. 59:47 So we know what this feels like. We know how to manage our way through it. And throughout all those cycles, we really did a great job, I think, driving that wallet share of our customer no matter what the mix of units, dollars and average unit retail look like.

60:01 Great, thanks for your time.

60:09 Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Rick Brooks for any further remarks.

60:16 All right. Well, again, I would just like to say again, thank you to everyone. Thank you to all our brand partners. Thank you to all our employees, and thank you to our investors out there who follow us so closely and pay attention to what we do. We greatly appreciate it. And we'll look forward to talking to you all in early June. Thank you.

60:34 Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.