Zumiez Inc  (NASDAQ: ZUMZ) Q1 2020 Earnings Call Transcript

Zumiez Inc  (ZUMZ) Q1 2020 earnings call dated Jun. 04, 2020

Corporate Participants:

Richard M. Brooks — Chief Executive Officer

Christopher C. Work — Chief Financial Officer

Analysts:

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

Jeff Van Sinderen — B. Riley & Company — Analyst

Janine Stichter — Jefferies LLC — Analyst

Mitch Kummetz — Pivotal Research Group — Analyst

Jonathan Komp — Robert W. Baird & Co., Inc. — Analyst

William Dezellem — Tieton Capital Management — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Zumiez, Inc. First Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in 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 about 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 — or risk factors that could cause actual results to differ materially from the information that will be discussed is available in Zumiez’s filings with the SEC.

At this time, I will turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead, sir.

Richard M. Brooks — Chief Executive Officer

Hello, and thank you everyone for joining us on the call. With me today is Chris Work, our Chief Financial Officer. I’d like to start by sharing my immense gratitude to our employees and partners for their continued dedication during these unprecedented times. These last several months have made many of us feel anxious, scared and uncertain of what lies ahead. The pandemic has clearly had a major impact on our business. Additionally, in the last week, we once again witnessed the impact of injustices in our communities. At Zumiez, we strive to hire and support the people that reflect our communities and that live our values. We invest in our employees, try to promote from within and support them as a platform to serve their communities, share their opinions, challenge assumptions and put their energy towards the causes they believe in. I’m proud to serve as part of the Zumiez team and I’m confident that by living some of our core values of equity and inclusion and driving people to action, we can make a difference if we all work together.

Now, I’d like to make a few remarks on the current status of the business, then I’ll share some thoughts on our first quarter performance and the rest of the year before handing the call to Chris who will take you through the numbers. After that, we’ll open the call to your questions. Fiscal 2020 got off to a strong start with first quarter sales and EPS tracking ahead of expectations through early March. However, our performance soon fell off as many of our markets enacted measures to help slow the spread of COVID-19, including requiring all non-essential businesses to close and people to shelter at home. Following the guidance from health officials and local governments, we made a decision to close virtually all of our stores as of March 19 in order to protect the health and safety of our customers, employees and the communities we operate in. With our brick-and-mortar locations temporarily closed to the public, we immediately shifted our focus to increasing financial flexibility and directing resources towards continuing to engage and service our customers through our digital platforms.

With the long track record of effectively managing the capital of the organization and quickly adapting to changing environments, we are confident in Zumiez’s ability to weather this crisis and emerge in a position of strength. In order to achieve this, we’ve had to make some difficult near-term decisions. First, we unfortunately had to eliminate virtually all hours for our part-time staff. We also suspended our hiring, eliminated substantially all planned fiscal 2020 bonuses and delayed the majority of merit raises. We also took steps to further strengthen our balance sheet by reducing planned inventory receipts, extending payment terms, delaying or cancelling select capital projects, including new store openings, and pausing our share repurchase program. Finally, in terms of rent, we suspended most payments while we continue discussions with our landlords about potential rent relief during this period while stores are closed.

We’ve had to make many changes to our business in response to the COVID-19 pandemic. One area that we made constant is our commitment and our investment in our people. We’ve discussed at length over the years the significance of our culture and brand and how they service critical competitive advantages that have helped us win throughout our 40-plus-year history. The most significant component of our culture and brand has always been and will always be our people. With this mindset, we made decision to pay our full-time employees throughout the pandemic. This was a meaningful commitment and one that we believe will benefit all of us in the short and long term. In fact, we’re already starting to see the benefits in our results. This started pre-opening as our teams continue to connect with our customers digitally through social engagement and fulfilling in our stores, and this has only magnified since starting the reopen process.

Our teams have been able to collaborate and execute quickly and safely reopening our stores as state and local governments begin allowing certain non-essential businesses to resume operations. We cannot be more proud of the dedication exhibited by our teams during what has been the most difficult operating conditions the company has ever faced. We banded together, took care of each other and maintained a strong commitment to our customers. We learned to work effectively together while physically apart from one another in order to maintain the needs of the business and successfully navigate the new challenges created by this unprecedented situation. The benefits of our one channel operating model weren’t fully evident prior to COVID-19. I believe they are now, as we’ve been able to optimize our inventory management and fulfill our digital demand using store fulfillment quickly, yet in a safe and efficient manner.

We ended the first quarter with 65 stores opened for business, representing 9% of our entire store base. And at the end of May, that number has increased to 493 stores or 69% of our entire store base. The work that our field teams and supporting departments have done to open stores in accordance with governmental regulations have been nothing short of amazing. They’ve done incredible job balancing the safety of our employees and customers, while still providing a unique and authentic shopping experience. This collective effort to reopen has gotten us off to a great start with total May sales declining 8.6% compared to the 35% decline in the first quarter. With comparable sales up 79.6% in May, consisting of our open stores and digital activity, we are well ahead of expectations for the month.

Looking ahead, there is still a great deal of uncertainty about the state of retail and the global economy due to the impact from the COVID-19 virus. And there’s still a lot of work ahead to continue navigate the current environment. Like Zumiez has done throughout its history, we will listen to our customers and adapt. Thanks to our dynamic teams and one channel mentality, we are well positioned to pivot to meet the needs of our customers wherever, whenever and however they want to engage with us. We learned a great deal from recession of 2008 and 2009 about how to serve the customer during challenging times and how market consolidation can be of benefit to our business. Much like that recessionary period, we believe the current environment will accelerate further consolidation globally, and our focus on the customer has Zumiez well positioned to gain further wallet and mindshare as we emerge from this crisis.

We’re thinking about this time period much like economic downturns in the past. We must be smart in how we navigate the business challenges, while also looking for long-term strategic investments that will set us up for the future. These include great real estate opportunities, new tools within our omnichannel environment and other strategic investments to support the next era of intimacy and now with our customers. The strength in our financial position can be a significant advantage in these times.

I have great confidence in our teams and the proven ability to navigate through unforeseen challenges. Our response to the pandemic has highlighted the strength of our culture and brand and bolstered my optimism about emerging even stronger from this current crisis.

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

Christopher C. Work — Chief Financial Officer

Thanks, Rick, and good afternoon everyone. I’m going to start with a few high-level comments on the financial strength of the business, review our first quarter and then provide an update on May sales before discussing a few updates on the full year. We entered fiscal 2020 in a strong financial position with cash over $250 million and coming off the highest earnings per share in the history of our company. This resulted from years of commitment and hard work by our team, coupled with strong financial planning. Now, in the closure and subsequent reopen, we have continued to see the strength of our one channel model and our stores working diligently to serve the customer.

The business ended the first quarter in a strong financial position. Cash and current marketable securities increased 29.3% to $217.2 million as of May 2, 2020, compared to $168 million as of May 4, 2019. This increase was driven by cash flow generated through operations, offset by capital expenditures and $13.4 million of share repurchases that were executed during the first quarter prior to our store closings. As of May 2, 2020, we have no debt on the balance sheet, but do have approximately $14.4 million in deferred payments associated with deferred lease payments and governmental programs. We continue to maintain access to our unused credit line of $39.5 million [Phonetic].

We ended first quarter 2020 with $136.4 million in inventory compared with the $136 million in inventory last year. Inventory grew only 0.3% from the prior year as our merchandising teams work to cancel or push out orders to curb the impact of declining sales due to store closures. Given our strategy to fulfill orders from stores, inventory in a large percentage of our stores continue to move through digital order fulfillment rather than remaining stagnant during the shutdown. Our overall aged inventory as a percent of total inventory is up slightly. However, overall, we feel well positioned as we move into the reopen phase.

During the first quarter, we repurchased $13.4 million or 700,000 shares of our common stock at an average purchase price of $19.31. We paused any repurchases when our stores closed and we currently have $86.6 million remaining in our stock repurchase authorization.

Turning to the income statement. The majority of our commentary here will be focused on total sales as our comparable sales policy removes closed stores from the calculation after they have been closed for seven consecutive days. Given this, we view total net sales as the best indicator of business performance during this challenging time. First quarter net sales decreased 35.3% to $137.8 million compared to $212.9 million in the first quarter of 2019. The decrease in sales is driven by the impact of COVID-19 and the closure of our physical retail stores across the world, offset by gains in our online sales throughout the period.

From a regional perspective, North America net sales decreased $71.4 million or 38% to $116.6 million. Other international net sales, which consists of Europe and Australia, decreased $3.7 million or 15% to $21.2 million. If excluding the currency translation, North America net sales decreased 37.9% and other international net sales decreased 11.7% for the quarter.

Now I would like to provide you a little more color about the cadence of the quarter, including results prior to our store closings and the post store closing results. We’re starting to feel the negative sales impact of the COVID-19 situation in the second week of March. For the first five weeks of the quarter through March 7, total sales were up 7.5% from the same five-week period in the prior year. For the final eight weeks of the quarter, which included nearly all of our stores being closed for the majority of that time frame, total sales were down 60.3% despite growth in our online sales of 75.9% as we shifted efforts to serving our customers digitally. From a category perspective, all categories were down in total sales with hardgoods being our least negative, followed by women’s, accessories, footwear and men’s clothing.

First quarter gross profit was $23.7 million compared to $66.5 million in the first quarter of last year, and gross margin was 17.2% compared to 31.2% a year ago. The decrease was driven primarily by 790 basis point increase in our store occupancy costs due to the continuation of rent charges without associated sales during our period of closures. While a significant portion of the cash rent payments were deferred, the income statements continue to reflect all occupancy charges due during the quarter. The gross margin decrease was also driven by a 350 basis point increase in order fulfillment and distribution costs due to increased web activity as a result of COVID-19 related to store closures as well as de-leverage across our distribution center fixed costs, including the continuation of wage payments during store closures. Also, a 140 basis point decrease in product margin and a 90 basis point increase in COVID-19 related impairment of our right-of-use assets.

SG&A expenses was $51.6 million in the first quarter compared to $65.5 million a year ago, a decrease of 21.2%. The decrease in SG&A was driven by lower store operating costs while stores were closed, combined with the actions we took to lower overall expenses in response to the impact from COVID-19 that Rick covered earlier. This number also includes the investments that we have made in our people in the store system and home office where we have maintained and paid all full-time staff throughout the closures. These investments have been pivotal and maintain the strong culture here at Zumiez, as well as positioning ourselves to get back to business as quickly as possible across the country when it’s safe to do so.

Operating loss in the first quarter of 2020 was $27.8 million compared with operating income in the prior year of $1 million. Net loss for the first quarter was $21.1 million or $0.84 per share compared to net income of $0.8 million or $0.03 per share in the first quarter of 2019. Our effective tax rate for the first quarter of 2019 [Phonetic] was 20.9% compared with 59.8% in the year ago period.

Now, to our May sales results, total May sales were down 8.6% for the four-week period ended May 30, 2020 compared with the four-week period ended June 1, 2019. As we move through the month, we continue to opening stores following the guidance of state, local and international authorities ending the month with 493 stores open or 69% of our store base. Overall results, since we have opened, have exceeded our expectations with total sales starting the month in week one down 35.8%, week two down 12.7%, week three up 5.1% and week four up 8%. It’s worth noting that our total sales were up from the prior year in the last two weeks of the month, despite the fact there were still hundreds of stores closed at the end of May.

Total comparable sales for the period ending May 30, 2020 were up 79.6%. As a reminder, this includes our open stores on the first day they are opened as well as our e-commerce sales in the period. By channel, our open store comparable sales increased 38.5% and our e-commerce comparable sales increased 181.6% during May. The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction. May dollars per transaction increased due to an increase in units per transaction and average unit retail. For May, hardgoods was our highest positive comping category followed by men’s, accessories, junior’s and footwear. There were no negative comping categories in the month.

Due to the limited visibility for the business, we will not be providing guidance for the second quarter of 2020 or the fiscal year. That said, we do want to give you a few thoughts on how we’re looking at 2020. We continue to manage costs across the business understanding this challenging environment and limited visibility. This has resulted in significant reductions in certain expenses as we work to align the cost structure to the sales loss during our closure and the potential for softer sales results as we move through the year. We are currently planning SG&A expenses across the business to be down significantly compared with 2019 associated with the removal of travel and training, reductions in planned capital, removal of incentives, other areas of compensation and many other areas. Due to the variability and performance over the back half of the year, this could increase or decrease as we move through the year and gain more visibility to the sales trends.

We are planning to open approximately nine new stores in 2020, including five stores in North America, three stores in Europe and one store in Australia. This is down from our plan coming into the year of 20 stores. This number may increase, if we see the right opportunities in the marketplace. We expect capital expenditures for the full 2020 fiscal year to be approximately $11 million compared to $19 million in 2019 and our original plan for 2020 of between $18 million and $20 million. The majority of the capital spend will be dedicated to new store openings and planned remodels, and this amount may also increase if we are able to secure advantageous locations as we move throughout the year. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $24 million, down slightly from the prior year. And we are currently projecting our share count for the full year to be approximately 25.3 million shares. At this point, we are not expecting any share repurchases until we have further visibility into the business.

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

Questions and Answers:

Operator

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

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

Hi, good afternoon. That’s a pretty impressive recovery you’ve seen in sales, particularly in the back half of May. Obviously, Rick, you alluded to what you did with your full-time partners and how that’s helped. I guess, I’m also curious if you’re seeing variation with the open stores across regions, what, if any, the kind of pent-up demand do you think is embedded in these numbers and if the stores that have been opened the longest are starting to see a tapering off in the trend over time or if they are just staying really, really robust?

Richard M. Brooks — Chief Executive Officer

Yeah. Well, thank you for the question. It’s a really — your questions are always, Sharon, right on the money. And I’m going to let Chris — we are actually prepared for your question here, particularly relative to what that trend looks like based on the week the stores open. So I’ll let Chris take it from there.

Christopher C. Work — Chief Financial Officer

Sure. So Sharon, as we said in our prepared remarks, we had 65 stores opened in the quarter or approximately 9% of our store base. At the end of May, that number had increased to 493 stores or 69% of our store base. As of today, we’re about 74% open. So as you can see, we’ve kind of continued to move in opening stores as we move through the second quarter here. The work of our field teams and supporting departments to make this happen safely and in accordance with government regulations has really truly been amazing. I think we’ve been quick to open. We’ve been engaged with the local community, prepared to face a variety of scenarios upon opening. At this point, we still believe our stores — we believe all of our stores are going to be opened by the end of June, and we are focused to getting them open as quickly as possible.

In regards to May’s results, with total sales declining only 8.6%, down from the 35% decline we saw in the first quarter, with hundreds of stores closed, I mean, we’re obviously pretty happy with the results as well. To understand the results, we’ve looked at this multiple ways. We’ve looked at it by markets by trade area, understanding what were web sales in the trade area prior to our stores opening, then looking at the impact that store openings have had on the trade area and the impact each week after opening. We’ve also tried to slice and dice this, really trying to understand, which formats may be performing better than other, street versus mall, international versus domestic, tourist, college, all the different types you expect.

And while we have a lot to learn, we’re very encouraged with the early results, noting that with some exceptions, pretty much all of our stores have opened, have comped extremely well in the first few weeks up until the end of May. Speaking just domestically, we’ve seen 87% of our stores that have opened have comped positively, with roughly 50% of our stores that have opened comping over 50% positive on a four-wall basis.

We’ve seen indoor centers perform actually stronger than outdoor centers, but both be very strong. We’re seeing a strong intent to buy across our stores with meaningful increases in dollars per transaction, driven by units per transaction. The web costs in the markets where stores have opened have decreased moderately, but remained extremely high throughout the month, currently running over 100% domestically and very high-double-digits in Europe. Traffic remains highly driven by organic and direct search. We have seen our store comps by week continue to be strong for the most part. And we are seeing challenges as expected in our tourist markets as well as some border markets and college towns.

With these results, we spent a lot of time thinking about why this is happening. And while these are just our initial thoughts, I’m going to try to outline a few things that we think are driving this today. First, we believe that investment that you mentioned in our people has been instrumental in driving a great customer experience. Our people have been engaged and connected to their consumer throughout the pandemic either through fulfillment or socially through different methods to connect with their customer. Our people are ready to open and when cleared by local authorities and our ability to open quickly has provided a great place for our customer, as well as non-traditional Zumiez customers when we are sometimes, one of the only stores open in the mall.

Secondly, our merchandising teams continue to be on the front end of trend-right product choices with skate continuing to perform extremely well in May, as well as our apparel categories. We believe our customer has pent-up demand from two months of quarantine and is looking for newness and interactions with the brand they trust. We believe our customers most likely receive some level of governmental assistance through this challenge in the form of stimulus or other unemployment or both and some may be making more than they were working. And we believe there is less competition for discretionary dollars. As we look at the landscape, most restaurants and bars are closed or take-out only, travel has been limited and sports movies and other venues have closed as well.

So all in all, we try to capitalize the best we can on this cycle and we couldn’t be more proud of our teams. Now going forward, I think the other thing I add to your question, Sharon, is we do remain cautious. We’re very pleased with this result, but as we look at the next few months and back half of the year, we are cautious in thinking about the — some of the things that are unclear and the damage caused by this pandemic and how it could impact us. This includes our consumers’ ability to spend, what happens with the stimulus and pent-up demand, the high rate of unemployment, what’s the impact of metering in peak, will the safety measures needed with the pandemic result in less severe — or less ability to serve our customers, what happens if the virus comes back in the fall, and we have a lot to learn. As you can imagine, our teams are working through all these implications and all of these and trying to figure out the best way forward. But we’re really happy with where our results are today.

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

I guess, following up on that, so you have those 65 locations that had opened by late April. When you look at though that — just like call them a cohort, but how has that trended through May? Has it been like a decelerating rate of improvement? So you see that kind of big bang when the doors open and then it tapers off or is it kind of holding steady, just using that as a base case?

Christopher C. Work — Chief Financial Officer

Yeah, we’re actually tracking this week-by-week. So every store that opens gets classified in the week of opening and then we’re reporting those stores as well as their associated web sales to try to see what’s happening. And effectively what we’ve seen is that they have stayed pretty strong. We’ll see a good pop when they open. And as a class or weekly classes of stores, they’ve continued to remain pretty strong throughout the month of May. We did see some web slow down, but like I said in my remarks, it stayed, actually the web stayed extremely strong. So we’re pretty happy with how the stores have opened and I think it’s resonated with our consumer.

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

And then my last question for everyone.

Richard M. Brooks — Chief Executive Officer

Just to add to that, just go ahead.

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

No, no, Rick, please.

Richard M. Brooks — Chief Executive Officer

I was just going to say, to be clear. I mean when we say that, we are saying that to maintain the pace of the comp across that chain and whatever the company is running across those weeks is basically maintaining pace as we go as those store classes progress.

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

Got you. And I guess, the other question — yeah, this working remotely, is killing me. The other question that I didn’t expect to ask today was — is on inventory and it’s not the question I expected. But I mean, do you feel like you have enough levers to pull, if demand continues to strengthen to have enough inventory going into back-to-school?

Richard M. Brooks — Chief Executive Officer

We feel — again, as Chris said, Sharon, there’s just so many uncertainties about what back-to-school is going to look like, will there still be reduced small hours. Still — remember, we’re doing these results in most cases in a large majority of our locations where traffic has been metered between 25% and 50% of occupancy. So we are still uncertain about what all that means, how does that translate into a peak season. We believe that we are actively out there pursuing inventory, particularly in certain categories of business and skate — obviously, skate would be one, but apparel likewise, even Chris said, we had good results in apparel.

So we believe we’re in a pretty good spot to work with our vendors and bring product in. There is definitely some supply chain challenges around this, so — to be clear, but we think by the time we get to back-to-school, we will be in a pretty good position to react to consumer demand. And that’s about the best I can say at this point, Sharon, in terms of how we’re — how we think about we’re planning the business, which has so many uncertainties, but that we think we can plan in a pretty effective way from a product perspective as well as what tactics and tools our teams will have to use in a peak and we may never have done before. We’ve experimented lots of ideas around that, that our teams are working on to capture, I think we will be as always a leader in capturing whatever demand is there.

Sharon Zackfia — William Blair & Company, L.L.C. — Analyst

Thank you.

Operator

Thank you. Our next question comes from Jeff Van Sinderen with B. Riley. Your line is now open.

Jeff Van Sinderen — B. Riley & Company — Analyst

Terrific to see the strong snapback in your business. Just wanted to sort of touch on the digital component, I know you have one channel model. However, given the strong performance in digital and the arguable endurance of that despite some of the major unknowns that are kind of hanging in the balance, can you speak about the profitability influence of digital, as that business scales, which it seems to be doing?

Richard M. Brooks — Chief Executive Officer

Yeah, I’d be glad to give it. I’ll tackle it at the high level. And Chris will tackle it, of course, with the real numbers. Jeff, you like to keep the two of it separate in that sense. But from my perspective, again, we do have a one channel model and our job is to empower customers to make choices about how they engage with us. And how, when, what they want to experience with, we’re building our models around all sorts of different ways to empower consumers. And also I would add to empower our people in the same way for engaging with our customers. So we still don’t care whether it starts digitally or in the physical world. We just want to win the customer is where we’re at now.

I will tell you that in — as always, as we’ve said here during the closure period, our teams pivoted, we try — we experiment with all sorts of new things, so the really exciting thing for me coming out of this is, I think we have confirmed some of our broad theories and strategies that we’ve been working on that we really could pivot more into that digital and say, let’s go try these things. And I think we’ve seen really good success there with a lot of experimentation and innovation around how we communicated with our customers, the relevancy of how we get — improving the relevancy of the communication with our consumers, but yet all make it a local and transparent to our teams.

So I feel like we have some real lessons we can take away from this. Now, do I still care whether the sales is a digital sales or physical sale? I actually don’t. And from a large perspective, I still think when we get back to a more normal cycle, we’ll kind of see digital acceptance patterns for our consumer kind of return to their previous trend line, but we’ve learned all I think a lot of valuable lessons, Jeff, in the process that’s going to help us improve the digital experience for our consumers and give them more options for how they want to interact with us. So I feel really good about that. And then, I’ll let Chris take it from there.

Christopher C. Work — Chief Financial Officer

Yeah. I would just echo where Rick saying about the one channel and how they work together, and I think this pandemic has given us yet another data point of the significance of that. As we did years ago, as we talked about opening stores across the US, we talked about when we opened stores, we saw an increase in web. And I think it’s no different in this cycle with internationally, obviously with a lot of room for growth, during the period of closure, we saw stronger web results in those markets where we have stores. And now, I want to be clear, we had good web results both where we have stores and where we don’t have stores internationally, but they were stronger where our stores were, as you would expect. So I think these two really do work together. To get to the heart of your question around digital profitability, this is a challenging in our model, as you know because we fulfill from stores. So they are very integrated together.

So we tend to look at the different metrics around this as if a customer walks into store, that could be our most efficient model, but overall, when we think about the contribution levels of a four-wall store and the contribution of the web, including having the shipping charges, they actually pair out to be pretty similar. Now remember, we don’t have a way to allocate all the labor back to the web, nor am I sure if we should, because a lot of our fulfillment within store is done outside of additional hours. So I think we look at the channels on par. And as Rick said, I think the bigger thing to us is just driving sales and listening to the customer and ultimately, pushing towards the trade area of profitability is how we see stores and web working together to serve a community.

Jeff Van Sinderen — B. Riley & Company — Analyst

Okay. Well, you certainly seem to be doing an amazing job of driving sales. Any update you can give us on what you’re hearing from landlords, any specifics there, maybe how that’s progressing, how you’re thinking about opportunities in real estate as we see vacancies kind of spiral?

Christopher C. Work — Chief Financial Officer

Sure. Let me just kind of give a quick update on where we’re at. And then I’ll talk a little bit longer term. Obviously, this cycle has put a continued challenge on the retail segment. Our strategy with physical retail has not changed. We continue to want to try to manage to not have one more store than we need to do in any given trade area. As it relates to COVID here in the short term, we continue to work closely with our landlord partners, I think is what I would tell you. This is a difficult time for both of us. As we previously mentioned, we did hold back significant portions of April and May rent, and we’re making partner — we’re making progress working with our landlord partners. We’ve — this includes abatements, deferrals, other rent actions that work to find a compromise in this difficult time. At this point in the process, we are well into it. We’ve got a lot of deals done and behind us and we have a lot of work to do as well. It’s a lot of time on our real estate teams and supporting teams that help get us into our financials.

I think longer term, we continue to monitor that bottom 10% to 20% like we talked to you about before. We look at each trade area, trying to find how the stores and the fulfillment aligned with what we’re doing in those markets. I think in the next three, five, 10 years, really honing in on that is going to help improve our overall profitability linking in things like our Stash data to understand how — more of our customers in those markets. And I think all of this is going to play to make us more profitable over the long term.

Currently, we really only have about 7% of our stores right now that are not making money. On a four-wall basis, this is up from 4% prior to the first quarter. So the vast majority of our stores are profitable. Even those that aren’t making money, many of those are EBITDA positive. So — and as I think about like that lowest 20% from a contribution perspective, we have the ability to exit roughly 75% of those in the next three years. So we’ve taken a very risk-based approach to real estate. I think it’s our thought that it’s the omni model that wins over the long term and stores that really own their market and their trade area, we’re going to invest in and the ones that don’t, we’re going to keep on shorter leases and be able to adapt quickly.

Richard M. Brooks — Chief Executive Officer

And Jeff, in terms of future opportunities that are out there, I mean, we are definitely going to be — this is where the strength of balance sheet really helps. I — particularly globally, I think this is particularly true because we have a lot of growth left in front of us in Europe and Australia. But we’re also, to be clear, not in a hurry either. I think there is going to be tremendous as we’re already starting to see consolidation in the retail world. I think that’s going to take a while to play out. So deals could get better, I think, from the real estate front over the next 12 months as that consolidation becomes even more obvious.

So we will be patient. As we — as you heard in our comments, we’re going to pull back from the store growth this year. We’ll be patient, but we’re definitely be opportunistic because we know that some of the — 2008, 2009, some of those stores we opened during the recession, we have had a decade of tremendous profitability for us because we are able to strike deals that really were opportunistic at the time. So we would definitely be out there looking at the markets where it makes sense. And our teams are thinking about that at this point, but we’re also going to be patient.

Jeff Van Sinderen — B. Riley & Company — Analyst

Okay. Thanks and best of luck.

Richard M. Brooks — Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Janine Stichter with Jefferies. Your line is now open.

Janine Stichter — Jefferies LLC — Analyst

Thank you. And first just a modeling question and kind of one big picture question. So on the gross margin, I think you said you had just over 100 basis points of product margin pressure in the first quarter. It seems like your inventory is very clean right now, just a little bit of aged inventory you mentioned. So would you expect the product margin pressure to be less than what you saw in 1Q? And then, I want to ask about hardgoods. You had really good momentum there pre-COVID. And it seems like that hasn’t changed. Just curious, to your thoughts on how social distancing is impacting the hobbies or interest of your customers and how they might be spending their free time and then, your thoughts on the impact that this is having on the skate cycle? Thank you.

Christopher C. Work — Chief Financial Officer

Sure. I’ll start on product margin here. From an overall perspective, we did say it was down pretty meaningfully in the first quarter. I’m not going to give clear guidance on the go forward as we’re still trying to navigate through this cycle. We do believe there will be promotional pressure as people get their stores back open obviously with some people needing to just clear out old inventory, some people needing to clear inventory to generate cash very quickly and others perhaps in true liquidation form. So we are trying to navigate it and think through it. Our hope is that it is not as significant as what we saw in Q1. We actually believe that our inventory position to end the first quarter is advantageous to be active here in the second quarter and in the back half of the year. I think our team has done a really good job keeping inventory clean, really investing in those areas that are driving sales and moving. So our teams are trying to navigate it as carefully as possible, but we do expect it to be promotional cycle.

Richard M. Brooks — Chief Executive Officer

And Janine, relative to your question on the impact of kind of consumer trend cycles here around the hardgoods business, we obviously have spent some time talking about this internally. And we’ve been asking ourselves the question, it’s clearly — skate hardgoods never was really strong a year ago at this point in time. And likewise here, it’s continued its strength here into — through Q1 and into Q2 and through the pandemic. So we have been talking about, well, how much of this we’re really seeing, obviously something kids can do and they can go out and skate by themselves or still be socially distanced with their friends out skating.

And so, the big question for us really has been, have we pulled demand forward. And we’ve spent a lot of time talking with internally about this. And externally, we don’t, of course, know the answer. But our general feel is that the trend is so strong and in talking with our skate brands, our partners on the wholesale side, and we feel like this is just demand. And we’re not sure that this pulled forward demand is just pent-up demand that we’re now seeing that the situation has given people a real chance to go spend their money they had on this category that they would have spent anyway. So we’ll see how it plays out over time. We’re not sure about that, but it’s definitely we think like a lot of sporting goods or fitness categories, our business here is reflective of the impact of the pandemic and — but it’s a continuing trend for us. It’s as strong as through the pandemic as it was previous.

Janine Stichter — Jefferies LLC — Analyst

That’s helpful. Thank you.

Operator

Thank you. Our next question comes from Mitch Kummetz with Pivotal Research. Your line is now open.

Mitch Kummetz — Pivotal Research Group — Analyst

Yeah, thanks for taking my questions. Chris, let me start on SG&A, because I think you made a comment that you expect – you’re planning it down significantly and then, you kind of went through some of the line items where you expect to cut some costs. I’m just trying to understand how to think about that maybe Q2 versus the balance of the year? Because in Q2, I would imagine, relative to last year, you’ll save a lot on payroll, just as you sort of phase the reopenings over the balance of the quarter. But then for the back half, I think you made a comment that you expect all your stores to be opened by the end of June. So when I think about the back half, at least from a — like a store payroll standpoint, that should be, I guess, sort of a pretty even year-over-year. So I’m just trying to understand how much you can save once the stores are open. So, any color around that might be helpful.

Christopher C. Work — Chief Financial Officer

Sure. Mitch, I’ll do my best. I’m going to be more directional in nature, just because as you know, a lot of this is tied to where the top line is at and other trends of the business. So as we think about some of the things they have led to our first quarter SG&A being down 21%, you’re talking about store wages around closures, reduced hours, reduction in project hours, reduction in store operation costs. Some of those things obviously are going to be more tied to store openings. We do have things like our larger national events that at this point in time, we don’t believe it’s safe to bring these large groups of people together, obviously reduced travel, reduced marketing events. A lot of our marketing portfolio has been live events and our teams have to pitch — have had to pivot to more digital events. And then we have some other areas like we did not do raises this year. We’ve reduced the 2020 incentive plan. Those types of things will play out across quarters. But I think generally the way that you’re thinking about it is right that we would have more significant declines here in the first quarter than the second quarter and it will sort of taper down as we move through the year.

I mean, obviously our real strategy here is trying to strike that delicate balance between pushing the business forward and making the right investments, while also maintaining capital and preparing for — if there is a future challenge as well here. So we’re going to stay pretty nimble. We do expect it to be down, as I said on the call, significantly, but that’s kind of how we’re thinking about it.

Mitch Kummetz — Pivotal Research Group — Analyst

Okay, fair enough. And then, just again on back-to-school, I’m just trying to understand how you’re planning the business for back-to-school. Is your working assumption that schools across the country are going to reopen for in-person instruction? Is that kind of how you’re planning the inventory? I know you made some comments about being cautious as you think about the business for the balance of the year. And if you are being cautious, I’m just wondering to what extent you can chase things if the trends can kind of continue along the lines that you’re seeing or if you’re kind of constrained by your conservative plans.

Richard M. Brooks — Chief Executive Officer

Thanks for the question, Mitch. So the first, the headline is — does back-to-school happen I think is the headline of your question. And so, we definitely think back-to-school is going to happen. The question is what form then does it take. And there’s going to be no one answer to that because it’s going to be different regionally across the country based upon what different parts of the country view as their perception of what’s safe and appropriate for their communities. So we know that there’s going to be no one answer to that.

In some cases, it may be all back to physical schools, schools reopen, kids come back and others are maybe a week-in, week-out scenario versus — physical versus digital, the alternate week-in, week out. Or in some cases, it might be — we might find that it’s an all-digital format. In all those cases, we think that what we do for young people, which is about providing them a way to self-express their identity. As long as their picture is up, even if it’s all digital, we think that we have a fair shot, the kids wanting to represent who they are through, what they wear. In fact, in that sense maybe it will be more important for us in terms of thinking about that. So we still — we are — our operating assumption is that some way, shape or form, back-to-school is going to take place.

Now, we are being cautious because we think we’re going to be in a recessionary environment, but we also want to look at where we might have upside. So we are having conversations, just like you asked about where can we chase and how fast can we chase, what can we do to make sure we can chase. And as you know, a large percent of our business in back-to-school is in printable categories, t-shirts, sweat shirts, hats, things that we can chase on a relative — on more quick basis than your traditional cut and sew kind of fashion. We’re also willing to take risks in some areas where we think we have evergreen inventory, so that we can be in a position to capture the demand that’s in place without really exposing ourselves to significant inventory because we — just moving it forward and we would just push out orders later in those categories. So we’re working through all that, Mitch, and trying to think about where we can chase or how we can manage to keep our upside high, but protecting the downside at the same time.

Mitch Kummetz — Pivotal Research Group — Analyst

Rick, as a real quick follow-up to that, I know that there a lot of vendors saw order cancellations over the last two or three months as all of this went down. Do you get the sense you’re dealing — talking to your vendors that there is a fair amount of inventory in kind of some of those basics that you could chase, if you need to that the inventory is there on the vendor’s books that you could tap into?

Richard M. Brooks — Chief Executive Officer

Our buyers will, of course, look at that, Mitch. We will also look at though relative to what we can do in our private label, while we might be able to move up in our private label. So it’s the combination of where can we go after that and what the opportunity is. Now, I will tell you that most of the larger vendors for us, kind of traditional industry vendors for us, are not a very big part of our business at this point. So for us, it’s really about these small emerging brands, particularly in the screenable categories that really drive the business, I think drive the traffic. In those cases, there has been some concern over what the state of those brands are.

And I think as we work with our smaller brand partners, we are finding they’re in pretty good shape because they’re small, they don’t have a lot of overhead, they’re really nimble and quick to respond and they also have the advantage that we are their key partner in most cases where the majority of their revenue or significant majority of their revenue. So as long as we’re financially stable, we can be there to back them and make sure — and they know that they’ve got us ready to support them as they need. So we’re working with those brands too through this cycle to say how can we help you, how can we make sure we have your brands properly representing our business during this peak period. So Mitch, that’s kind of the way we’re thinking about it. We’re really looking at both — what the key different brands where we have differentiation, and then we’re looking at the categories where it’s more of a fashion category and we’re weighing out what inventory is available versus what we can do within our private label.

Mitch Kummetz — Pivotal Research Group — Analyst

Got it. Okay, thanks and good luck.

Richard M. Brooks — Chief Executive Officer

Thank you.

Operator

Thank you. And our last question comes from Jonathan Komp with Baird. Your line is now open.

Jonathan Komp — Robert W. Baird & Co., Inc. — Analyst

Yeah. Hi, thank you. Just maybe one follow-up. I’m curious if you’re willing to share when you look at consumer behavior, either one of your business was online-only here where now that it’s reopened. Any kind of broader observations that you would share in terms of changes in the behavior across brands or any other observation that you could share?

Richard M. Brooks — Chief Executive Officer

From a brand and trend perspective, Jon, it was — let’s just say this, what was good before, it was good during and is good post. And so, if a brand was strong beforehand, it’s strong, it was — maintained a relative strength during the closures and maintained has been strong post. So think about generally, what’s good is still good pre and post-pandemic. And so, I would say those things. Now in terms of consumer behavior as Chris said, what we saw with our website was we actually saw organic traffic and direct load traffic to be the real areas of growth. So this is super encouraging to us in the cycle.

As I said, we don’t care whether the consumer is a — is of true one channel model. However they want to come shop with us is great. But when we see that the real drive, what really drove our traffic during the closure period was organic traffic, meaning they went — they might be at a search box, but they type in Zumiez in that search box or direct load where they literally type zumiez.com into their browser line and coming directly to us. That’s what grew significantly and was the majority — vast majority of our traffic. To me, what that tells you is the brand strength and the relationship our employees have with their customers. And that’s really important because that’s why you’re seeing the great result post too is because now they have another option.

Now post, we did see some different reactions for how consumers want to shop in the stores. And so, our teams are — we’ve learned a lot already that there’s going to be different techniques that we’re going to have to employ. And I can share all those things that we’re seeing out there, but these are the things that are going to inform us as we think about what happens in the back-to-school cycle where we will have even larger volumes of customers, but maybe yet still be metered in terms of how many customers come in the door. So — and we definitely all still have all our safety protocols in place. So we did see some, I would call them small, changes in consumer behavior, when the people came back to the store, but otherwise, it’s — I have to tell you there’s been a lot of love for the Zumiez brand. And I think particularly in the digital side, that’s what drove our business was consumers who come directly to us.

Jonathan Komp — Robert W. Baird & Co., Inc. — Analyst

Yeah, that’s encouraging. And maybe just as a follow-up, maybe not asking for specifics that you just referred to in terms of operating changes, but any early thoughts kind of adapting to the new normal, what that might lead to in terms of initiatives or shifts in your focus?

Richard M. Brooks — Chief Executive Officer

Yeah. It’s a good question. And I’ll tell you this is a discussion we just had with our Board a couple of days ago relative to — our perspective I’m sure is the same as yours, which is that we think that the trends that were in place pre-pandemic are still the trends that are going to move forward in terms of consumer trends or trends in the consumer world more broadly. But clearly, I think what the pandemic is going to do is accelerate the change of those — the speed of those trend cycles. So with the Board, we talked about this across really five groupings, the retail, real estate environment, the competitive environment, the consumer environment, our employee environment and then the supply chain environment. And so, we believe that pre-pandemic, we had outlined a lot of really key initiatives for that were right for our business and our consumer, Jonathan, that where we needed to really move down in these clear directions. You’ve kind of heard us refer to this intimacy and now as a frame line, a guiding sort of principles and speed is definitely one of those ideas. And speed always being dominant, right, and the need to have scale to function properly in today’s world. So we had a series of investment plan.

So really our discussion with our Board this past week about what do we think is going to change, what the pandemic change curve is going to accelerate, what are those areas where we may have to readjust some of our initiatives. And so, we are — we didn’t come out with all the answers, but we clearly are going to do — we have time to do the work over the next few months. We’re evaluating exactly what your question is. We have some instincts about what needs to go faster and move up in terms of priority and — but that work is still under way.

Jonathan Komp — Robert W. Baird & Co., Inc. — Analyst

Okay. Look forward to hearing more. I appreciate the perspective.

Richard M. Brooks — Chief Executive Officer

Thank you.

Operator

Thank you. Our final question comes from Bill Dezellem with Tieton Capital. Your line is now open.

William Dezellem — Tieton Capital Management — Analyst

Hi, thank you. Would you be able to break out comps by category for the month of May?

Christopher C. Work — Chief Financial Officer

No, Bill. That’s not something we’ve done historically. I think what we try to do is we try to lay them out really in the order of magnitude kind of the largest to smallest or in a period of loss, obviously the opposite way. So at this point in time, we had no categories that comp negatively in May. We talked about skate being the leader and laid those out — laid the rest them in our prepared remarks.

William Dezellem — Tieton Capital Management — Analyst

Great. Thank you.

Richard M. Brooks — Chief Executive Officer

Thanks.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Rick Brooks for any closing remarks.

Richard M. Brooks — Chief Executive Officer

Thank you, Daniel. Again, I just want to wish everyone safety and health here as we work through the challenges of the pandemic. We’re clearly not through it. We have a ways to go, but I wish everyone the best. And again, as always, we greatly appreciate your interest in Zumiez. And we look forward to talking to you on our next quarterly call. Thank you everybody.

Operator

[Operator Closing Remarks]