Zumiez Inc. (ZUMZ) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to the Zumiez Inc. Fourth Quarter and Full-Year 2017 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 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 filing with the SEC. At this time, I would like to turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Hello and thank you everyone for joining us on the call. With me on today is Chris Work, our Chief Financial Officer. I’ll begin today's call with a few brief remarks regarding our fourth quarter and full year performance, then I'll share some thoughts about the future before handing the call over to Chris who will take you through the numbers. After that, we’ll open up the call to your questions. We ended 2017 with strong fourth quarter comparable sales performance, which comes on top of a successful holiday selling period in 2016 and represents our sixth consecutive quarter of meaningful positive comparable sales. Our topline results were stronger during the second half of the year despite tougher comparisons as the work we've done to position the company for sustained growth continues to gain traction. For the quarter, comparable sales increased 7.5% and while we're excited about our topline performance there are a number of moving parts in our bottom line results that weren’t contemplated when we established our guidance. Chris will walk you through those shortly. Our annual comps were up 5.9% and operating profit increased 23% for the full year. These continued strong operating results reflect the significant efforts of our teams to listen to our customer and provide them with the product and experience that they are looking for. Looking forward we believe we are going to continue to expand our market share, accelerate earnings growth, and return greater value to shareholders in the years ahead. Before I hand the call over to Chris, let me outline some of our beliefs about the future of retail. To start with, we believe in a global consumer world. Today the power consumers have immense transparency and are driven by trends, brands, price and availability of product around the world. To date we've established a strategic physical presence in six countries across three continents with a digital presence that extends well beyond those boundaries. In addition, in order to succeed retailers need to evolve to serve in power consumers globally and continuously innovate to meet their ever changing needs. At the same time, we believe in a channel less consumer world where consumers do not see themselves as shopping online or in a physical store, but rather with a retailer that they trust, identify and engage with across multiple touchpoints. To this end, we have made investments over the past several years in our technology platforms to create a seamless shopping experience for our customers, allowing them to purchase what they want, where they want, and how they want all of the tailored, hyper localized approach and significantly improved speed through our localized fulfillment initiative delivering substantially all digital order through our local stores. With this solid foundation in place, we are well positioned to add new innovation on top of our current platforms. We believe our consumers want and demand new brands expecting us to lead on the emergence of new brands and fashion trends as part of their lifestyle community. We have retooled our processes, measures, and capabilities in service of our customer who wants to be more self expressive than their peers. In 2017 we launched over 150 new brands more than ever before and are constantly driving for further improvement on this critical front. We believe now we're entering into a new phase in servicing our customer, moving beyond omnichannel into a new consumer environment with yet higher expectations. While we're not sure what to call this new consumer phase, the New World will be characterized by key themes and words, such as trade area, localization, optimization, speed, intimacy, engagement, connection, innovation, and community. We have now established a new set of initiatives that will move us into this new consumer phase, which we'll began executing in 2018 and evolve as we test and learn over the next three to five years. One thing will remain constant among all this change in the consumer world is that underlying every aspect of what we do at Zumiez is our belief in the power of our culture and our brand position. Our brand guides us in all that we do to serve our customer and our cultural values guide us in how we execute in service of our customer and in alignment with our brand. These beliefs are the primary reason that we're excited about what the future holds for Zumiez. As the consumer world continues to rapidly evolve, we believe we are well-positioned to extend our lead in our lifestyle niche by creating unique customer experiences on a global scale. We look forward to capitalizing on the opportunities created by these changes we discuss today to further separate ourselves from the competition and create value for our customers, our employees, our brand partners and our shareholders. It is an exciting time in retail and we are confident that what we have done for the last 40 years in building our brand and culture will be a significant tailwind for 2018 results and beyond. With that, I'll hand the call to Chris for his review of the financials. Chris?

Thanks Rick and good afternoon everyone. I'm going to start with a review of our fourth quarter and full year 2017 results. I'll then provide a brief update on February before discussing our first quarter guidance and some high level perspective on how we're thinking about the full year. Fourth quarter net sales increased $44.6 million or 16.9% to $308.2 million from $263.6 million in the fourth quarter of 2016. Contributing to this increase were positive comparable sales growth of 7.5%, the net addition of 13 stores since the end of last year's fourth quarter, the 53rd week in 2017 were $10.3 million and the positive impact of foreign exchange were at $5.3 million. Also benefiting fourth quarter 2017 net sales is an adjustment to deferred revenue related to our STASH loyalty program were $3.8 million. During the 2017 fourth quarter, we saw an increase in transaction volume partially offset by a decrease in dollars per transaction. The decrease in dollars per transaction resulted from lower units per transaction partially offset by an increase in average unit retail. This quarter represented our sixth consecutive quarter of transaction gains. During the quarter our men's category was the largest positive comp in category followed by women's and footwear. Accessories was the largest negative comp in category followed by hardgoods. From a regional perspective, North American net sales increased $37 million or 16.2% to $265.6 million, while the international net sales which consist of Europe and Australia increased $7.6 million or 21.7% to $42.6 million. Excluding the impact of foreign currency translations, North American net sales grew 15.8% and other international net sales grew 9.2% for the quarter. Fourth quarter gross profit was $114.7 million an increase of $20.6 million or 22% compared to the fourth quarter of 2016. Gross margin was 37.2% in the quarter an increase of 150 basis points compared to 35.7% a year ago. The increase was primarily driven by 120 basis points of leverage in occupancy, 80 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program, estimated redemption rate, and 70 basis points of improvement in product margins. These increases were partially offset by 70 basis point increase in inventory shrinkage and 20 basis point increase in incentive compensation. Inventory shrinkage has been difficult for us in 2017. We remain focused on solving this problem which required assessing the root causes at the store level. This is an area where we believe we will show leverage in 2018 as we make the necessary improvements needed to drive value. SG&A expense were $77.7 million in the fourth quarter compared to $66.1 million a year ago. SG&A as a percentage of net sales was 25.2% compared to 25% in the prior year. The 20 basis point increase was primarily driven by 100 basis point increase related to our annual incentive compensation partially offset by 40 basis points of leverage in our store operating cost and 30 basis points of leverage across other corporate costs. Operating income in the fourth quarter of 2017 was $36.9 million or 12% of net sales an increase of 32.4% compared with the prior year operating income of $27.9 million or 10.7% of net sales for the fourth quarter of 2016. Net income for the fourth quarter was $19.9 million or $0.80 per share compared to net income of $18.2 million or $0.74 per share in the fourth quarter of 2016. In addition to our improved operating performance there were several factors that shaped our bottom line results compared with last year which were unanticipated in the last updated guidance. I've already touched on the positive impact of the deferred revenue adjustment related to our STASH program which was worth $3.8 million or $0.10 per share. On top of this, recently enacted U.S. Tax Reform benefited this year's results by $0.5 million or $0.02 per share. Offsetting the combined $0.12 per share tailwind from these two items was a $0.22 per share of headwinds including a valuation allowance booked against certain deferred tax assets in Europe were $3.4 million or $0.14 per share, adjustments to inventory valuation expense accruals in Europe were at $0.05 cents per share and a $1.2 million of expense impact or $0.03 per share related to asset impairments. Our effective tax rate for the fourth quarter of 2017 was 46.3% compared with 35.3% in the year ago period. The increase was driven by the valuation allowance booked against certain deferred tax assets in Europe, partially offset by the benefit related to U.S. tax reform. Turning to the full-year results, net sales for the fiscal year 2017 were $927.4 million, an increase of $91.1 million or 10.9% from $836.3 million for fiscal year 2016. Contributing to the increase with a positive comparable sales growth of 5.9%, the net addition of 13 stores in fiscal 217, the 53rd week in 2017 were $10.3 million and the positive impact of foreign exchange were $6.3 million. The STASH loyalty program deferred revenue adjustment of $3.8 million was also a benefit to the year. By region, North American net sales increased $73.9 million or 9.8% to $827.8 million. International net sales which consists of Europe and Australia increased $17.2 million or 20.8% to $99.6 million. Excluding the impact of foreign currency translations, North American net sales grew 9.6% and other international net sales grew 14.9% for the year. 2017 gross margin was 33.4% and increased 50 basis points compared to the prior year gross margin of 32.9%. The increase was driven by leveraging of occupancy cost was 80 basis points, 30 basis points related to the recognition of deferred revenue due to changes in our STASH loyalty program, estimated redemption rate, and a 20 basis point increase in product margins. These improvements were partially offset by 50 basis points and higher inventory shrinkage and 10 basis points related to higher incentive compensation. Annual last year expense was $261.1 million or 28.2% of net sales compared to $235.3 million or 28.1% of net sales in 2016. The increase as a percentage of net sales was driven by 60 basis point increase related to annual incentive compensation offset by 50 basis points of leverage in store operating costs. Operating margin for fiscal 2017 was 5.2% compared to 4.8% in 2016. Our 2017 operating profit was $48.8 million, an increase of 22.7% from operating profit of $39.7 million in 2016. Full year net income was $26.8 million or $1.08 per share compared to 2016 net income of $25.9 million or $1.04 per share. Net income for 2017 was negatively impacted by a valuation allowance booked against certain deferred tax assets in Europe partially offset by the deferred revenue adjustment related to our STASH program and U.S. tax reform all previously discussed. Turning to the balance sheet, cash and current marketable securities increased 54.7% to $121.9 million as of February 3, 2018 up from $78.8 million as of January 28, 2017. The increase was primarily driven by $65.5 million in cash flow from operations partially offset by $24.1 million of capital expenditures primarily related to new store growth and remodels. During 2017 we added 19 store locations including 12 in North America, five in Europe, and two in Australia. As we have discussed we are continually evaluating our physical store presence to ensure that we have the right number of stores in the right locations within each trade area. As a result, in 2017 we closed six stores bringing our net store openings to 13 for the year. We ended the year with 698 locations including 657 in North America, 34 in Europe and 7 in Australia. We ended fiscal 2017 with $125.8 million in inventory up 17.7% from $106.9 million at the end of fiscal 2017. This increase is driven primarily by the shift in the retail calendar in 2017 and timing of spring merchandise received with the 53rd week. When comparing inventory to the same calendar week last year, the week ending February 4, 2017 compared to the week ending February 3, 2018, inventory growth was 8.5%. Other factors contributing to the inventory increase include strong sales trends, 380 basis points impact of foreign currency exchange, and the increased global store count. We continue to feel confident in the general quality of our inventory. Our aged inventory defined as inventory older than four months has decreased as a percentage of total inventory from the prior year. Now to our February sales results, total net sales for the four-week period ended March 3, 2018 increased 23.2% to $63.4 million compared to $51.5 million for the four-week period ended February 25, 2017. Our comparable sales increased 9.2% during the four-week period ended March 3, 2018 compared to comparable sales decrease of 3.1% for the four-week period ended February 25, 2017. The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction. Dollars per transaction increased for the four-week period due to an increase in average in retail partially offset by a decrease in units per transaction. During the four-week period the men's category was our highest positive comp in category followed by women's hardgoods and footwear. Accessories was our only negative comp in category for the period. Looking at guidance for 2018, once again I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating sales, product margin and earnings growth given the variety of internal and external factors that impact our performance. With that in mind, we currently expect the comparable sales will increase between 4% and 6% for the first quarter of 2018 with total sales in the range of $198 million to $202 million. Please note that our monthly sales gains during the quarter will be impacted by the shift in the Easter holiday. We expect this shift to positively impact our March sales and be a detriment to April sales compared with the prior year. Consolidated operating margins are expected to be between a negative 2.6% and a negative 1.7%. At the high-end of our guidance our operating loss would declined approximately 46% from the first quarter of fiscal 2017. We anticipate our loss per share to be between $0.18 and $0.13 compared to an $0.18 loss per share in the prior year first quarter. The earnings per share guidance is negatively impacted by approximately $0.03 per share related to our inability to recognize the tax benefit on losses in certain jurisdictions within Europe. We expect that the second and third quarter per share will also be negatively impacted. During the fourth quarter we expect this to be a benefit to our results as we generate earnings in Europe. Before I wrap up, I'd like to give you a few thoughts on how we're looking at 2018. As we mentioned above, we continue to experience positive topline momentum and believe we're well positioned to grow operating margins and leverage the business in 2018 and beyond. We have now at six consecutive quarters of solid positive comparable sales growth including strong comparable sales growth of 7.5% in the fourth quarter of 2017 on top of comparable sales growth of 5.1% in the fourth quarter of 2016. We have started strong in 2018 with 9.2% comparable sales growth in February and continue to feel that we have some positive momentum in our product offering. As we look to 2018 and beyond, we continue to believe that the investments we've made in our infrastructure creating a seamless sales experience for our customers, our unique approach to merchandising, as well as those investments we continue to make in the Zumiez team will drive long-term top and bottom-line growth. With that in mind we anticipate that we will grow comparable sales in fiscal 2018 in the low single-digit range. It is important to point out that the extra week in fiscal 2017 will be a detriment to sales and earnings growth rates in fiscal 2018. The extra week in 2017 is worth approximately $9.1 million or $0.05 per share when comparing to 2018. 2018 represented record product margins in both North America and on a consolidated basis. With that in mind we are planning product margins to be flat to slightly accretive for 2018. From an operating profit perspective we are planning growth in the high single digit range despite the headwind of the 53rd week in 2017 previously mentioned. SG&A is planned to grow at significantly slower rate in 2018 than we experienced in 2017 as we are planning strong expense management across all of our entities and are not expected to have the year-over-year increase in incentive compensation we had in 2017. From an earnings perspective, we expect to see significant benefits from our planned pretax earnings growth just mentioned and from U.S. tax reform. We are planning our business assuming an annual effective tax rate of approximately 27% for the year inclusive of the valuation allowance impact. We are planning to open approximately 13 new stores including 6 in the U.S., 5 in Europe and 2 in Australia with roughly half of the openings occurring ahead of the back-to-school season. We expect capital expenditures for the full 2018 fiscal year to be between $21 million and $23 million compared to $24 million in 2017. The majority of the capital spend will be dedicated to new store openings and planned remodels. While our store count growth rate is decreasing in 2018, the related decrease in capital will be offset by an increase in remodels for the year. We expect that depreciation and amortization will be approximately $26.5 million in line with the prior year and lastly, we are currently projecting our share count for the full year to be approximately $25.3 million shares. And with that operator, we'd like to open the call up for questions.

Certainly. [Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley. Your line is now open.

First let me say congratulations to all your team on the strong results in Q4. Maybe you could just touch a little bit more on Europe, how you're looking at that business. I guess what you're really most focused on for Europe this year, any new key initiatives and then overall what your expectations are for that segment this year?

All right, Jeff let me ask - I’ll ask Chris to start a little bit of background and then I'll follow up from there. Chris?

Sure, clearly Jeff as we laid out right, we have had some losses in Europe that have led us to devaluation loans we disclosed today. I think to grow Europe to what it is today has taken a meaningful investment and we believe this investment has really put us in a place to capitalize in the European marketplace, including a strong retail network both stores and web in three distinct countries, as well as a web platform that we talked about before that is operating across Europe and even beyond and is a pretty sophisticated platform. That said, to date we have not had the results from the investment we're hoping. And we drove this business with the investments to breakeven in 2015, but we've retreated backwards the last two years, really due to some topline headwinds that have not met our expectation and increased cost of business. So, even as we have, we've driven positive comps there, we have not gotten to the spot we need to be. But we believe we've got a good path forward in this region. I think we have the team in a good spot to deliver and we've taken care of some of the challenges that we've had there. 2017 has had we had – we had an old age impact of inventory that we feel like we've gotten a really good spot. As we mentioned in our prepared remarks inventory consolidated is in a good spot, but that also speaks to where we are in Europe. We’re much, much more current than we were 12 months ago and we've had a couple of impairments here that we've taken as well that have kind of, I think helped us with some of our underperforming stores. So from a go forward perspective the team feels good in their strategies of driving value here over the years to come.

All right, thank you Chris, and I guess Jeff, I'd just add that a little bit of even greater clarity around the sales challenges. I think in 15 we talked about amazing results which was driven I think as many of you know about are really huge long board trend and then in 2016 it basically completely reversed and of course we were still playing out as Chris said investing and building the business at that point when sales actually went – got considerably more difficult relative to what we assumed to be appropriate pace of growth at that point. So it's kind of led us to where we are today. Now I guess I conclude by saying I believe in our team over there. I believe in our strategies. We're going to execute a lot of the omnichannel initiatives you've seen us do here in the U.S. and Canada and we know that new markets take serious investment and that we need to give them the time to mature into those investments. And I can tell you that Canada is running a few years ahead of Europe in their pattern and we feel that we've reached a point in Canada where we really have a sustained profitable platform and that's my expectations for what we're going to do in Europe and I know the leadership team over there is committed to doing exactly that.

Okay, that's really helpful. And then can you talk a little more about your latest thoughts on the evolution of brands that have been leading for you? I know you introduced more than a 100 new brands in 2017. Just wondering if you anticipate a changing of the guard sort to speak on which brands will l6ead the charge for you this year versus last year? And then if you could update us on your thinking about your footwear segment, which I know historically was a larger segment for you and that when it started to turn positive, if you can just touch on recent improvement there and the prior penetration remind us of that and what the current penetration is in footwear? Thanks.

All right, great Jeff, glad to do so and I'll again just to remind everyone that our brand pipeline like we've talk about the 150 new brands in our comments about that we've launched this past year which was an all time high for us and I think that the team is very excited about it. But these are the brands that we expect will be important to us in three years from now and so this is why I think it's, with our business important to understand the stage of brand of development as we work through it. And so, really great news right there. We've got such a big pipeline there's certainly not a lack of brands that are being started and emerging into the marketplace. And so that’s a really exciting thing, because I think as I said our customer expects us to deliver newness, unique assortments and new products to them and I think we’re in a great sport for that with this whole idea of individualization and everyone have their own personal customized kind of point of view. But so, let me with that as the intro let’s I'll turn it over to Chris, he'll give you some of the stats around how we've been thinking of some of the traditional steps Jeff that we kind of share on our annual basis with the investment community. Chris, you want to take it from there?

Sure, yes. As we look at 2017 as compared to 2016 and just how our brand portfolio has performed, one of the things we’ve shared with you guys is kind of the top 10, in the top 20 brands have looked and overall we have seen some consolidation in the Top 20 external brands here at Zumiez’s, but we continue to see the turnover that we actually think is probably appropriate for the business of 10% to 20% here of the top 10 and 20 brands turning over each year. So we seem to have kind of some healthy rhythm within the brands. We've talked really since June of 2016 about three brands that were kind of coming on and how they still had growth. Those three brands individually, those three brands collectively represent 10% of our total sales which is actually I think a good step when we think of kind of the peak brands reaching between 6% to 9% individually. So we still feel good about those three core brands. We’ve talked about plus some of the more heritage brands that have filled in around it and I think the overall brand structure is pretty healthy. As we mentioned in our prepared remarks, this was all time highs for us from a product margin perspective too, which is worthy of a callout specifically in light of the fact that we’re truly in a branded cycle and have seen our overall private label penetration decrease as a percentage of overall sales over 300 basis points, and that’s not and I think our private label teams are still doing a fantastic job. I just think it speaks to where we are in the cycle and then obviously being able to still drive product margins to all time highs is a testament to our product team. So we feel pretty that the brand mix is still pretty healthy for where we’re at today.

Yes, and again, that's one of our calling cards Jeff is this broad diversity in the mix and that is why again as I talked about in my intro comments, the new measures we put in place, the fact that we've been I think very disciplined about talking about the brand pipeline now more than ever in this process. And as Chris said, we’re always about doing what's right for the customer in terms of sales and what they want and that's why it’s a pretty dramatic shift in private label. And I’m really proud of our product teams that we're at this point where we still got peak product margins even with a decline, a significant shift in our decline in our private label volume as overall part of our mix. So sufficed to say I think we’re feeling good about where we’re at on the brand cycle, the brand pipeline. Let’s talk about footwear a moment and I will ask Chris to share some of the percentages with you here in a moment Jeff, but footwear what I would tell you is yes we’re very excited that it's positive here over the last couple of months and because obviously we've had a long struggle with footwear for a number of years. But I guess I'd still characterize it, I don’t as we’re kind of bouncing off the bottom and we’re happy about it, don’t get me wrong. We are happy to be - always happy to be positive, but I’m still not sure where footwear is going from a trend perspective and I don’t think that's clear in the marketplace yet. I think that's still being sorted out. So while we’re running positive at this point, we're also testing a lot of different ideas in footwear from working on things that we believe are trends and that we can play in the footwear world to looking at new brands, to size, how we think about how we carry the depth in various sizes by brand, by location, the mix of women’s and men’s. We're experimenting with all these things and all these fronts because we would like to see footwear keep going. Again to me it’s still, I don’t, I’m not sure this is a clear pattern yet and I’m happy it's up, but I'm still not as confident Jeff that I'd say we have a clear pattern to move forward. Chris, do you want to share some penetration numbers?

Sure, yes, this is our first quarter positive in men's - in footwear overall since Q4 of 2012 and in 2012 footwear as a percent of total business represented 22% of the business and now as we've closed out 2017 it represents 16% of the business. And I'd just add to Rick’s point despite what we've seen happen in footwear we've still been able to run positive comps here and I think that also speaks to the model too, and so we definitely are happy that it’s up, but I think we’re more happy in the overall number of up 6%.

Yes, I’m happy to help customers Jeff anyway they want to be helped. If they want to spend all their apparel dollars with us I’m pretty thrilled to help them do that and again as Chris said, I think this is the strength of our model. The broad category selection across multiple departments and of course the broad diversity of brand presentations and the strength of our model, it’s the strength where I think the model consumer world is and so it’s – we've managed through a tough footwear cycle, I think and particularly we’ve seen that we can come out around the other ends when footwear this forward cycle becomes less prevalent, I think we win in some of those dollars.

Okay. That’s really helpful. You guys have done a terrific job managing brands and at some point here, I’m sure we will see the next trend in footwear. Thanks for taking my questions and best of luck for the rest of Q1.

Thank you, Jeff.

Thanks Jeff.

Thank you. And our next question comes from the line of Sharon Zackfia with William Blair. Your line is now open.

Hi this is Sharon, can you hear me okay?

Yes, just fine.

Okay, great. So a couple of quick questions, I guess Rick what you talked about at the beginning was very helpful in terms of how you are kind of evolving the thinking of the business. I guess I’m trying to think about that more quantifiedly on our end. So if you think about the different growth trajectories of the business, is there any way you can bucket where the growth comes from primarily in the next two to three years versus the next three to five years, and then kind of translate that into any kind of revenue or bottom line targets over that timeframe?

Awesome, thank you for the questions Sharon. I don’t think we will be willing to do that on phone calls Sharon, just so I say that because obviously you know we’re modeling over our five year windows and we’re looking at all these patterns and so I’m not ready to go into that far outside of the guidance I think we’ve given for 2018. But maybe I'd share a little bit more about my thinking, maybe that will help us as we think about kind of some of these directions that I kind of gave you at the top. So I talked about a group of things the kind of beliefs we have and where the growth is going to come from Sharon. So it’s definitely this belief that there is this global consumer world that we have a channel less consumer, that we're serving consumer who wants to be more self expressive than their peers and I think that is again what a power consumer is about for our particular customer. And then this new phase I think that we may be moving in. so what I would tell you is probably not much new in terms of - it is not new, it is about global consumer, the channel less consumer or unique position around how special our assortments have to be in this world to serve this, our unique target customer. But I think I can share with you maybe this will help you some as you thinking about, I think in each of those I can share with you a bit, where we actually have evidence that what we’ve been doing has been working. So in the case of the global consumer, our belief that our consumers are and all consumers today are global consumers, we have brands as well as trends that are already flowing Sharon across the oceans for us and working on multiple continents. And with growth brands, it includes fashion trending brands and it includes again brands and transform in multiple directions, this is not just new brands going from North America, Europe and Australia, it’s European brands flowing into our North American stores and Australian brands flowing into our North American stores. So, I think this and these are not insignificant numbers that we’ve been talking about going in these directions, so this is part of I think how we have to think about serving this customer. They expect us to be this, the power of social media and their desire to choose what's unique for their own thinking. So this positioning long-term is really important. The second thing I guess I talked about this idea of the seamless channel less consumer experience and as you know we spent a lot of time innovating around how we have executed in the omnichannel world, and I would tell you that our business module today is an integrated channel neutral platform. And giving an example of this, a few examples of this is, when our web business grows digital sales today, we’re now able to lever physical store, our physical store cost structure. And I’m not sure lot of retailers can say that, but to me this is one of the measures of what you mean when you say you have an integrated seamless experience right, you have to integrate it into everything you do in the service of customers. And of course our store teams and digital sales teams they all work as a integrated unit now, looking at all the touch points and how we can best drive consumers to whatever channel the empowered consumer prefers. Probably the easiest example, Sharon, I could give you of evidence here about this idea of how we’d recreated this kind of new integrated business model is localized fulfillment. So through localized fulfillment and in particular already our order routing algorithms, we've now levered store payroll and our other store cost structures in two successive holiday seasons. And when I hear a lot of retailers talk, they talk about how a significant growth in web revenue is de-leveraging their business. We've got an integrated model that allows us to where we can lever that idea of web revenue over our fixed store cost basis. So this is really what we're trying to get at when we do this and some of the evidence is I think as one of the easiest way to see the evidence are others too. So we're able to leverage at store cost basis and even more importantly, I think we're dramatically improving our speed to customers because again I think speed is one of these key things customers want. I've already talked about niches of brands, I've talked about all those brands and the brand pipeline I feel great about that. And again, there's some of that I would tell you that's a cyclical process like when people want to spend all their money in footwear and it was athletic performance footwear, that was tough for us. Now we've cycled back to the areas I think we can have longer term runs on and so some of the circle, but again a large part of the sharing is this retooling of our processes and measures and new capabilities that our product teams developed to put more uniqueness within our localized assortments and they've done that over the last few years. So to a large extent and I stress this due to the fact that our customer expects this from us and we are delivering on that and that's also I think really great for emerging brands and that's why we're attracting merging brands because that we have that customer that needs them, it's also why emerging brands are attracted to Zumiez because we're serving our mutual customers here too. So I feel good about that. In all areas like I still think we have a lot of room to improve Sharon in those first three. I think one of the most - the last thing I talked about was this idea that I believe we have to enter a new phase of consumer world and I guess what I'm really saying is, I think it's now time to move beyond this omnichannel mantra that, omnichannel is like 2010 talk at this stage of the game. If you haven't got there now I think you have a big problem and I'm telling you we've got there and built a whole different kind of business model at this point of where we're at. So I think this new phase is going to really a fun and challenging phase. I don't think there's many players that can play at it and I think we're one of the few that can and then we've shared some of those words and we think that will kind of guide us. And that goes like trade area, localization, optimization, speed, engagement, those kind of with innovation community I think that will guide us on this. But it's now time as it's we're not we just don’t want to talk about it, we're going to start doing, so we've got these new initiatives Sharon that we're going to start developing and testing some of these ideas we have about this new consumer phase. I’m not going share with you exactly what each of those initiatives are, but I will give you a little bit of context about them. One of them is involves targeting specific processes that I believe that we have to reengineer to service a different kind of consumer experience and that will be, that will actually touch on multiple levels of the business. Another one is going to involve a detailed assessment of another one of the initiatives that will involve a detailed assessment all of our consumer experience at each consumer touchpoint. And the last initiative is really focused on improving speed and lowering costs, again across multiple fronts on the business. So I guess what I would tell you is, if you buy what I'm think I've seen in the marketplace, I think we have, I think we already have an unique product position. I think trends are moving in our direction and I think we can move further ahead of our competitors now as we begin, I think a lot of competitors still working on omnichannel, we're going to start working on what we believe the whole new engage - level of consumer engagement. And yes we're certainly doing some omnichannel things we know we have some things we can do there in terms of improvement yet, but we're going to move on to I think some even bigger ideas about how we can drive sales consistently over the next few years. And I guess the last thing I'd say it is, this is very important to me, that everyone puts the context of when we make these comments, they put in a context that just how important our culture is and our brand is in driving these things. Everything we're going to do is going to be done through the guiding lens of our brand positioning and everything we do will be, the how we do it will be guided by our cultural values. And those are the two things of that rapidly changing similar that just are never going to change. So I guess those of you, I'm not willing to get down to specifics Sharon, I think that's something that Chris and I would actually like to do at some point over the next couple of years and working through this with the investment community, but these are reasons I think we feel pretty excited about where we're at. These are the reasons I think that we can have a tailwind behind us as we look into ’18 and into the next couple of years.

Okay, that’s helpful. I look forward to hearing more about how that kind of all kind of figures. I think people struggle a little bit with 600 stores now in the U.S kind of what the next five to 10 years look like for Zumiez and then what the growth path is, so when you’re comfortable kind of specify that I think that would be helpful.

And again I'd just put into context of your last comment Sharon on the concept of trade area and we want to capture all of our trade in and as we said many times I don't care what the number of stores is, I just want to get it all. And I think one of this is one of the new ways of thinking about consumer engagement is how do we do that will both maximize the topline and optimize the business. So you see some of the words start to come alive I think in terms of how we think about what we're going to do in service of customers.

Okay, great. Thank you.

Thank you.

Thank you. And our next question comes from the line of Janine Stichter with Jefferies. Your line is now open.

Hi, thanks for taking our question. We just wanted to follow up a little bit on some of the gross margin puts and takes and you're assuming low single digit comp for the year, so would that assume some deleverage in occupancy? I think in the past you've been leveraging at about 3%, and how do you think about that setting with kind of from the other gross margin inputs such as March margins and then including shrink and also puts on the costs as it sounds like should continue to be a source of leverage? Thank you.

Yes, just to clarify, you're speaking to 2018, correct?

Correct.

Yes, I'll just kind of high level talk about how we're thinking about 2018 to your question. Yes, we said we think we can grow sales at low single digit and grow operating profit in the high single digit range. So inherently we're going to see some leverage throughout the P&L. From a gross margin perspective we're planning product margins, again we enter 2018 at an all time high. So we're kind of planning those flat to slightly accretive for the year in relation to occupancy and some of other areas there. I think that's an area we can probably get leverage on in a low single digit or at least whole ground low single digit comp today and today's environment, so that item specifically. But we're really trying to push the business up and down the P&L to make the right investments that we believe we need to make for the customer experience, but while also really trying to hold costs in other areas. And we have split this business really into kind of our mature market which is our North America market here in U.S. and Canada where the focus is really on how do we localize our sales efforts and really optimize the cost structure and then we have our maturing markets that are in growth mode in Europe and in Australia that take some investment to still build out the customer platform, but we're going to do it in a smart way while we grow the business. So we did mention it in our prepared remarks that we expect SG&A is going to grow significantly lower than the prior year. And as you know 2017 we had to – we were able to based on our results fully fund our incentive programs and we laid that out in the impact on 2017 which was worth $5.5 million. We don't expect that at this time based on these results to be funding that at a further level as we move into ’18 obviously unless we significantly exceed what we’re laid out here today from a concept. So I think overall, this is the kind of our next stages we believe of really building and growing the top line and being really responsible about how we build expenses. And so we are expecting leverage over a variety of different categories which inherently gets you to the low single digit comp on the top line with the high single digit operating.

Great, thank you.

Thanks Janine.

Thank you and our next question comes from the line of Jonathan Komp with Baird. Your line is now open. Okay Jonathan, your line is now open.

Okay, can you hear me?

Yes.

We go you.

Okay, great. I want to followup first on the comps guidance for 2018 up low single digits, it doesn’t sound like there is any specific reason to expect the material slowdown from what you’re running and I understand kind of planning the business appropriately. So I just wanted to maybe clarify the different areas of thinking behind projecting low single digits for the year?

Sure. Jonathan, how I would look at this is, as you look at the cadence of 2017, we had more opportunity in the first half of the year than the second half in regards to these current trends. And I would tell you our visibility for the next three months is always going to be clear than the next 12. So at this point in time as we’re looking at the business, we feel good about how we started the year. We feel good obviously we've given guidance here four to six comp for the first quarter and our goal is always to going to be able to drive past that. But we will come up on top of the trends as we move through the year and so as we've provided some color on the year, we’re planning the business a little more conservatively as we move through the back half and come up across what is now multiyear trends. Now our goals will be to beat that and over our 40-year history we have had a good history of doing that year-over-year-over-year of driving comps. So that's where we are focused on, but as we think about the year in planning purposes, we are targeting kind of that low single digit at this point.

Okay, great. And then to the extent you were to over-deliver on the sales, are there incremental investment areas that you might over invest and got to reinvest some of the upside or how would be think about the flow through in that scenario?

Well, I mean I think kind of tying back to that prior conversation, I mean one of the challenges we had in 2017 on a strong sales performance is funding things like the incentives and then clearly we've had our challenges as we've disclosed here with things like shrinkage and items like that. So our target as we move into 2018 is to make gains on some of the areas where we've had challenges like shrinkage and we don’t have planned to end the increases incentives by any means that we did in 2017. So I would expect us to have good solid flow through on any exceeding of that low single digit, just like we had historically. We don’t see any significant headwinds that would cause us to not get the flow through on increased sales performance.

Okay. Great, so then my last question really a bigger picture margin question, I know you were discussing the fact that the incremental sale of the comps regardless of what channel it comes it's not necessarily deleveraging your fixed costs. And I’m curious now as the sales have come back that certainly the operating margin back in time has been a lot higher. I think you are in the mid single digits now and it’s been even some of the years double that looking back historically. But I'm just curious, how you're thinking about the longer term margin structure of this business and kind of how much you should be recapturing?

Yes, it’s a great question and what I have told people obviously I think a lot of retailers had a little bit of a reset here. There is - retail has become more challenging. There's a lot more price transparency across retail and maybe it’s just a more challenging environment which has taken some of that operating profit out for pretty much everybody across retail. So now, as we look at kind of coming back from really what was our biggest challenge years of 2015 and 2016, we are really focused on growing the topline and growing the bottom line and really focused on growing the bottom line faster than the topline as indicated today in our guidance. So we used to say that we thought this would be a business we could get operating margins to the low teens. I don’t think we believe that in today’s environment, things could obviously chance in the future. But this is a business they we're driving to get operating margins into the high single digits. That's really our focus and our path here as we roll forward and I hope what you're able to see from us is that we can continue on with this pattern of growing sales and growing earnings faster than sales and if we’re able to do that over the years to come, I think that is what you should expect from us.

Yes and I don’t think Jonathan it will be awesome, it won’t be necessarily a straight line, we are worried about recessionary period and I still think there is a lot of consolidation to go within our niche and - but as you span that over a longer period of time I think those things are all things that will benefit us over our long term planning. So I would love to have greater consolidation marketplace, I'd love to rationalize the market and to where we can do what we really do well like peak product margins, full-price selling, full-margin selling. And so this is, I agree with Chris, I think we have confidence that over a period of years we can get to a high single digit operating margin which will be great from where we are at today and I’m hoping that and when we do that we will own more dollars in the marketplace through consolidation and rationalization in the marketplace.

Okay, great. Thanks for all the perspectives.

Thank you.

And I’m showing no further questions at this time, so with that, I'd like to turn the conference back over to CEO, Mr. Rick Brooks for closing remarks.

Thank you Andrew, and I guess just a quick thanks is what I'd like to offer here. Thanks to all of our shareholders and investors who have been patient with us and I'm hoping we're going to have a great year here in 2018. Thanks to all of our Zumiez staff members across the country for their great work and of course thanks to our brand partners for their support in what we do and all of our loyal customers out there. We really always appreciate your support and we're looking forward to a great 2018. Thank you everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.