Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. First Quarter Fiscal 2018 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 will 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 today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few brief remarks regarding our first quarter 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. 2018 has gotten off to a good start as the strong sales momentum we experienced during the holiday season accelerated in the first quarter. Both our top and bottom-line results exceeded our expectations, fueled by the strength of our assortments, our seamless shopping experience across physical and digital channels, and the world-class customer service our teams continue to deliver globally. For the quarter, comparable sales increased 8.3% compared to our guidance of 4% to 6%, and operating margin was negative 0.8% of net sales, an improvement of 72.6% compared with the prior year and ahead of the high-end of our guidance of negative 1.7%. Net loss per share improved to $0.10 versus $0.18 last year and above the high end of our guidance that was a loss of $0.13. Our recent performance has reinforced our belief that we are well-positioned to benefit from the shifts that are taking place in global retail. Our top priority is to stay consistent and relevant with our customers in order to expand our market share, which we believe will lead to accelerated earnings growth and value creation for our shareholders. Before I hand the call over to Chris, let me review some of our thoughts about the future of retail as it relates to Zumiez. We believe there are increasingly blurred lines between retail channels. Our focus is firmly on embracing today's empowered customer and winning them…

Thanks, Rick, and good afternoon everyone. I'm going to start with a review of our first quarter 2018 results. I'll then provide a brief update on May before discussing our second quarter guidance and some high-level perspective on how we are thinking about the full year. First quarter net sales increased $25.1 million or 13.9% to $206.3 million from $181.2 million in the first quarter of 2017. Contributing to this increase were positive comparable sales growth of 8.3% and the net addition of 12 stores since the end of last year's first quarter. During the 2018 first quarter, our comparable sales were driven by an increase in transaction volume, partially offset by 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 seventh consecutive quarter of comparable sales growth and transaction gains. During the quarter, our men's category was the largest positive comping category, followed by women's and footwear. Accessories was the largest negative comping category, followed by hardgoods. From a regional perspective, North America net sales increased $18.7 million or 11.5% to $181.3 million. Other international net sales, which consists of Europe and Australia, increased $6.4 million or 34.4% to $25 million. Excluding the impact of foreign currency translation, North America net sales grew 11.3% and other international net sales grew 17.8% for the quarter. First quarter gross profit was $62.6 million, an increase of $10.5 million or 20.2% compared to the first quarter of 2017. Gross margin was 30.3% in the quarter, an increase of 160 basis points compared to 28.7% a year ago. This increase was primarily driven by 160 basis points of leverage on our store occupancy costs. SG&A expense was $64.3 million in the first…

[Operator Instructions] Our first question comes from the line of Janine Stichter from Jefferies. Your line is now open.

Just a quick question on the gross margin, you’ve mentioned that the primary driver or I think the only driver was occupancy leverage. Can you comment on some of the other components, what you are seeing with merch margin shrink? And then you are guiding to product margin flat to up slightly for the full year. How should we think about the opportunity and which quarters we could see product margin increase? Thank you.

Talking about gross margin, obviously we said, we have been getting some leverage on the occupancy side. As we think about the other items, product margin specifically, we ran phenomenal product margins last year. It’s the highest in our history and as we have moved into both Q1 and Q2, we have seen those amounts kind of stabilize with where we have been. The Q2 guidance does assume that our product margins are down slightly, but we have got a few things going on in the business. The team has done a great job of working with our branded partners. As you guys know, a lot of our sales have been driven by apparel, which are technically a higher margin category, but we have seen some resurgence in footwear here too, which is typically lower margin. I think the other thing to point out is, despite how high our margins have been, our private label penetration has actually decreased here in 2017 and into 2018, and that's okay for us because we are really trying to serve what the customer wants. And there will be cycles that are probably more trend-driven where maybe private label plays a part, and there will be cycles that are branded. And so, those are working together. From a shrink perspective, we have mentioned this has been a challenge really for four to six quarters here, and while we still are working through it and it is a process, we are on plan this quarter and I think that's a good start to where we want to be, and as you would expect, we are planning that to get better as we've said here over the last year that we think it's something that we can make a difference in and fix. So, we are actively working with that. We just kicked off our second round of inventories for 2018, which I won't be able to comment on today, but we'll have a better outline here as part of our Q2 earnings call and we're continuing to work on that. So, we're happy to get some leverage there. We think we have some leverage to go, especially as we work through our shrink challenges we've had over the last 12 months, and we'll kind of continue from there.

Our next question comes from the line of Jeff Van Sinderen from B. Riley FBR. Your line is now open.

This is Richard Magnusen in for Jeff Van Sinderen. Congratulations on the quarter. Could you give us a little more on how you have planned your business for back-to-school this year in terms of whether the lead brands have changed versus last year and maybe which categories you are leaning into more? And then if you could, give us your latest thoughts on how you see your business evolving, given recent traction and potential for that to return to being a bigger part of your business over time.

I'll start and Chris can help me out as we go. No, I'm not going to give any specifics about how we are thinking about brands and where we are placing bets and educated bets for back-to-school at this point. And again, I'd just like to remind everyone that our model is about the diversity of the brand collection, and not just at a national level but that relates to local store by store assortments. So, our ability to micro assort small brands mean that are relevant in local markets is a very important part of our business, not necessarily for driving sales but for driving newness for our customer that cares about uniqueness in their assortments that are willing to wear those new brands first. That's really a hallmark of a big part of our business and how we drive our unique assortment. So, our story is the same. It's about the portfolio of brands. And I think as you know, we launched 150 -- over 150 new brands in 2017 ahead of our plan, and at this point I think Chris, we are basically on – I’d say we are on plan this year for new brand launches?

That's correct.

And so, I think we feel good about where we're at in that front, Richard, and again, but it's a portfolio approach focused on localized markets, and the same goes for categories and we'll say this about the categories and then we'll dovetail into your footwear question. So, again, it's the same question on categories, big departments, lots and lots of subcategories underneath there, lots of diversity in our business as we serve the entire lifestyle for our consumer, so even struggling departments like accessories there which has been more difficult lately, we have lots of subgroups in there that are doing quite well and driving a lot of volume while we have some others that have been more challenging for us. So, it's always a broad mix of again a kind of portfolio approach on our category business too. And then as we think about the whole business overall, and we'll morph the call into talking about footwear at this point, is we always – we'll go through major kind of large cyclical cycles around -- sometimes a footwear-driven cycle, which we had one from 2009 to 2012. And then we moved out of that. Footwear moved against us in terms of what we could do, it moved into more of an athletic based business, and that was challenging for us. But then most of those periods, we actually comped up and we did it by going where the customer wanted us to go. And now that we have seen generally footwear be more difficult across the footwear retailers, our customers are telling us that we need to be in apparel in a big way. That's where the interest is, that's where the newness is, and so that's what we are doing for our customers. So, even in challenging…

Okay. And we know it's tough to separate out the digital part of your business, but is there more you can share in terms of what you are seeing in omni-channel trends and behaviour of your customers?

The key thing to say is that there is no – it's truly a channel-less world, so all customers in all channels. And I think as we continue to get into looking at the customer journey through our experience, there are varied journeys. Again, each customer has their own view of it, but no one works in single channel, virtually no one works in single channels any more. So, it's all about the integrated experience. So, as we are looking forward, and we think we have one of the best integrated experienced channel-less models in specialty retail today with the way we have executed it, culturally appropriate for our team in how we do things at Zumiez, and brand appropriate for our customers at how we execute on behalf of our brands, we think we are one of the best models out there today. And the good news there, Richard, is we have a lot of ideas. This is an experimentation phase, we talked about in the prepared comments, we're going to go out and keep pushing this. The customers are going to want to expect – as I said on the last call, I think a new era of customer engagement is coming upon us with this empowered consumer. Moving beyond omni-channel, all new ways to engage with them over the next, starting this year and over the next few years we're going to be testing and trying new ideas and really pushing some new ideas forward so we can engage customers wherever they want, however they want, and be out there anticipating their needs in the marketplace. So, I think we have one of the best models, if not the best model out there in specialty retail today, and we're going to get better yet at doing it. So, I would tell you that customers are in all channels all the time with unique tasks based upon their interest and for example what social media channels they follow or don't follow, and that's the great thing about the world as empowered consumer is truly empowered to find their way, to be on their own journey, and we're going to be there with them.

And I'd just add to what Rick said, and what's really important for us is that they find us. So, from a financial perspective, we are impartial whether it comes on the Web or in the stores. We just want them to find they'd have a great experience with us and come back. And so, as we look at these results, we look at our results overall, obviously having an 8.3 comp here in the first quarter, we don't have a Web business of scale that could drive an 8.3 comp on its own. So, we are comping meaningfully in stores. And when I say meaningfully, we are talking solid mid-single-digit comps in stores and while our Web is comping ahead of our stores and growing at a faster pace, we are seeing an uptick in both channels, and I think that speaks to the strength of our model and where we're at, and again, we want the customer to experience us the way they want to experience us.

All right, perfect. That sounds great.

Our next question comes from the line to of Sharon Zackfia from William Blair. Your line is now open.

I guess a question on SG&A. So, it's nice to see the leverage. I know you did a lot of investing on reaching the customer in a more holistic way over the last several years. Are you at a point now where you think you can sustainably leverage SG&A going forward? And then secondarily, the tax element is somewhat confusing this year, and I know you're trying to help us through that, Chris, but can you remind us if the tax issues in terms of the elevated tax hits continue into the third quarter and then there's a lot of recovery in the fourth quarter? I don't remember if you had a cadence for the back half on that.

Sure. I'll start with the tax question and then move to SG&A. From a tax perspective, your answer is, yes, we are going to have some pulls here in the first three quarters that will be made back in the fourth quarter. And the reason for that is, we laid out on the call, we are not able to take the tax benefit on losses in certain tax jurisdictions within Europe. So, Europe is much more concentrated in the fourth quarter and very much more of their profit is driven in the fourth quarter. So, for the first three quarters of the year, there are projected to be losses in that business which will flow through to the bottom line at 100%, and then as we get to the fourth quarter, any income earned would also flow through at 100% because of where we are from a tax position there and the associated GAAP accounting. So, that's why you're seeing kind of some interesting tax rates here. Obviously in this quarter it put us in a negative tax rate, and while we are trying to guide people to kind of get to that 27% for the year. From an SG&A leverage perspective, we also are happy to see some leverage in that category. As you know, over the last few years we have had some investments in things like minimum wage and our new commerce platform, and also as we talked about last year, just the incentive accruals that had been not funded at 100% and were funded over 100% based on results for 2017. So, now as we move to 2018 and we kind of have the incentive accrual baked into the model so to say or at least in the prior year numbers, where we are able to leverage on that better. From an investment perspective, we will continue to have investments to serve the customer but we don't have large projected investments here in the next few years. They are probably more incremental and probably replacing some of the other historical investments that are falling off. So, we feel good about our ability to try to leverage here over the near term and we'll obviously update our investors if that was to change.

And I'd just add to that, Sharon, I think we have, if you look at our technology platforms, we basically touch almost everything in terms of how we interact, the consumer facing side of what we are doing, and over the last few years, four to five years. So, I agree with Chris, I think most of the major investments now are probably behind us for a number of years and we'll be making incremental – the investment will be more incremental in nature as we move forward.

Our last question comes from the line of Jonathan Komp from Baird. Your line is now open.

I want to follow-up first on the same store sales. You've been positive for seven quarters and I think 8.30 is the new high mark we've seen for a number of years. But Chris, you're assuming low single-digits for the year, which would imply pretty lower second half assumptions at least baked into that. So, just wanted to get a little more color on your thinking there and the sustainability of what you are seeing currently.

I mean I think what I would tell you is, this is a business that has seen positive comparable sales for most of its 40 years and we've been able to comp on comp, and we've done that through the point that Rick really pointed out to earlier, right, this is a collection of categories, it's a collection of brands, we are trying to move and adjust with where the customer wants. And so, that is our strategy. Now we have run pretty strong results here over the last seven quarters, and as we move into the back half of this year, we are running up against some of our bigger results from last year and multi-year results, as we were stronger in the back half of 2016 as well. So, we have planned results to [indiscernible] a little bit based on the experience that we've had, but you can bet that we're going to try to go out and beat those results as well, right. I mean that's our challenge to ourselves and our team. Every quarter, every month, every day, every hour, [indiscernible] associate level in the store, right. And I think the bigger piece of our annual guidance is that on this low single-digit comp, we are planning high single-digit operating profit gains, and this is an important distinction for us because we did this in our March call as well, putting on operating profit because we think that's one of the better metrics to look at us right now. Because of tax reform and because of the valuation allowance that we have on certain European entities, we think this is really the true indicator of the performance of the business and we are planning that up high single-digit on a low single-digit comp and we feel pretty good about that result. And so, that's what we are working towards. We're working to really grow the top line, service the customer, but also do it as profitably as we can. And so, that's how we are thinking about the rest of the year.

Okay. And just a follow-up there, I know the high single-digit operating profit target in terms of the growth, you didn't changed versus the last quarter even though you showed some nice upside in Q1 and showing good momentum here in early second quarter. So, any moving parts there or just kind of any additional color on the assumptions would be helpful.

No, there's nothing new to call out other than I would just point, as you know, the fourth quarter is where we make the majority of our earnings, the third quarter being the second most earnings, and we're only 20% through the year here with first quarter in the book. So, obviously as we move through the year, we'll try to give more color if we think that those assumptions are going to change, but having the smallest quarter behind us, we did not make any changes to that from our March release.

Okay. And just last one for me, longer-term I know you have talked about getting back to high single digit operating margin for the business. Is there any way to frame up in terms of guidepost in terms of how long you think it might take to make that type of progress?

We certainly have it framed up internally, I'll tell you that. In this type of environment we are not going to come out externally and put metrics around that at this point. What I would tell you is, we're very focused on the type of growth that we have laid out for 2018. As you know, this is one of the first times we have given full-year color to the level that we have, and that's because this is really our initiative, again as I said earlier, to serve every customer and to grow as profitably as we can, and in that order. And so, we are working very hard to that effect and we're working hard to continue to build our models with a mature base here in North America and a growth base in our international subsidiaries to grow sales at a reasonable level and grow earnings ahead of sales. And so, it will take some time to get to that high single digit, but we are working very hard to kind of push those levers to drive more profitability of the business.

Okay. And just to clarify, if you were not operating internationally today in a theoretical sense, would you already be towards that high single digit operating margin level?

There's not quite that much of a pull. I mean to be very transparent, Europe is not operating profitably but it is about 10% of the business, is not that big of a pull. So, we have some work to do internationally but we feel good about our path there. We've got a great base and a strong structure to grow off of here. Obviously our task here over the next couple of years is going to be to scale the investment we've made there to continue to grow the existing units and to add profitable new units as well as online sales to those businesses, and we think we've got a good path to do it. So, it's not that much of a pull, to answer your question, but I think we can grow both as we continue to move forward.

And I'd just add to Chris' comments there that we've always known that building international market takes time, it takes energy, and you have to reach those leverage points. So, that's kind of what we're looking for there doing that. But the most important reason that we're growing internationally is because our customers are truly global consumers now. It gives us insight into what's going on in other parts of the world and brands can emerge anywhere and become global brands quickly that become drivers across our whole platform. So, also want to just keep in mind that yes, we'll work through the profitability challenges, we'll drive better results as we build towards those leverage points, and like we have in Canada already at this point. But the more important message of why we are pursuing international growth is because our customers in this world, a shrinking world being driven through the power of consumer technology demands that were there, we want to be there and leading on new brands and we need to lead on new brands because brands become global so quickly around the world. We need to be there to see them so we can serve those young brand partners and get their brands to help them grow as they trigger those global growth points, and more importantly, serve our mutual customer. So, in a long term strategic point, Jonathan, that's really the key thing for me as we've invested now since starting in 2010 in Canada over the last eight, nine years in doing this, it's always been about the customer and where we think those customers are going and our ability to serve them based on this, the power and what customer expect from us from being global citizens and global consumers.

Very helpful. Thank you.

And we have a follow-up question from the line of Sharon Zackfia from William Blair. Your line is now open.

Just I guess two questions. I'm just wondering if you think you have a shot at hitting the $1 billion mark in sales this year. And then secondarily, I don't think you have repurchased shares in a while. I don't remember if you have an authorization out there. But if you could just give us an update on the thoughts of what you're doing with your free cash.

Sure. I'll take the cash item here first. We have maintained a very consistent position when it comes to cash. And first and foremost, we look at cash and say, where can we invest in the business in service of the customer to grow top line or to help control expenses and we put a lot of money into that. Obviously you've seen our capital spend over the last few years driven at those levels, and then there is some operating spend as well. And then secondly, we look outside the business if there are good opportunities to grow the business through acquisition or other types of partnership that we think could add value for our shareholders, and you've seen us do that with Blue Tomato and Fast Times here over the last five to six years. And then lastly, we return to shareholders. So, at this point in time, we do not have a buyback program in place. As you are aware, we have bought back a fair amount of the Company and spent over $176 million since 2012 and feel pretty good about where the investment stands in relation to our stock today. So, this is something we continue to view with our Board of Directors and get their input on how they want to drive, but we've stayed pretty true to that philosophy and really go over that with our director group every quarter as we meet with them ahead of our earnings release here. So, from a $1 billion mark, we're pushing. We are just as excited as you probably are having been a follower of Zumiez for as long as you have. That will be a metric we would be excited to get to and we're pushing and we'll see what the rest of this year has in store for us if we're able to get there.

I was going to ask if Rick has to get a tattoo if he hit $1 billion.

No tattoos on Rick ever. That's the rest of the store theme and the buyer, they are going to still cover that for me, Sharon. The $1 billion number for me, I have to tell you it's been a goal for a while because when I – to give you a sense, the year before I started here at Zumiez, in 1992 they did $10 million. So, for me there's a symmetry around the $10 million to the $1 billion number that it's a milestone for us and it's important milestone, and again, I'd just say that other people have gotten there faster than we have but they did it differently than we did. They arrived at it by doubling and doubling units. As you know, we've been the one that wants to do it the right way, through growth and quality people, through building our teams. It's taken us a long time but I think the quality where we have gone is worth it. And so, yes, I'm excited about trying to get there too. I'm with Chris. I want to get there as soon as I can. Like I say, the $10 million to the $1 billion is it will be next [indiscernible] day I think for me personally and for a lot of people here in the building.

I'll cross my fingers. All right, thanks.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the call back over to Rick Brooks for closing remarks.

All right, thank you very much everyone and we appreciate your interest as always in Zumiez here and our Q1 results, and we are looking forward I think hopefully to a strong Q2 and a good year, as Chris has kind of outlaid for us for the full year of 2018. Again, I think it's a very exciting time to be in retail, really interesting challenges but great opportunities. So, thank you all and we'll look forward to talking after the – with the Q2 results. Good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.