Zumiez Inc. (ZUMZ) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Before we begin, I would like to remind everyone of the company's Safe Harbor language. This 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 is available. A number of these factors that could cause actual results to differ materially from the information that will be disclosed is available in Zumiez's filings with the SEC. At this time, I would like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks.

With me today is Chris Work, our Chief Financial Officer. I'll provide some commentary on our second quarter results and the trends we are seeing so far in the third quarter before providing an update on our strategic priorities for the remainder of the year. Chris will then take you through our financial results along with our outlook for the third quarter. After that, we will open the call to your questions. Second quarter sales decreased 2.5% from the prior year. While we are disappointed that results are short of expectations due to softness in the U.S., we are encouraged by the diversification of our global business where our international entities provided positive sales growth for the quarter. Our current quarter-to-date trends through Labor Day have shown similar results to the second quarter. The U.S. is trending down after very strong performance over a similar period in the 2 prior years, growing 14.1% in 2024 and 13.2% in 2025. Our international entities have seen low single-digit positive comparable sales in the same timeframe this year. Current overall sales results have been meaningfully impacted by our U.S. sales deceleration, driven by softness in footwear and an overall drop in transactions. We know from experience that these down cycles are generally temporary, and we are actively working to refine our merchandise assortments and further lean into our customer experience initiatives to improve the trajectory. As we move forward, we are executing on both our domestic and international strategies to continue advancing the business. First, domestically, we are evaluating all areas of business to positively impact the customer through the important holiday cycle and into 2027. As we reflect on the U.S. business second quarter and back-to-school results through Labor Day, the footwear category has been the most significant headwind, accounting for 70% of the total U.S. sales decline from the prior year through that timeframe. Footwear has been challenged since the second quarter of 2025, and the year-over-year comparisons get easier as we head into the fourth quarter of this year. We have also seen evolution in apparel trends that have positively driven the business for over 2 years. These changes created a sense of urgency to work with our brand partners as well as our own private label brands to bring newness and changes to our assortment. On the service front, we continue to invest in our people with training focused on capturing every sale. We are learning more about our customers through our data initiatives, which are enhancing our ability to communicate with them in relevant ways to improve the effectiveness of marketing initiatives and evaluate where operational changes are needed in the business to enhance the customer experience. As we have said for some time, our job is to meet consumers where they are and continue to move with them in this important stage of their life. Identifying and leading on trends has been at the core of Zumiez's success throughout our history, and we have confidence that our teams will deliver as we move through this transitional period. Second, internationally, we remain focused on the key strategic priorities that have helped us improve the business, dating back to the fourth quarter last year. This includes driving revenue through refreshing our product mix with innovative, distinctive offerings, continued growth of private label that supplemented our branded product and resonated with our customers, enhancing our margin profile, and maintaining a rigorous commitment to profitability optimization in each market. This includes executing a premium pricing strategy to drive margin expansion while managing expenses to grow with the bottom line. With the positive inflection in our sales, we are making traction on this initiative in each of the international markets. Lastly, we continue to maintain our solid financial foundation, which is the backbone of our ability to manage volatility while funding initiatives aimed at serving our customer. Our financial position remains a source of real strength, giving us the flexibility to continue investing in our strategic objectives, while also delivering value to shareholders through our share repurchase program. Financial flexibility matters more than ever in a consumer environment where the speed of trend cycles has never been faster. And it underpins confidence in our ability to navigate whatever comes next while continuing to build long-term shareholder value. Let me be clear, I am disappointed with our current results, and our people are working hard to improve the business. I have confidence in our team to make the changes needed to positively impact the fourth quarter and 2027. Closing, I want to thank our entire organization for the continued hard work and dedication to our customers. It remains the foundation of everything we do. Let me hand things over to Chris for the finance review.

Thanks, Rick, and good afternoon, everyone. I am going to start with a review of our second quarter fiscal 2026 results. I will then provide an update on our quarter-to-date sales trends before providing an outlook for the third quarter. Net sales for the second quarter of fiscal 2026 decreased 2.5% to $209 million, compared with $214.3 million in the second quarter of fiscal 2025. Comparable sales were down 2.1% for the quarter, with Canada, Europe, and Australia all having positive comparable sales growth for the quarter. The negative comp was driven by softness in the U.S., as Rick previously covered. For the second quarter, North American net sales were $173.9 million, a decrease of 3.4% from fiscal 2025. Other international net sales, which consist of Europe and Australia, were $35.1 million, up 2.5% from last year. Excluding the impact of foreign currency translation, North American net sales decreased 3.3%, and our international net sales were up 0.8% year over year. Comparable sales for North America were down 2.9%, while our international comparable sales increased 2.1% in the second quarter. From a category perspective, accessories was our largest positive comping category, followed by men's. Footwear was our largest negative comping category, followed by hard goods and women's. The consolidated decrease in comparable sales was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction were up for the quarter, driven by an increase in units per transaction, offset by a decrease in average unit retail. The second quarter gross profit decreased to $73.9 million compared to $76.1 million in the second quarter of last year. Gross margin was 35.3% of sales for the quarter, compared with 35.5% in the second quarter of fiscal 2025. The 20 basis point decrease in gross margin was primarily driven by 60 basis points of deleverage in store occupancy costs due to lower sales, partially offset by 50 basis points of benefit from tariff refunds. SG&A expense for the second quarter of fiscal 2026 was $75.2 million, or 35.9% of net sales, compared with $75.9 million, or 35.4% of net sales in fiscal 2025. The 50 basis point increase in SG&A as a percentage of net sales was driven by a 50 basis point increase in non-wage store operating costs, 40 basis points of deleverage in store wages on lower sales, 40 basis points of deleverage related to non-store wages, and 20 basis points of deleverage in other corporate costs. This is partially offset by 70 basis points of benefit related to lower annual incentive compensation and 30 basis points benefit related to a litigation settlement recorded in the second quarter of last year. Operating loss in the second quarter was $1.3 million or 0.6% of net sales compared to a prior year operating income of $0.1 million or 0.1% of net sales. Net loss for the second quarter was $2.7 million, or 17 cents per share. In the year-ago period, we reported a net loss of $1 million, or 6 cents per share. Our effective tax rate for the current quarter was negative 91.5% versus 210% a year ago. The unusual tax rates in the second quarter this year and last year were primarily due to the allocation of losses across the jurisdictions in which we operate. Lastly, due to our repurchase activity over the past 12 months, our share count is down approximately 6% since the second quarter of last year, which will positively benefit full-year EPS, but is a headwind in the quarters where we record a lot. Turning to the balance sheet, the business ended the quarter in a strong financial position. We had cash and current marketable securities of $97.3 million as of August 1, 2026, compared with $106.7 million as of August 2, 2025. The decrease in cash and current marketable securities from the second quarter of last year was primarily driven by $34.5 million in share repurchases and $10.6 million in capital expenditures, partially offset by $35.7 million in cash flow from operations. As of August 1, 2026, we have no debt on the balance sheet, and we continue to maintain our full $25 million unused credit facility. During the second quarter, we repurchased 1.2 million shares at a total cost of $23.2 million under the authorization provided by the Board of Directors on March 11, 2026. Year to date through the second quarter, we have repurchased a total of 1.5 million shares at a total cost of $29.5 million. We ended the quarter with $157.3 million in inventory, compared with $157.7 million in inventory last year. On a constant currency basis, our inventory levels were down 0.6% from last year. We feel good about our current inventory position and the quality of our inventory on hand. Now, to our third quarter-to-date results through Labor Day. Net sales for the 37-day period into September 7, 2026 decreased 4.3% compared to the 37-day period in the prior year ended September 8, 2025. Comparable sales for the 37-day period ended September 7, 2025 were down 3.5% from the comparable period in the prior year. This was on top of a 2-year stack of positive 21.8%. From a regional perspective, net sales for North America business for the 37-day period ended September 7, 2026 decreased 4.7% compared to the 37-day period ended September 8, 2025, while our other international business decreased 0.9%. Excluding the impact of foreign currency translation, North American net sales for the 37-day period in September 7, 2026 decreased 4.7% from the prior year, while our international net sales decreased 2% compared to 2025. Comparable sales for North America decreased 3.9% for the 37-day period ended September 7, 2026, compared to the same weeks in the prior year. Comparable sales for our other international business increased 0.5%. From a category perspective, accessories was our only positive comping category. Footwear was our largest negative comping category, followed by women's, men's, and hard goods. Consolidated decrease in comparable sales was driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction were up for the period, driven by an increase in units per transaction, partially offset by a decrease in average unit retail. With respect to our outlook for the third quarter of fiscal 2026, I want to remind everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin and earnings growth given a variety of internal and external factors that impact our performance. Given the softness and back-to-school results, we believe it's prudent to look forward to an appropriate level of conservatism. We are anticipating total sales to be between $222 million and $226 million for the 13 weeks ended October 31, 2026, representing a decline in sales of 5.5% to 7% compared to the prior year. Comparable sales are expected to be between negative 5% and negative 6.5%. For the third quarter, we are expecting product margin to be down 20 basis points to 40 basis points due to decline in our U.S. business, and higher penetration of international sales that operate at a lower margin. Consolidated operating income for the third quarter is expected to be between 1% and 1.7% of sales, and we anticipate earnings per share will be between $0 and $0.10 compared to earnings per share of $0.55 in the prior year. Regarding our full fiscal 2026, with the slowdown in our business and the increased consumer pressures we are observing, we believe caution is warranted when considering our outlook for the full year. Given this, we will refrain from providing specific full-year earnings guidance at this time, but we will provide some high-level context around how we see the business. From sales, we are currently seeing stronger results in our international business and softer results in our domestic business. Considering these trend lines in the business and inclusive of our third quarter guidance, we now believe sales will be down low single digits to the prior year, which includes the $12 million of negative impact of closed stores. We believe consolidated product margin will be roughly flat to the prior year, with growth internationally, while our domestic business will be down slightly. With the anticipated product margin, we believe gross margin will be roughly flat to the prior year as a percent of sales. SG&A is expected to be down slightly in total dollars on lower levels of incentive compensation, and deleverage with sales down to the prior year. Operating margin, with the previously mentioned assumptions and barring significant deterioration in the consumer environment, we now believe operating margin will be down slightly in fiscal 2026 compared to previously communicated levels of 50 to 100 basis points of growth. While effective tax rates will fluctuate by quarter, we anticipate that our full year effective tax rate will be roughly 55% in fiscal 2026, compared to an effective tax rate of 44% in fiscal 2025. We are planning to open 5 new stores in fiscal 2026, all within the U.S. We plan to close approximately 16 stores during fiscal 2026, including 10 in North America and 6 internationally. We expect our capital expenditures for fiscal 2026 to be between $13 million and $15 million. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $19.2 million, down from $21.3 million in fiscal 2025. And we are currently projecting our diluted share count for the full year to be approximately 15.8 million shares. This share count does contemplate full execution of the $40 million repurchase program approved by the Board on March 11, 2026, which was officially completed in early September. Our strong financial position and proven ability to execute gives us confidence in our ability to navigate the current environment while continue to invest in our long-term strategic priorities. And with that, operator, we would like to open the call up for questions.

[Operator Instructions] The first question comes from the line of Mitchel Kummetz from Seaport. Your question, please.

Rick, I was hoping to just get your take on what is happening in footwear. A number of retailers have already reported, not necessarily maybe the most direct competitors of yours, but there has been talk about weakness and legacy silhouettes. There has also been some talk about maybe a shift away from athletic to non-athletic. I do not know to what extent you are seeing some of that and how are you sort of planning to kind of pivot the assortment so that you are better aligned with any sort of strength that might be in footwear right now.

Yes, I mean, thank you, Mitch. I think we are clearly seeing that. It has been a challenge for us for quite a number of quarters now, as we have said, and it is, I think, we are aligned around the idea that we are selling lifestyle athletic footwear. So it has been, I think, we are in kind of sweet spots. It has really been struggling in terms of just, again, what our mix of products has always said. So as we look at this niche, as we look forward, we are certainly trying a lot of different things. And we have some things that are working to offset, but it is not working at a level that is able to deal with the big brands that are trending down. So our goal looking forward as you look into the back half of this year and into next year is to continue to try, work with our partners, continue to drive uniqueness into the footwear -- into our footwear business. That is where we really see that we can have, we can, we can have success. Now, that is going to be easier for us to see, Mitch, because we are going to, I we feel that we are going to find the bottom of this cycle here as the anniversary of these big negative comps in 4Q. I think it is as usual for us. It is going to be about uniqueness of product and then finding that next trend brand that is really going to drive us forward.

Yes, and there has also been a lot of talk among some of these retailers that this has been a particularly promotional back-to-school season around footwear, and I am just wondering, how are you guys addressing that? And to what extent is that putting pressure on your margins, if, you know, to the extent that you have to compete with some of those promotions?