Good afternoon, ladies and gentlemen, and welcome to the Zumiez Incorporated First Quarter Fiscal 2022 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’d like to remind everyone of the company’s safe harbor language. Today’s conference call includes comments concerning Zumiez, Incorporated business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call are not based on historical facts that 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. At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

Hello, everyone. And thanks for joining us on the call today. With me is Chris Work, our Chief Financial Officer. I’ll begin today’s call with a few remarks about the first quarter, before handing the call over to Chris, who will take you through the numbers and our outlook. After that, we’ll open up the call to your questions. When we reported record Q1 results a year ago, and more recently, when we discussed our outlook for 2022 during our fourth quarter call in March, we outlined several reasons why the first quarter of 2022 would be down on a year-over-year basis. To reiterate, a year ago, we achieved over 100% revenue growth compared with Q1 of 2020, another 30% compared with pre-pandemic levels in Q1 of 2019. As our teams did an amazing job capturing a large share of the outsized consumer demand that was fueled by record domestic stimulus in early 2021. This was all contemplated when we provide guidance for Q1 sales to be between $215 million and $221 million. As you saw from our release, sales came at the high end of our range at $220.7 million, which represents a 21% decrease compared with Q1 last year and increases of 60% and 4% over Q1 2020 and 2019 respectively. On top of the difficult sales comparison, the operating environment has become increasingly more challenging due to supply chain bottlenecks, higher logistics costs, a tight labor market and high levels of inflation. These factors were also incorporated into our outlook, but some of the headwinds were stronger as the quarter unfolded, which combined with a shift in timing of certain expenses, resulted in the EPS coming in $0.02 below our guidance range of break-even to $0.10. While we’re disappointed that our first quarter profitability fell short of…

Thanks, Rick, and good afternoon, everyone. I’m going to start with a review of our first quarter results. I’ll then provide an update on our second quarter to-date sales trends before providing some perspective on how we’re thinking about the full year. First quarter net sales were $220.7 million, down 20.9% from $279.1 million in the first quarter of 2021 and up 3.6% from the pre-pandemic first quarter of 2019. Compared with the first quarter of 2021, the decrease in sales is driven by the significant benefits from the U.S. stimulus realized in early 2021. And to a lesser extent, the continued inflationary pressure on the consumer and increased competition for the discretionary dollar. These forces were partially offset by increased sales in each of our international geographies. From a regional perspective, North America net sales were $186.3 million, a decrease of 25.1%, compared to 2021 a decrease of 0.9% compared to the same period in 2019. Other international sales, which consists of Europe and Australia were $34.4 million, up 13% from last year and up 37.5% from the same period in 2019. Excluding the impact of foreign currency translation, first quarter North America net sales decreased 25% and other international net sales increased 21.8%, compared with 2021. First quarter gross profit was $72.4 million, compared to a $103.2 million in the first quarter of last year. And gross margin as a percentage of sales was 32.8% for the quarter, compared to 37% in the first quarter of 2021 and 31.2% in the first quarter of 2019. As Rick highlighted, product margins were strong in all geographies on full price selling this quarter, but the sales mix shift away from our higher margin U.S. business overshadowed this impact as the company’s – company level resulting in a mixed driven decrease…

[Operator Instructions] And our first question comes from Jeff Van Sinderen of B. Riley. Your line is open.

Hi. This is Richard Magnuson in for Jeff Van Sinderen. Thank you for taking our call. Given the higher fuel prices, are there any discernable trends that you’ve noticed in store traffic versus UPT and ADS that suggest that the consumers buying more at one-time and shopping less frequently?

I can’t talk – well, look here, but I don’t think I’ve seen the typical trends we see Richard in these scenarios is that is what happens. Weekends become a bit bigger, people consolidate trips. I haven’t sense that at this point in looking at sales, but I think that is an expectation we would have as time progresses towards these high gas prices, we’ll see consumers consolidate trip, and we will expect to see again, that would mean weekends a little bit better historically as how it’s worked for us rather than weekdays.

Richard, I’d just add to that. Kind of correlated to that we are seeing a pickup in our own private label merchandise, as we think about kind of what that trade off could be. We have seen a little bit of a spike there in the first quarter, which also indicates some of the pressures that the consumer might be under.

Okay. And then can you speak more about how you have planned back to school merchandise receipt flow this year versus last year, and any other color that you can add on supply chain getting better or worse overall?

Sure. Yes. I mean, I think what you saw from us here in this release is it’s really kind of a re-look at the back half of the year. I think one thing that we’ve seen over the last couple years is with the stimulus and outsize spend and really actually our results coming into the pandemic in 2017, 2018, 2019 is we’ve run really strong results. And I think that’s a testament to the strategies we’ve put in place and the way that we’re speaking to the customer. And so we’re really pleased with how we’ve performed. Obviously, when you run outsized results during the period of stimulus, you might have more challenging results as you anniversary that. So I think we’re seeing some of that. And then we’re looking at kind of just where the consumer’s at with the pressures on them, the inflationary pressures on them, the rising costs really across pretty much all areas of their ecosystem. As well as retail is probably over indexed a little bit over the last couple years as people have been doing less travel and less experiential. So I think there’s more competition for the discretionary dollar. So, we thought about a lot of that coming into the year how we planned Q1, obviously the results of Q1 and now the first month of Q2 had us just sort of revisit how we’re thinking about the year. As we think about back to school, to your question specifically, we have planned a little bit more of a decrease in what we had coming into the year, we’re starting to think about that both in back to school and end of holiday to plan inventory receipts a little bit lower in light of where the environment is. There’s not going to be a major change in cadence year-over-year. We’re still expecting the back to school season to flow and a similar cadence to what we’ve seen the last couple years. But I think overall we’re planning a little more conservatively just based on the backdrop of where our consumer’s facing and what we’re seeing in the marketplace. Obviously, one of the benefits of our business is we can adjust. We have really good relationships with our brand partners and we continue to work with them to navigate this environment. As you know, a large portion of what we do is screenables and quick moving. So I think we can, as we start to see differences or movement in trends we’ll be adjusting. But we are looking at the back half more conservatively as we’ve laid out in our guidance today.

And I would just add Richard that as we said in the comments, and I’m very confident that as we get into those peak windows, no matter what the performance – our performance is, I think on a relative basis, I feel good that it’s going to be strong relative to our competitors.

Okay. And then lastly what else can you tell us about the trends in European business and the outlook there?

Sure. Yes. I mean, I think as we think about Europe overall, I think obviously we’re very proud of how the Europe team’s operating. This is a super challenging environment. We had really strong hopes coming into this year about just the momentum we built there. And obviously with the war in Ukraine, we talked about in our March call we did see a tick down on kind of their performance and has been well documented here over the last couple months has obviously really impacted the cost structure and inflation structure over there, specifically around energy, but some of the same concerns we’re having here. So I think as we think about kind of where we’re at in the short-term, the results remain positive, which we’re really happy with. They had some closures last year. So that while positive results in Europe, they’re not as quite as high as we originally anticipated. I will say, Q2 is off to a better start. It’s still a little bit lower than what we were planning coming into the year. We stated on the call here just a few minutes ago that we did obtain a subsidy that helped offset some of the losses we had incurred across 2020 and 2021 in the amount of about $3.6 million. So that did help overall. But, I think it is still a difficult operating environment, but one that I think our teams are really executing here. And that kind of gets me to thinking about the long-term for Europe, and where we’re at. And I would tell you, we feel really confident in our position just as we have in March, and calls prior to that. And I think that that reasoning is really hinged on the fact that, this is a good time…

Right. Thank you. I’ll jump back in the queue.

And our next question comes from Corey Tarlowe of Jefferies. Your line is open.

Hi, good afternoon and thank you for taking my questions. How are you thinking generally about the promotional environment? And what are your expectations for the environment going forward?

I’ll start Corey, and then let Chris add his thoughts too. But again, as we’ve said here, we feel pretty darn good about our inventory position. And we think we can, as the direction Chris gave you in thinking about where product margin can be for this year. We feel obviously pretty good about where we’re at now. There is one big caveat with that in this environment, depending on how much more difficult the broad macroeconomic environment is, our competitors own a lot more inventory. And it could, if things, if they drive down prices a lot, then we may have to react to it, but that is not our current plan. We feel we can manage through it well, and we gave you the direction kind of, we’re thinking about our own cadence at this stage of the game relative to the product margin. Chris, I don’t know if you had anything else to add.

No, I just add, I think, the product margin for us, we mentioned on the call was, this last year was our six year in a row of product margin gains. And as we’ve disclosed the last couple of years, the last year was 110 basis point increase the year before that was 70 basis point increase. So, we’ve made real substantial progress on some of our initiatives over the last few years both during the pandemic and prior to the pandemic. So, I just call out that there’s a big benefit there. I mean, we were really happy with how our business performed in the first quarter. I think our teams really executed the plan in regards to where we were planning product margin. We did mention product margin was down 20 basis points, but that’s really more a factor of mix than anything else. As many of you know, our U.S. business runs at a higher product margin than our international entities, which is also an opportunity for us, because our international teams, as they gain scale and they continue to grow will have more opportunity to grow product margin. And we’re seeing that today in how they’re executing. So, I think Rick’s totally right. We’ll be – we’re going to kind of have to manage this to where the market’s at, but again, our strategy has been pretty clean coming into this. So, we’ll see how the next few quarters play out.

And I just add, again, the comment Chris made earlier, Corey, that the fact that, again, we don’t drive our private label to any particular target customers take us there. And they’re telling us at this point that the private label’s important to them, all our collection of private label brands. So, we’re seeing that tick up, and so obviously will be following our customer there too, in terms of which will be a good thing from a margin perspective for the business.

Question on the 2Q guide, what’s embedded in the EBIT margin improvement sequentially from 1Q?

Yes. I mean, I think you have a few different things. Obviously Q2 historically has been a little more of a profitable quarter than Q1 to start with. I think that’s where you have to originally kind of think through, and then as we think through the second quarter, I think we’ve got kind of costs planned a little more appropriately for where they are. We don’t have the event load that we had in the first quarter, as you know, we did our a 100K, which is our annual training and recognition event, as well as our manager’s retreat in the first quarter which is our two of our three annual events. We normally would have the first of those in January. So it would fall into the prior year, but just because of safety for our employees and where the pandemic was at we moved into the first quarter. So you’re going to see some movement of costs like that. That’s played out into the second quarter and I think overall that’s going to tell the main story. I think when we think about the second quarter and where earnings is at one of the things we’re really proud of is just how that bridge is from the pre pandemic timeframe. And I think, again, that maybe speaks to your earlier question around product margin, because we have seen really great product margin gain since 2019 as well as how we’ve tried to manage costs to offset some of the other areas where we’ve seen increases. So that’s kind of how we’ve thought about Q2 and obviously we’ll see how it plays out.

Very helpful. And then just lastly, what’s your expectation around shipping and logistics costs as we move throughout the year?

Yes. I’ll go ahead and take a crack at this and if Rick would like to add anything. This has been one – as we called out in our call, this is one of our bigger misses in Q1 where we just saw cost increase at a level that we were not anticipating. And I think as we move through the year, we’re hoping there’ll be some moderation of that. But also knowing that there’s been a lot of supply chain challenges and higher cost there. So we factor that in as we moved into our guidance and how we kind of our high level guidance for the – I should say our detailed guidance for Q2 and our high level guidance for the year that we are expecting there to be continued price pressure on the supply chain now to manage that we do. We are working on some things, some initiatives internally that can consolidate packaging and decrease some of those costs overall. And then we’re hopeful those will play out, but we’ve also factored in a higher cost here for the remainder of the year.

Understood. Thank you very much. Best of luck.

Thank you.

[Operator Instructions] Our next question comes from Mitch Kummetz of Seaport Research. Your line is open.

Again, thanks for taking my questions. Hey Chris, on the categories, I don’t recall you seeing what the categories were for the quarter. Maybe I missed that, but I guess even more important than that. I’m curious how they stacked up versus 2019. I don’t know if you have that.

Versus 2019, well, let me start with the quarter. We did see all categories down in the first quarter as you would expect hardgoods led the way followed by our men’s business, our women’s business, our accessories business. And then footwear was our strongest negative. I don’t have them compared to 2019 in front of me today. What I can’t tell you is that that’s a little more of a mixed bag. We have some that are up and some that are down. But overall we’ve seen in the short-term categories down.

Yes. I guess as a follow-up to that, the some up some down, do you know if hardgoods was down in the quarter versus 2019 and does your guidance assume hardgoods is down like your sales guidance now? I think is up mid singles on a three year if I did my math correctly. I’m wondering if hardgoods was down in the quarter versus three years ago, and if it guidance assumes hardgoods is down versus three years ago?

Hardgoods would not have been down versus three years ago. And I think the way we’re thinking about hardgoods, obviously, as you know it had quite a run up until last year. And obviously last year, right about in Q2, it started to become more challenged. And 2021 was a pretty tough year for hardgoods. I think if we look at that period of time, 2018 into 2020 it went from 10% of the business in 2018 and 19% of the business in 2020. So last year it was at 15% of the business. So you saw that, our strategy over the last 10, 20, 40 years has really been to just drive where those dollars are at. But as we came into 2022, we did expect hardgoods to be down. Obviously, we expected the losses to moderate as we moved to the year, just as a – as we saw a pretty big drop off during 2021. So as we look at Q3, Q4, we’ve already seen pretty large drop-offs in 2021. So our expectation is that we will continue to see, in Q2, hard goods drop. We may continue to see it in Q3 and Q4 as well, but certainly at a lower level than what we’ve experienced over the trailing three or four quarters.

Okay. And then on – again, I’m kind of working through the math. But again, it looks like on a three year, you expect sales to be up mid-singles, EBIT to be up 16% or so, mid-teens, call it, which I think gets me to kind of a 9% op margins for the year. I don’t recall if you gave the margin rate for the year. I was hoping you’d kind of talk through – so I think you said in the past that long-term sustainable op margin is – I think you said like in the low double-digit range. Can you talk about some of the headwinds that are in the margin this year that you think go away over time and if there’s any way to kind of isolate their impact that they’re having on the year?

Yes, certainly. I think your math’s pretty much right on from where we’re thinking the year. And as we entered the year, we thought we had the opportunity to maintain double digits from where we’re at. But obviously, with what we’ve seen now through the first quarter and the current trend, we are planning that really high, high single-digit in operating profit dollar – or operating as a percent of overall sales, which again would be as we look back at kind of where we performed here, would be pretty high compared to where we were at pre-pandemic. And I think that’s one thing, I would just call out even with the annual guidance that we put out there today. While a step backwards from last year, it continues to be our second highest sales in the history of the company and the second highest earnings in the history of the company. And as, these aren’t always straight lines. But over time, it’s about driving forward. So I think as we look at kind of – to your point of just where are we on this op margin, if it is at that 9%, we do continue to believe that long-term we can drive that into the double digits and meaningful above maybe even into the low teens. So like where does that come from? To your second question, I think there’s going to be continued – I think we can continue to do margin expansion. And while in the short-term, we’ve talked about that being a little more compressed, I think long-term, we do have initiatives here that we think we can continue to drive here in North America. We believe internationally, we have a lot of room to grow there. I think you’re going to see continued leverage…

Great. I appreciate all that color. Thanks.

You bet.

And I’m showing no further questions. I would now like to turn the call back to management for closing remarks.

All right. Thank you all very much for your interest in Zumiez. Again, as we’ve said here, we feel great about where we’re at. We have a bit of a tough time. Not a straight-line, but as we all know, every time we go through the tougher times, we come out stronger and better at the other side. So as always, we appreciate your interest in Zumiez, and we look forward to talk to you again in September. Thanks, everybody.

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Have a good day.