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.'s business outlook and contains forward-looking statements. These forward-looking statements and all other [Technical Issues] 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 additional - excuse me, actual results to differ materially from the information discussed is available in Zumiez filings with the SEC.

At this time, I would like to turn the call over to Rick Brooks, Chief Executive Officer. Mr. Brooks, you may begin.

Richard M. Brooks - Chief Executive Officer

Thank you and hello, everyone. Thanks for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I'll begin today's call with a few remarks about the third quarter, then I'll share some thoughts on sales for the fourth quarter to date before handing the call over to Chris who will take you through our financial results in more detail. After that, we'll open up the call to your questions.

As you saw from our earnings release issued earlier today, our third quarter was a historic one. We've adeptly navigated multiple external headwinds over the past 18 months, starting with the pandemic in early 2020, continued global supply chain disruptions, labor shortages, inflation and in some cases, closures due to COVID.

Despite these challenges, this quarter, we grew net income 5.4% over Q3 of 2020 and a remarkable 60% of the third quarter of 2019 pre-pandemic levels. In fact, we've now generated more income in the first nine months of 2021 than in any full year period in the Company's history, and we still have the important holiday season ahead of us.

Looking at the underlying drivers of the record earnings quarter, net sales were up 7% and 10% on a one and two year basis respectively. The majority of school districts around the country resuming in-person learning this year, back-to-school is highlighted by strong full price selling, reflecting pent-up demand and our ability to serve the customer through our integrated model, however they want to interact with us. The increase in sales combined with product margin growth offset an uptick in SG&A expenses as we saw an expansion of store hours, an increase in marketing and the completion of our first national store manager in-person event in 18 months in North America.

Looking ahead, the fourth quarter has started well despite numerous challenges, underscoring our ability to capitalize on strong consumer demand and expand our market share. Fourth quarter to date through Tuesday, November 30, total sales up 11.5% year-over-year and up 8.6% compared to the same period of 2019. Our performance of the Black Friday weekend bodes well for the remainder of this holiday season. While we continue to experience global supply chain challenges, labor shortages, inflation, closures tied to COVID and now risks associated with new Omicron variant, we are confident that our investments in people, sourcing and fulfillment will allow us to serve our customers with the distinct merchandise offering, great service and seamless shopping experiences that are the pillars of Zumiez's long-term success.

As we would like to say, periods of significant change create opportunities and companies that have the right people, strategies and resources in place can take advantage of times like this to advance their brand and business. While Zumiez isn't fully resistant to all the challenges that are plaguing the industry, we believe the current environment will accelerate further consolidation globally and that our adaptability and focus on our customer will lead to the further wallet and mindshare gains. We believe this is evident domestically and also internationally. We're continuing to win share in Europe and Australia despite being hit with closures in both regions throughout the year and the current closures in Australia during the important lead up to holiday - excuse me, in Austria, the lead up to holiday.

While we are tactically adaptable, our overarching consumer-centric strategy rooted in strong brand and culture will remain constant. We built a business in which we partner with great brands to bring diversity and uniqueness to our customers that allows them to individuate. We built an infrastructure in which customers can shop with us to get what they want, when they want, how they want and as fast as they want. We've morphed our business into a channel-less this organization with inventory visibility from all touch points and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which sales originate. Each of these distinct attributes will serve us well in today's hybrid shopping model and logistically challenged environment. Our unique position in the marketplace leaves us well-positioned to capitalize on consumer demand and expand our market share over the near and long term.

To close, I want to thank the entire Zumiez team for their hard work and dedication to upholding the cultural values that are directly tied to our strong third quarter and positive start to the fourth quarter. Despite the fantastic financial results, these are not easy times to operate in and our teams continue to work relentlessly in service of our customers.

With that, I'll turn the call over to Chris to discuss the financials.

Christopher C. Work - Chief Financial Officer

Thanks, Rick and good afternoon, everyone. Similar to last quarter, I'll provide comparison to both prior year and the third quarter of fiscal 2019 where appropriate, given the impact of the pandemic on the year-ago period. Following my review of the third quarter results, I'll provide an update on the fourth quarter to date sales trends and our current perspective on the full year.

Third quarter net sales were $289.5 million, up 6.8% from $271 million in the third quarter of 2020 and up 9.6% from $264 million in the third quarter of 2019. The year-over-year increase in sales was primarily driven by our ability to capitalize on current trends, the reopening of stores compared to short-term store closures related to COVID-19 pandemic in the prior year and a more normalized back-to-school season in our US business.

Our stores were open approximately 99% of the potential operating days during the third quarter of 2021 compared to approximately 95% of the third quarter of 2020 and 100% of the third quarter of 2019. From a regional perspective, North America net sales were $257.5 million, an increase of 7.1% over 2020 and up 8% compared to the same period in 2019. Other international net sales which consists of Europe and Australia were $32 million, up 4.5% from last year and up 25.2% from two years ago. Excluding the impact of foreign currency translation, North America net sales increased 6.8% and other international net sales increased 5% compared with 2020. We continue to experience temporary COVID-related store closures during the third quarter in Australia, noting they are open for approximately 42% of the available operating days.

During the quarter, the men's category was our largest growth category, followed by footwear and accessories, hardgoods was the largest negative category followed by women's. Third quarter gross profit was $114.7 million compared to $105.8 million in the third quarter of last year and $94.6 million in the third quarter of 2019. Gross margin as a percent of sales was 39.6% for the quarter compared with 39% in third quarter of 2020, and 35.8% in the third quarter of 2019. The 60 basis point improvement from the third quarter 2020 was largely due to 60 basis point decrease in web shipping, a 60 basis point decrease in impairment losses related to operating lease, right of use assets and a 50 basis point increase in product margin. These increases were partially offset by a 110 basis point increase in inventory shrinkage after historically low results in 2020 with stores closed.

Gross margin improved 380 basis points from 2019, driven largely by product margin improvements of 220 basis points, occupancy leverage of 120 basis points and a shrink improvement of 40 basis points. SG&A expense was $74.8 million or 25.8% of net sales in the third quarter compared to $67.9 million or 25% of net sales a year ago and $70.3 million or 26.6% of net sales two years ago. Compared to 2020, the increase in SG&A expenses as a percent net sales was primarily driven by 80 basis points of increased store payroll as many stores increased operating hours from the pandemic-related reductions in the prior year, 50 basis points due to corporate costs, consisting primarily of increased travel, training and marketing, and 30 basis points due to the decrease in governmental subsidies. These increases were partially offset by a 40 basis point decrease in annual incentive compensation and 30 basis points due to leverage of our non-wage store costs.

Operating income in the third quarter of 2021 was $39.8 million or 13.8% of net sales compared with $37.9 million or 14% of net sales last year. In the third quarter of 2019, we had operating profit of $24.3 million or 9.2% of net sales. Net income for the third quarter was $30.7 million or $1.25 per diluted share. This compares with net income of $29.1 million or $1.16 per diluted share for the third quarter of 2020 and a net income of $19.2 million or $0.75 per diluted share for the third quarter of 2019. Our effective tax rate for the third quarter of 2021 was 25.5% compared to 24.7% in the year ago period and 25% two years ago.

Turning to the balance sheet, the business ended the quarter in a very strong financial position. Cash and current marketable securities increased 6.9% to $338.1 million as of October 30, 2021 compared to $316.2 million as of October 31, 2020. The increase in cash and current marketable securities was driven by cash generated through operations partially offset by share repurchases and capital expenditures. The Company repurchased 2.2 million shares during the quarter, an average cost of $41 per share and a total cost of $91.6 million. Fourth quarter to-date through Tuesday, November 30, the Company has repurchased an additional 0.4 million shares, at an average cost of $47.91 per share and a total cost of $17.5 million.

This brings our total year-to-date stock repurchases to 2.8 million shares, at an average cost of $42.16 per share and a total cost of $120 million. We have $68.8 million remaining on the current share repurchase authorization. As of October 30, 2021, we have no debt on the balance sheet and continue to maintain our full unused credit facilities. We ended the quarter with $175.1 million in inventory, up 8.8% from Q - from the third quarter of 2020 and down 4.5% compared with the third quarter of 2019.

On a constant currency basis, our inventory levels were up 8.4% from last year. We continue to be happy with our current inventory position in light of the current sales trends and operating environment. As Rick mentioned, we are not immune to the global supply chain challenges facing the industry over the last 18 months, but continue to work closely with our brands and suppliers to navigate the challenges that are facing all of us. Overall, the inventory on hand is healthy and selling at a favorable margin.

Now to our fourth quarter to-date results. Fourth quarter to-date sales through Tuesday, November 30 increased 11.5% compared to the same period in the prior year ended December 1, 2020. Compared to the same period two years ago ended December 3, 2019, total net sales increased 8.6%. Our stores were open approximately 99% of the available days during the period in 2021 compared to approximately 97% in the same period last year, with our current closures almost exclusively occurring in Europe. We continue to monitor the situation in Europe with closures closely and at this time, we are planning new stores to be opened ahead of holiday.

From a regional perspective, net sales for our North America business for the 31-day period into November 30, 2021 increased 7.5% over the comparable period last year and were up 8.3% compared to the 31-day period in December 3, 2019. Meanwhile, our other international business increased 39% versus last year and increased 10.3% compared with the same period of 2019 as we continue to see closures in the current year, however, less frequent than in 2020.

From a category perspective, men's was our most positive category followed by footwear, women's and accessories. Hardgoods was our only negative category. Due to limited visibility in the business, we will not be providing specific guidance for the fourth quarter of 2021 or fiscal year 2022, but do want to provide a directional update on our expectations for the year. These updates assumes the current store closures in Austria, which are expected to reopen by mid-December, but does not include any other closures or significant impacts of current or future COVID variants. Concerning revenue for the full year fiscal 2021, we are projecting net sales to grow in the mid-teens from fiscal 2019. This translates to net sales growth from 2020 to just over 20%. For the fourth quarter, we anticipate sales growth from the prior year in the high single digits.

Moving to gross margin, 2021 gross margin is currently planned to grow substantially year-over-year driven by leverage of occupancy [Phonetic] costs on increased sales, a reduction in shipping costs, as web revenue normalizes with stores being open and improved product margins. We do not anticipate gross margin - we do anticipate gross margin growth in the fourth quarter, but more modest than the year-over-year growth experienced in the third quarter of this year.

Fiscal 2021 SG&A costs are expected to increase in line with our sales growth from 2020 for several reasons discussed on our Q2 2021 earnings call, many related to pandemic. As a reminder, the drivers of the SG&A increase include store wages and benefits increase with expanded mall hours from reductions in 2020 due to the pandemic, government subsidies received in 2020, not anticipated to repeat in fiscal 2021 at the same level. An increase in incentive compensation and other discretionary accruals are related to improved performance, a legal settlement accrued during the second quarter, an increase in costs related to training recognition events that were reduced significantly in 2020 due to the pandemic, an increase in marketing events and another related spending that were not possible with the restrictions of 2020, and increase in travel costs in the back half of 2021 with very little travel included in our fiscal 2020 results.

In summary, we expect to see expansion in gross margin while SG&A expenses grow in line with overall sales. On a net basis however, we anticipate operating margins will be up year-over-year in fiscal 2021 reaching low teens as a percent of sales. We are currently planning our business assuming an annual effective tax rate of approximately 25% in fiscal 2021 compared to 25.6% in 2020. We are planning diluted earnings per share to increase meaningfully in fiscal 2021 compared with fiscal 2020, driven primarily by significant increase we achieved in the first quarter and to a lesser extent, our earnings in the back half and the impact of our stock buyback executed during the year.

For the fourth quarter of 2021, we anticipate that EPS growth will be in the mid to high-single digits as a percentage over the prior year, inclusive of the impact of stock repurchase previously discussed. We are planning to open 23 new stores in fiscal 2021, including approximately seven stores in North America, 12 stores in Europe and four stores in Australia. We are planning to close approximately five to six stores during the year.

Capital expenditures are planned to be between $19 million and $21 million in fiscal 2021 compared with $9.1 million in fiscal 2020. The majority of the capital spending will be dedicated to new store openings and planned remodels. We expect the depreciation and amortization, excluding non-cash lease expense will be approximately $22 million in fiscal 2021 compared with $23.5 million in fiscal 2020. We are currently projecting our weighted average diluted share count for the full year to be approximately 24.8 million shares. Given the repurchases over the past quarter, we expect the weighted average diluted share count for the fourth quarter of 2021 to be approximately 23 million shares. Any further share repurchases would reduce these amounts.

With that, operator, we'd like to open the call up for questions.

Question & Answers

Operator

Thanks. [Operator Instructions] Our first question comes from Sharon Zackfia of William Blair. Your line is open.

Sharon Zackfia - William Blair - Analyst

Hi, good afternoon. I apologize, Chris, you talked really fast. So if you talked about this, I just didn't catch it. I guess I'm curious, there's been a lot of conversations about consumers shopping earlier this holiday season. And I'm wondering if you think you've seen any evidence of that and how you are handicapping that as you talk about the fourth quarter revenue growth rate, particularly that last week into Christmas? And then any thoughts on what you're thinking about for store openings in '22?

Christopher C. Work - Chief Financial Officer

Sure. I'll go ahead and take that. I think as it relates to Q4 and sales trends, this is certainly something we've been trying to monitor and understand. I think from our perspective, you can tell that our Q4 growth rate is lower than what we've produced year - quarter-to-date. And I think that's a factor of considering what you've mentioned here and also a factor - of the fact that January last year was extremely strong.

And so if you look at our cadence last year, we got quite a bump in January that really drove the quarter up, and that was primarily related to that period of stimulus. So we're not expecting that as well. So I think you can take those two factors as kind of factored into our guidance. This is something we also heard a lot about last year of people waiting until the end and we obviously didn't experience that as much last year.

So we're kind of weighting that with probably a lesser impact than probably what we'll see in January, but definitely factored into our thoughts. As it relates to store count in 2020…

Richard M. Brooks - Chief Executive Officer

2022.

Christopher C. Work - Chief Financial Officer

2022. Thank you. I think as we've always said, we like to be very opportunistic in how we think about this. And if we look back at the last significant downturn and rental rates, which is probably during the last recession, we opened some really good stores in 2008, 2009 and coming out of that recession. And I think we're looking at this market very similarly to say that there's good opportunities to work with landlords, to fill spaces and find markets that we think we can do well over the long term. So at this point, as we think to 2022, I think you could expect us to increase the number of store openings in each of the geographies that we operate.

Sharon Zackfia - William Blair - Analyst

Thank you very much.

Operator

Thank you. [Operator Instructions] Our next question comes from Jeff Van Sinderen of B. Riley. Your line is open.

Jeff Van Sinderen - B. Riley - Analyst

Hi, thank you, guys. Can you please just give a little bit more color on digital versus in-store sales that you saw over Thanksgiving week? Maybe if you could touch a little bit on Black Friday and Cyber Monday and how that differed versus the same period in '20 and '19. Thanks.

Christopher C. Work - Chief Financial Officer

Sure. I think what we've seen in digital really throughout the whole year, let me start a little bit higher level before I kind of tackle the holiday, is that we've actually seen - when we looked at where we were in 2019 compared to 2020, we were about 16% annually penetrated digitally in 2019. That went to 26% in 2020 as we were predominantly closed during large portions of the year.

And as we're planning this year, we actually sort of anticipated that we would be somewhere in between that, that there'll be some level of digital that would hold, and that - but we wouldn't be as high as we were in 2020. I think we're really happy today to tell you that we're much closer to the 2019 numbers than we are to the 2020 numbers, which I think is a really good thing for our brand and our customer. And again, you have to kind of frame this into that 12 to 24-year old who's trying to self-express and figure out who they are, and they come into our stores, which are pretty energy filled with an awesome sales team that can talk with them, human-to-human and connect and I think create a really good buying experience.

So we're really quite happy that our digital sales have moved much closer to 2019. That being said, and as Rick said in his remarks, we're pretty impartial to how they shop. So we've sort of set up our model to - you can buy online, you can buy in store, it's kind of their choice. And we're here to serve them, and we've built our cost structure on the back end to really not care which way that they - would they choose to shop.

So as it played out over the holiday weekend here, what's really interesting is our results got stronger as we moved through November and the holiday weekend was good. I think we saw a much larger return to stores than we had seen, which was a detriment to the web. But not quite as strong as where we were in 2019. So probably somewhere in between, kind of like what we had - what we've seen across the year in digital penetration.

Jeff Van Sinderen - B. Riley - Analyst

Great. Thank you. And then another question from me. So relevant to incoming spring merchandise, what changes are you guys seeing in supply chain? And how are you planning inventory for the spring?

Christopher C. Work - Chief Financial Officer

Well, I'll take a crack at this, and then I'll let Rick add anything he'd like to add. I mean, I think from a supply chain perspective, it's certainly something that's gotten a lot of publicity. And whether you're talking about spring or whether you're talking about many periods across this year, including holiday, it's been a grind. And I think fortunately or unfortunately, however you want to look at it, it's not different than what we've been experiencing now over the last 18 plus months. And it's been challenging since we came out of the significant closures of 2020. I think our teams have done a phenomenal job working with our brands and our vendors to get product in. We certainly have departments that have been more challenging, some of which have been pretty well-publicized, like footwear has been a challenge with some of the global supply chain headaches.

And so I think as we move to spring, our thought process is to continue to navigate this with brands. And where we have areas where our brands are going to have a tougher time delivering on what we're hoping to get to, we're looking to other areas of the business that are working and trying to move those sales around. And I think this actually gets to one of the strengths of our model, is that if you look back at time and you look at our sales and our comparable sales performance over time, what we know about our model is as much as we'd like to have all departments positive at all times, that's not very likely. And what we find is that there's different cycles and departments get really hot for a year or two years, sometimes three or four years, and then we typically see those dollars move to other departments that we operate in.

So I think that's why we're very happy with our positioning. It's really a lifestyle retailer of having the apparel, the accessories, the footwear, the hardgoods. All of those things kind of play against each other and help us navigate periods like this, specifically times like the spring that you've mentioned in your question, where we probably will have some challenges in some departments, and we'll have to try to shift all those to other places.

Jeff Van Sinderen - B. Riley - Analyst

Awesome. And then just quickly one final question. Can you speak a tiny bit more about what you're seeing in the Europe segment, and any changes to strategy or new initiatives you're working on there?

Christopher C. Work - Chief Financial Officer

Sure. Yeah, let me just kind of cover Europe pretty high level. I mean we're super proud of the Europe team for their 2021 results in light of the challenging backdrop. This is an area where really stores across the region have continued to be challenged with closures. It's not like here domestically, where we've been open pretty much all year. We saw 60% of the possible days in Q1, we're open - or I'm sorry, closed, 12% of Q2. And while we're opened all of Q3, we've now been closed 8% in November with all of our Austrian stores closed until right now, we believe December 13. And this is compared to their close 25% of all of 2020.

So our Austrian stores do represent about 25% of our store base over there. They represent a higher percent of our store sales just because it's our original market. So some of our strongest stores are in that market. So we're currently estimating that we'll have an impact on Q4. But what I would say is despite those challenges and closures, we find ourselves in a spot where we're up double digits in sales to the prior year. We're only down modestly to our budget. We view our customers as extremely loyal. I mean, we're seeing very similar trends to when we've had closures here of the moving to digital penetration. And overall, we do expect this downturn to help propel us in the months and years ahead. As I think we're creating a very strong loyal base there. And some of our regional players are challenged.

I think long term, as you talk about strategy and your question of how we think about it, I mean, I would just say we continue to believe in the long term for Europe. I think it's a good time to invest in the market, similar to Sharon's question about store growth next year. I think we're seeing some good opportunities on the rent side in Europe. We're opening 12 stores this year, with our first store in Norway. And we plan to increase that next year and continue to open new markets. Our strategy there has been a mix of filling in markets where we have a presence, and then adding stores in markets that are new is kind of a way to both grow markets and also manage the risk of each start class, right, as we kind of grow along.

So I think this is really aligned with our strategy to continue to grow there. I think we believe the investment we've put in has put us in a place to really capitalize on the marketplace. We've got a really strong team there and have built out a lot of the back office to be able to manage this growth. Now, we believe we're one of the largest lifestyle retailers now in Europe. I think it's a pretty fragmented space and a space that we can really win kind of market-to-market.

So - and then lastly, I'd just say it really ties in with our belief of being a global retailer, right. Our ability to find brands that emerge locally and grow them globally. So that can be brands here that we take to Europe and introduce to that marketplace. It can be brands to start in Europe that we bring back here. And I think it helps us be a better brand partner across the globe and obviously, in working with our brands.

So I think we're really quite happy despite the challenges, right. And I think with 2021, we still have some uncertainties with COVID and how that's going to impact the winter, how much travel people can do, what's going to happen from a restriction perspective, while we're able to open our stores in December. There still are some travel restrictions in other areas of the economy, like restaurants and hotels that aren't able to fully open until after the holiday. So we're obviously monitoring that.

And I think our planning that we've laid out today is inclusive of those restrictions, but never quite sure where this is going to go. That being said, I think long term, as we look past 2021, think into 2022 and getting beyond this - the virus, I think we feel like we're in a really good spot. I think we believe that the customer returns to kind of normal habits, and we can recapture what we've lost here in some of the closures. I think we're in a really good path to profit and still consider that in that kind of 12 to 24 month time frame.

Jeff Van Sinderen - B. Riley - Analyst

Great. Thank you so much.

Operator

Thank you. Our next question comes from Sharon Zackfia of William Blair. Your line is open.

Sharon Zackfia - William Blair - Analyst

Hi, sorry. I had a follow-up question. I was just curious, just given this being such a high season for you, how are you doing on staffing in the stores? And I mean, are you going to bring in seasonal labor? Can you talk about your ability to actually kind of service this holiday season? Thanks.

Richard M. Brooks - Chief Executive Officer

Sure, Sharon, glad to give you some color around that topic. I think we're - as we said in our comments, we're clearly not immune to the challenges around labor in the marketplace, but I also think we are more adept than many of our competitors have been able to be relative to our labor. And that's fundamentally because we have such a loyal customer base, and we essentially hire our customers.

And so we are hiring seasonal staff through this season and getting hours for them on the floor. And of course, we're also maximizing hours for our existing teams and our top salespeople through the process too. But I think, again, the loyalty of our consumer base gives us a great population of young people to hire. So we're seeing them a lot in our stores, and it gives our managers a chance to basically take a look at who - which of those loyal customers have the cultural values that we want, that we expect in our employees, bringing them in, getting them the training and then unleashing them on the sales floor. So we've had some challenges here, but I think we're generally faring better than most people are on this topic.

Sharon Zackfia - William Blair - Analyst

Thanks. And then one more question for Chris. I guess the lack of giving more color on the fourth quarter, is that primarily due to the uncertainty around Europe at this point? And did you touch on Australia at all? Did I miss that?

Christopher C. Work - Chief Financial Officer

No. I think when we think about the fourth quarter, I think that is probably the biggest hurdle out there, as well as the fact that the January stimulus impact is still something we're continuing to measure. We certainly have our estimates. We've now had a couple of rounds of this and I think have some good planning there. But I think we felt it was best to kind of stay higher level at this point until we have complete certainty around where our stores are going to be.

And I think the second part of your question on Australia, we are fully open in Australia. I think they've done a really good job. They have had a lot of challenges too. As I mentioned, their Q3, they were still closed the majority of the quarter. So we're happy to get them back open. I think they're performing at a really good clip. We feel very similarly about Australia that we do in Europe. I think our growth there has been really successful. We've been able to open new stores both in existing and new markets, and they've performed pretty well. So we feel good about where we're at in that market.

Sharon Zackfia - William Blair - Analyst

Great. Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call - I apologize. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to Rick Brooks for any closing remarks.

Richard M. Brooks - Chief Executive Officer

All right. Thank you, Valerie. Appreciate that. Again, I just want to thank everyone for obviously your interest in Zumiez and your passion following what we do and wish everyone a great safe holiday season, and we look forward to talking to you again in March. Thank you, everybody.

Operator

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ZUMIEZ INC

Q3 2021

Earnings Transcript

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