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Zumiez Inc (ZUMZ 0.85%)
Q3Â 2019 Earnings Call
Dec 5, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and welcome to the Zumiez Inc. Third Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward 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 now turn the call over to Rick Brooks, Chief Executive Officer. Please go ahead.
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'll begin today's call with a few brief remarks regarding our third quarter and holiday performance to date. Then I'll share some thoughts about the future. Before handing the call to Chris who will take you through the numbers. After that, we'll open up the call to your questions.
The third quarter, represented our fourth consecutive strong back-to-school season and the 13th quarter of positive comparable sales gains. We drove solid full price selling in each of our geographies, resulting in a comparable sales increase of 5.5% versus our guidance of 2% to 4%. This comes on top of a 4.8% gain a year ago and 7.9% gain, a year before that.
We're very pleased with our performance and our team's meticulous focus on providing high quality service to the customer through every touch point. It is this focus has allowed us to convert mid single-digit topline growth into a significant improvement in profitability. The sales gains coupled with gross margin expansion, and the benefits from numerous expense saving initiatives we've implemented throughout our organization, drove a 37.1% increase in earnings per share to $0.75, which is $0.14 above the high end of our guidance range.
Our relentless attention to serving our customers, combined with a powerful operating model, we built around the single cost structure, has fueled our strong track record of performance and has Zumiez well positioned for continued success. This includes the fourth quarter, which has started well with quarter-to-date comparable sales measured through Tuesday, December 3rd, 2019, increasing 3.3% compared to the same period last year ending Tuesday December 4th, 2018.
As we reflect upon the strong results in the first nine months and full Year outlook, we reminded that our short-term results are directly attributed to the execution of our long-term strategies. For Zumiez, our long-term focus remains squarely on continuing to execute the customer centric growth strategy that the company has been building and evolving over its 40-year history. Many of the key elements of our strategy haven't changed over the decades, where others have been refined to reflect the impact of technology on consumer purchasing behavior.
Before I hand the call over to Chris for a review of the numbers, let me expand on the key elements of our long-term strategy. It starts with having the right products and brands that our customers are looking for, with an engaging customer experience. Our product selection is made up of a distinct mix of leading and emerging brands that are not broadly distributed. All the years, we've been able to consistently achieve this balance through strong relations we've forged with our brand partners, and more recently, our global reach that allows us to serve both our customers and brand partners at heightened levels, this includes clearly articulating our culture driven lifestyle brand position, and showcasing our ability to connect with the target audience in a authentic, engaging environment, that is uniquely curated by our people, all the way down to the local level.
Over the years, we spent significant time and resources, improving our localized merchandise assortments through investments in our people and technology, that enhance the customer experience at each touch point. Our teams across organization put a significant amount of effort into understanding our customers, not only today, but how they continue to evolve and what will be important to future generations. This thinking is embedded in our culture, and is reflected in who we hire and how we operate. These teams are in tune with the local and national trends that are important to our customers, and can speak to them across all of our channels. This approach allows us to serve the customer in an authentic way, bringing all the touch points together through the customer journey.
The next factor critical to our success, is speed. With the proliferation of digital capabilities, the speed of commerce has changed dramatically in recent years. We're already faster than most of our competitors, as we have the ability to deliver all digital orders out of our stores. This concept allows us to get product into the customers hands faster, by cutting down the shipping distance and also providing a stronger and more relevant product offering in stores.
Looking ahead, we are going to get faster in every aspect of serving and meeting customers needs than we are today, through enhancing localized assortments and our ability to get to know the customer more intimately through improved digital interactions and enhanced in-store experiences. Finally growing internationally has allowed us to identify consumer trends that emerge locally and grow globally and to achieve the scale necessary to work together with our brand partners in serving our customers around the world.
Our expansion has established a strategic physical presence in eight countries across three continents, with a digital platform that allows us to reach even further. We are applying learnings and best practices from each of our markets to ensure that we are on top of the latest fashion trends and brand cycles, which can now launch from anywhere in the world and quickly spread globally, due to proliferation of smart devices and social media. Our international businesses are primed for future growth and through exporting our operating model. We are taking our processes and tools from the more mature US operations, and seeing good results internationally.
In the third quarter, our businesses in Europe and Australia again performed ahead of the consolidated comparable sales growth. With the strong comparable sales, margin growth and overall store growth year-to-date, we have seen improved operating performance as well. We're excited about the progress being made by the Blue Tomato and Fast Times teams and continue to build upon the benefits of a globally integrated business. We are the only retailer in our lifestyle niche that can offer our brand partners global reach in major markets that meet consumer demand.
With regard to our financial model, we believe two key factors have contributed and will continue to contribute to our ability to drive improved results over the long term. First, as a lifestyle retailer, we have built our business to be exceptionally nimble, continuously evolving with customer trends and preferences. The capabilities we have built continue to provide us with a defensible strategy in maintaining and growing share, with our segment of a lifestyle market that seeks to be unique and different.
The first nine months of 2019 is a great example of this, as we saw a category shift in our business globally, with footwear and hardgoods leading the comparable sales trends, while men's and women's apparel have posted softer results. This is a meaningful change from one year ago, when we saw the apparel categories driving our positive comparable sales. Overall, the goal continues to be selling at full price and full margin, while listening to the customer with regards to the categories and brands they want to see at Zumiez. This focus has resulted in growth of comparable sales in 34 of our 40 years and is something that we believe will continue to be an advantage into the future.
Secondly, as we transitioned into the digital age, we've done a tremendous amount of work, creating an operating model that positions Zumiez to win with the digitally empowered [Phonetic] consumer, by combining our digital and physical sales channels to work seamlessly in service of the customer. With one inventory, that is accessible from all customer touch points, localized fulfillment, integrated sales teams, aligned goals, and our strong cultural values, we are well positioned to scale the business in today's integrated world. This strategy directly contributed to our 2018 results, as we increased operating profit by 25.3% on a 5.5% growth on revenue for the year, and we've continued that trend into 2019, delivering operating profit growth of 58% through the first nine months of 2019 on sales growth of 4.6%.
I'll leave you with this by staying true to our customer, culture and brand, with an intense focus on long-term results. We've consistently outperformed the competition and strengthened our market position. It is these thoughts that drive our long-term planning and feed the blueprint for our current year success. We've established a platform for growth, based upon a strong culture and brand that we are confident will support continued growth and increased shareholder value well into the future.
With that, I'll hand the call to Chris for his review of our financials. Chris?
Christopher C. Work -- Chief Financial Officer
Thanks Rick and good afternoon everyone. I'm going to start with a review of our third quarter 2019 results. I'll then provide a brief update on the quarterly sales trends, before discussing our fourth quarter guidance and our updated perspective on the full year.
Third quarter net sales increased $15.2 million or 6.1% to $264 million from $248.8 million in the third quarter of 2018. Contributing to this increase were positive comparable sales growth of 5.5% and the net addition of 15 stores since the end of last year's third quarter, partially offset by a decrease of $1.4 million due to changes in foreign currency rates.
During the 2019 third quarter, our comparable sales were driven by an increase in transaction volume, as well as an increase in dollars per transaction. The increase in dollars per transaction resulted from higher units per transaction, partially offset by a decrease in average unit retail.
During the quarter, the hardgoods category was our largest positive comping category, followed by accessories, footwear and men's. Women's was our only negative comping category. From a regional perspective, North America, net sales increased $11.9 million or 5.3% to $238.5 million. Other international net sales, which consists of Europe and Australia, increased $3.3 million or 14.8% to $25.6 million. Excluding the impact of foreign currency translation, North America, net sales grew 5.4% and other international net sales grew 19.8% for the quarter.
Third quarter gross profit was $94.6 million, an increase of $7.7 million or 8.9% compared to the third quarter 2018. Gross margin was 35.8% in the quarter, an increase of 90 basis points compared to 34.9% a year ago. The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, 30 basis points improvement in web fulfillment distribution and shipping costs, and a 20 basis point improvement in the write-off of excess or slow-moving inventory. Product margins were flat during the quarter, despite unfavorable mix shifts across categories and geographies.
SG&A expense was $70.3 million in the third quarter, compared to $68.5 million a year ago. SG&A as a percent of net sales was 26.6% compared to 27.5% in the prior year. The decrease was primarily driven by 100 basis points of leverage in our store costs, including 30 basis points of depreciation. Operating income in the third quarter 2019 increased 32.2% to $24.3 million or 9.2% of net sales, compared with the prior year third quarter operating income of $18.4 million or 7.4% net sales. Net income for the third quarter was up 38.7% to $19.2 million or $0.75 per share compared to net income of $13.8 million or $0.55 per share for the third quarter of 2018. Our effective tax rate for the third quarter 2019 was 25% compared with 26.5% in the year ago period. The decrease was primarily due to a reduction in net losses in certain jurisdictions, which are excluded from our estimated annual effective tax rate, due to the uncertainty of the realization of deferred tax assets and the proportion of earnings or loss before income taxes across each of our jurisdictions.
Turning to the balance sheet, cash and current marketable securities increased 39.7% to $178.6 million as of November 2, 2019, up from $127.9 million as of November 3rd, 2018. This increase was primarily driven by $77.6 million in cash flow from operations, partially offset by $19.2 million of capital expenditures, primarily related to new store growth and remodels. We ended third quarter 2019 with $183.4 million in inventory, down 1.9% from last year, excluding the year-over-year impact of foreign currency translation, inventory declined 1.4% from the prior year.
Now to our recent sales results, our comparable sales increased 3.3% quarter-to-date through December 3rd, 2019 compared with the prior year quarter days sales results through December 4, 2018. We have provided this comparison for 2019 due to the timing of the Thanksgiving holiday shift. The comparable sales increase was driven by an increase in transactions and an increase in dollars per transaction. Quarter-to-date, dollars per transaction increased due to an increase in units per transaction and an increase in average unit retail. Quarter-to-date, the hardgoods category is our highest positive comping category, followed by accessories in men's. Women's is our largest negative comping category, followed by footwear.
Looking at the guidance for the fourth quarter of 2019. Once again, I'll start off by reminding everyone that formulating our guidance involves some inherent uncertainty and complexity in estimating, sales product margin, and earnings growth given the variety of internal and external factors that impact our performance. With that in mind, we currently expect that comparable sales will increase between 2% and 4% for the fourth quarter of 2019, with total sales in the range of $314 million to $320 million. Consolidated operating margins are expected to be between 12.5% and 13%, and we anticipate earnings per share will be between $1.26 and $1.32 compared with last year's earnings of $1.18.
Now I want to give you a few updated thoughts around 2019., given our performance year-to-date. We are now building on 13 consecutive quarters of positive comparable sales. As we look to the fourth quarter of 2019 and beyond, we continue to believe that we've made that -- with the investments we've made in our infrastructure, creating a seamless sales experience for our customers, our unique approach to merchandising, as well as those investments we continue to make in the Zumiez team will drive long-term top and bottom line growth. With that in mind, we are updating our annual expectation for consolidated comparable sales growth to be approximately 4% compared to our previous guidance for comparable sales growth to be between 2% and 4% for fiscal 2019.
In fiscal 2018, we achieved peak product margins, improving from the previous high point in 2017, despite a heavily branded cycle resulting in reduction of private label share of 370 basis points. In fiscal 2019, to date, we have also experienced mix shifts that have impacted margin. These mix shifts include our category sales, trending toward hardgoods and footwear, which have lower product margins in the apparel categories, as well as higher top line growth in our international businesses. While international product margins continue to grow and have additional opportunity, they are currently lower than our US operations, based upon where those businesses are in their lifecycle.
For 2019, we expect product margin to be down between 10 and 20 basis points from the prior year, consistent with our Q2 earnings call update. We continue to manage costs across the business, with the more mature concepts in North America, focused on leveraging at a low single digit comparable sales growth. Internationally, we are focused on managing costs well within the current sales and unit growth rates, and driving our concepts closer to breakeven, reducing the impact of the losses on the overall business. We currently anticipate year-over-year operating profit growth of approximately 25% to 30% for fiscal 2019. We are currently planning our business, assuming an annual effective tax rate of approximately 26%, comparing to our prior year rate of 27.5% and diluted earnings per share for the full year are now expected to be between $2.38 and $2.46, up from our previous guidance of $2.10 to $2.20, representing a year-over-year growth between 33% and 37%.
We have opened 15 new stores in 2019, including five stores in North America, seven stores in Europe and three stores in Australia. There are no further store openings planned during fiscal 2019. We expect capital expenditures for the full 2019 fiscal year to be between $19 million and $21 million compared to $21 million in 2018. The majority of the capital spend is dedicated to new store openings and planned remodels. We expect that depreciation and amortization, excluding non-cash lease expense, will be approximately $25 million for the year, down approximately $1.6 million from the prior year. We are currently projecting our share count for the full year to be approximately 25.5 million shares. Any share repurchases during the year, will reduce our share count from this estimate.
And lastly, on December 4, 2019, the Zumiez Board of Directors approved the repurchase of up to $100 million of our common stock. This repurchase authorization replaces the previously approved $75 million repurchase program, and is expected to continue through January 30, 2021, unless this time period is extended or shortened by our Board of Directors.
And with that operator, we'd like to open up the call for questions.
Questions and Answers:
Operator
[Operator Instructions]. First question is from Sharon Zackfia from William Blair. Your line is now open.
Sharon Zackfia -- William Blair -- Analyst
Hi, good afternoon. A couple of questions on -- I guess most obviously on the rate of SG&A growth, which has been really, really low in terms of dollar growth through the first three quarters that you're driving kind of the mid-single digit sales gains and I know, Rick, you alluded to this some in the prepared commentary, but how do we think about SG&A going forward? I mean is this kind of a new normal where you can grow SG&A at a low single digit percentage rate, or is there something unusual this year that you are really harvesting and it will tick up again in future years?
Christopher C. Work -- Chief Financial Officer
Sure, Sharon. I'll go ahead and take that. So thank you for your compliments on our SG&A growth, we're pretty happy about it as well. This has been a big effort of ours, as we've been thinking about the business over the last couple of years and setting goals really by entity and how we're planning the business. And as we think about 2019 and how we've exited the last couple of years, I think that -- the one benefit we've had in growth rates is -- last year we performed pretty well. The year before that and 2017 we did as well. Throughout that time we were growing the incentive pool, and we've got that kind of to that targeted level and and beyond. And so, there is a benefit in incentives to a modest amount in how we're planning 2019 right now. So that's one area, but beyond that, it's really strong expense management across all of our entities. This is something, again, we kind of talked about in our long-term plannings of how do we think about SG&A and really all costs to really try to optimize the business. And it starts with some of the things Rick talked about, as we have talked about localization and how we're thinking about one sales channel. We've really tried to break the business apart and say, you know, the customer only sees us as one sales channel. We don't need to see our cost structures too. And so fulfilling from stores, and the way we've been able to ship closer to the consumer, all of those things have been benefits to our overall business. That being said, we've had many other areas within SG&A, just in our management of store wages, how we've looked at store operations and the management of store costs. We've really kind of gone back and looked at our web businesses across all of our entities, to say where can we optimize some of the costs there, and of course attacked some of the areas of corporate SG&A as well.
So all of those are contributing to what we're seeing on the store growth -- from a store growth rate, I think, I'm sorry -- from an SG&A growth rate. I think what you should expect from us going forward is we're going to really work diligently to plan it at a rate below sales. And domestically here, we're looking at low-single digit comp plans, and trying to plan SG&A to grow below that and internationally, obviously the growth rate from stores and top line is going to be higher, based on the opportunities there. But again, we're trying to manage SG&A very-very tightly to keep that SG&A rate pretty meaningfully below the sales rate of growth, to really drop through that profit to the bottom line.
So really happy with where the rate stands for 2019. I don't think it's a direct straight line into 2020 and growing forward. We'll probably see a little higher rate of growth, but plan that rate below sales.
Richard M. Brooks -- Chief Executive Officer
And Sharon. I think to add to that, I don't want you to think that this is a cost saving push. We are making investments in our business to about things that we think are going to drive long-term results simultaneously, as Chris has laid out, our ability to think about this concept the trade area, optimization of trade areas, the importance of refined localized assortments as we mentioned in the comments, and how we are able to lever labor in new ways, in a single cost structure world. There are lot of initiatives, how we're going to act with our consumer over the next few years, and all sorts of different ways being more highly relevant to them. I think that will continue to drive this. I don't want you to think that, this is really about cost savings at one side. This is really about optimization of the business, and why we are investing for the future at the same time.
Sharon Zackfia -- William Blair -- Analyst
Okay, that's helpful. And then on merchandise margin or product margin. I know you've kind of have that slightly negative guidance all year. But it's been kind of slightly positive through the first three quarters. So I guess, that means we're going to have all of that happen in the current quarter. Is that really more geographic because of the kick up in international in the fourth quarter, or is it more of the category mix?
Christopher C. Work -- Chief Financial Officer
Yeah, it definitely, as it relates to the fourth quarter and we have been up and down. We are a little bit up in product margin in Q1, down in Q2 and relatively flat in Q3 here. So as we think about Q4, international is just a larger portion of the business. So that is going to -- the mix shift to international is going to have a bigger impact into the fourth quarter. But the growth, as we've really reported all year in skate hardgoods predominantly, but also footwear has been pretty phenomenal. And so that mix within categories is impactful as well. But to your question, international will have a larger impact in the fourth quarter than the category mix, but both will have an impact in the fourth quarter and -- where our plans are today.
Sharon Zackfia -- William Blair -- Analyst
Okay, thank you very much.
Richard M. Brooks -- Chief Executive Officer
Thanks Sharon.
Christopher C. Work -- Chief Financial Officer
Thanks you, Sharon.
Operator
Thank you. Our next question comes from the line of Jeff Van Sinderen from B Riley, FBR. Your line is now open.
Richard Magnusen -- B. Riley FBR -- Analyst
Hello, this is Richard Magnusen in for Jeff Van Sinderen. Historically, during the strong skate hardgoods cycle, what did you experience in the snow hardgoods related apparel business, with the snow conditions being equal? We're just wondering if there is a correlation you can point to?
Christopher C. Work -- Chief Financial Officer
No, there is no correlation is a simple answer, Richard. Snow is -- as a function of weather, to a large degree, when were talking about snow hardgoods and the hardware that goes with it, so it's really a function of where does it snow and how much does it snow, and does it now in our larger markets where we do business versus the smaller markets, where we might operate around the country, or around the world. So it's a function of snow. I don't view it is -- I don't see any correlation relative to the trend skate cycle.
Richard Magnusen -- B. Riley FBR -- Analyst
Okay. And then regarding the various brands that you carry, understanding as the leadership of the brands is constantly evolving, can you speak to any emerging trends that you're seeing develop, and what is your latest thinking on where you are in the branded cycle in the apparel business? And then maybe you can touch on the trends in your footwear business as well and the outlook there?
Richard M. Brooks -- Chief Executive Officer
I'll let Chris talk a little bit more deeply about the trends relative to mix of our business and things like that. But let me start off Richard, by just saying that, I think that we feel good about the pipeline for new brands. I believe we're on target for hitting our launch this year, of how many new brands we target to launch on an annual basis. So we're not seeing any lack of new brands coming forward into the marketplace. From that perspective now, it doesn't mean that they become an all star [Indecipherable], work as local brands as we start working with them and beginning to help them, build their business. So I'll just remind you that from my perspective, you have to think about our business as a portfolio of brands, a portfolio of departments and categories, and at different times, different things will drive the business. And again, as we talked in our comments that can change rapidly, as you've seen from last year with the apparel being the driver of this year with skate hardgoods and accessories being the driver.
And so our view of this, both from a brand perspective, emerging brands, is that we're always going to see something happen. If this is a wallet share drive and we believe we are pretty good at capturing our share of the wallet. So just keep that in mind, our model is about this portfolio approach to brands and the lifestyle, representing entire lifestyle through departments in category combination. So with that, I am going to let Chris add some comments.
Christopher C. Work -- Chief Financial Officer
Yeah, I'd just say from a trends perspective as we've talked about it over our history, we really try to look at kind of our top 20 brands and and how they represent, and we've said in the past, at 20% to 30% turnover, over an annual period is pretty common. We are actually just trending slightly ahead of that, through the third quarter year-to-date. So we'll come back and report that after a full year, which is probably the best read to kind of give an idea of what's happening.
But to Rick's point, I think we continue to see the pipeline look good. A couple of the brands that have moved into our top 20, weren't even in our ecosystem a year ago, which is -- which is kind of, I think, a really cool sign and again highlights what we talked about over the years, that just the speed of trends and how fast things move. So overall, the top 20 brands in regards to kind of where we are in this brand cycle, our top 20 brands are actually through the first nine months, a little higher, total penetration than they were a year ago, which has historically been an indication for us, it's kind of still the strength of the cycle and where our top 20 consolidating taking more of a share. So again, overall feeling good about the make up.
In regards to footwear, footwear has been a driver all year long. We talked about that. We did call out that it was just down -- it was down through quarter-to-date, but I will reiterate it was down very-very slightly, almost to the flat level. So we are feeling fine about where footwear stands, and the footwear trends have been good. We still have one vendor that has been a bigger driver there, but we are seeing growth in other areas of footwear too, so it's not just all growth in one areas and that's -- that's the diversity that Rick talks about, both across departments as well as within department. So we obviously feel very pleased with the trends of the business and where our brand situation sits.
Richard Magnusen -- B. Riley FBR -- Analyst
Thank you.
Christopher C. Work -- Chief Financial Officer
Thank you.
Operator
Thank you. Our next question is from Janine Stichter from Jefferies. Your line is now open.
Janine Stichter -- Jefferies -- Analyst
Hi, thanks for taking the question. Congrats on the great results. Wanted to ask about the women's apparel business. I guess, that's the one piece that you could maybe say, is a little bit weaker right now, everything else seems to be working really well. So what's going on there? Can you give us some context? Is it just the fact that we've been in a stronger branded cycle, and I think that the women's apparel tends to skew a little bit more toward private label, or how should we think about it, and is there some outlook where you can give us that -- the timeline for that piece of the business, which are positive. Thank you.
Richard M. Brooks -- Chief Executive Officer
Sure. Glad to help out a little bit there Janine, in terms of thinking about the women's business. I think women's is -- tends to be a bit faster from a trend perspective, than our men's side of the business. So some of that I think, we tend to see more volatility around women's, both on the upside and the downside. Traditionally, I'd also remind you that, I think that our women's consumer, in many respects, buys men's product to a large degree. And so some of the new and emerging brands we have, are brands that I think where we're not offering women's products. So that -- we will probably see some of that women's from just this a trend perspective buying the smalls in men's, for example, in t-shirts and things like that.
So what we talk about women's, to be clear, what we are talking about is, the number we're talking about -- is women's apparel. It doesn't include accessories or women's footwear. So it's a broader mix, when we look at overall women's, and then again, I think there is this push to -- for our business that women don't see gender lines as clearly. They are just as happy to buy men's sizes and men's brands, and certain assumptions, where women like the fit better frankly on the men's side of the business. So it's not as clear as just women's apparels. It has been a negative. But I do add that, it tends to be more volatile than the men's side traditionally, because trend cycles move even faster on the women's side of the business.
Christopher C. Work -- Chief Financial Officer
And I'd just add one thing with women's just to remember, we have been down for the first three quarters of this year, but we were up 10 quarters prior to that and up pretty strong. So even when I look at like the two year stack through the year, its still positive. So we ran some really strong results in women's, and yes, we've been running down. But still pretty good results overall, specifically in light of where the overall business sits.
Janine Stichter -- Jefferies -- Analyst
Great, that's helpful perspective. And then just anything you can give on tariffs what you're hearing from your branded partners? Any update there?
Christopher C. Work -- Chief Financial Officer
Yeah, absolutely. From a tariff perspective, obviously we're -- just like all other retailers here, monitoring this very closely. One of the things we talked about over the last few quarters, is just where our exposure lands and we still are -- probably just over since 9/1, which is the last time the last update we've had of kind of the rates going into effect. We're still probably just over 40%, 41%, -- 42% of product coming from China, that I try to remind people, when you talk about this, because that number can't seem bigger, but such a large portion of our business is screenables and much of that is blanks that come from China. And so as we start to break that down, the imported value of a blank is obviously much less than the completed value. So but yeah, I mean we continue to work with our vendors here. To date, what you see through the third quarter and what's planned in the fourth quarter, there are -- there is not a material impact. There are areas where we have seen the increased tariff and a few areas where we've seen some pass-through from our brands and -- but at the end of the day, it's not material to this year, it's something we'll continue to monitor and manage, as we move into 2020. We're going to -- we're going to really try to take a balanced approach here of working with our vendors, continuing to try and move production where possible, finding other potential offsets on price here. And then in the last case scenario, potentially having to raise our prices to customers. So it's an ongoing situation we're monitoring, and we'll kind of keep tabs on it here.
Janine Stichter -- Jefferies -- Analyst
Great. Thank you.
Operator
Thank you. Our next question comes from Mitch Kummetz from Pivotal Research. Your line is now open.
Mitch Kummetz -- Pivotal Research -- Analyst
Yeah, thanks for taking my questions and congrats on the quarter. I have a few questions. I just want to circle back on footwear, which was -- sounds like a barely negative quarter-to-date. I know that's a very small sample size. It doesn't sound like its anything you guys are concerned with. I just wanted to drill down on that. I mean is there -- I know that these categories sort of ebb and flow and I'm -- it doesn't sound like you feel like footwear is now something that is going to hit a downward trajectory like maybe apparel has for the last few quarters, and I'm just kind of wondering, why you think that is, if this is just a blip or too small of a sample, or...?
Richard M. Brooks -- Chief Executive Officer
I think Mitch, the way I think about it. obviously we've looked at this different ways. It's been trending really well for us all year along. We've looked at this over the last two Q4s, and have actually seen November softer than December. So December typically has gotten stronger in footwear sales, which I think makes sense, in regards to the gift-giving and the need around Christmas time for people wanting footwear. So we don't have any indications at this point. I would kind of classify more to your question of the smaller sample size in November, obviously the good portion of our volume here is still to come, and we expect footwear to still be a strong part of our Q4 sales.
Mitch Kummetz -- Pivotal Research -- Analyst
Yeah. Got it.
Christopher C. Work -- Chief Financial Officer
Historically, I'd just add that, again I think footwear really booms in the post-holiday period, when our consumer -- our young consumer is back in the store as opposed to the gift giver. So that's what we've really seen historically, footwear doing better.
Mitch Kummetz -- Pivotal Research -- Analyst
Okay. And then on EBIT margin, you guys are closing in on 8%. It looks like based on what the Q3 guide is, you are sort of inching toward that? Because I know that in the past, when people have asked you about EBIT margin targets, you sort of talked about, I think 8%, something lower than prior peak. I'm just wondering, now that we're kind of getting close to that number, where do you think you could go from here, what's the low hanging fruit at this point on the margin side, to get it above that 8% level that I think you've kind of referred to in the past?
Christopher C. Work -- Chief Financial Officer
Yeah, thanks Mitch, and I'll kind of tie this in with even Sharon's question earlier on SG&A, because we're super happy with where the results are coming in for this year, obviously on top of very strong results in 2018. To your point, the top end of our Q4 guidance would indicate operating profit or EBIT close to 8% there, it's about 7.7% in operating profit, compared to 6.2% a year ago. So very, very happy with the growth there.
And I think what we've pushed in the past, is to say, high single-digits, and so that to us means, we can probably get closer to 10%. And it's going to take some work to do that. We are working on ways always to kind of optimize and maximize the potential of our North America business, that's here that's very mature. Obviously you guys know, we have a good opportunity to grow internationally and turn that profitably, which will help us a lot.
But in addition to the comments I made around Sharon's question earlier, you know, there is other areas that have contributed to this operating profit or EBIT margin depending on how you want to look at it, in regards to -- we continue to make some traction on shrink, and are seeing our shrink rate come down. we called out the amount of excess and obsolete inventory management that we've been able to benefit from, which is really our teams coming together and maximizing some of our clearance and damaged product to bring more value to that. We've talked about occupancy leverage and opportunity there and working on that line item, and there is a lot of the kind of DC optimization and shipping optimization projects that we've reaped some benefits from, and have benefits to come in the future.
So for us, I think it's really trying to push it to get back to that around 10%, and we kind of -- so that's where we're pushing toward.
Mitch Kummetz -- Pivotal Research -- Analyst
And then last question, just you kind of touched on it briefly in your response to that question. But profitability update on Europe, especially given what you've seen on the international business last couple of quarters, I would imagine that that's been pretty impactful on the profitability of international business. But it's still losing money, if I'm not mistaken, I think you kind of talked about getting closer to breakeven this year. One, can you get breakeven, just kind of based on what you've seen over the last couple of quarters in particular?
Christopher C. Work -- Chief Financial Officer
Yeah. Thanks Mitch. Definitely its part of the mix right, when we're growing here, operating profit between 25% to 30%, a big portion of that is North America, just because the lion's share of our business, but there is a great contribution from our international teams here as well. We've talked about are losing millions of dollars over the last couple of years. We are getting that down quite a bit. We'll make substantial -- our forecast, we're going to make substantial improvement here in 2019. We'll try to give a little more color on that in Q4. I think it is important, just based on the seasonality of that business, that we see how the Q4 comes in, but our current estimates would mean -- would show we're going to be making major traction there in 2019.
As we look toward 2020, our current focus based on how we're planning the rest of this year and into 2020, is that we will continue to make substantial progress and this would be a business that within the next year or two, we would be looking at on the profitability side of it. So I think that we're getting very close. We are really excited about our current results, as Rick talked about on the call, we continue to see Europe performed very strong, specifically in some of those important markets outside of -- Austria, which was the home country for the business. We've seen Germany be really strong. We opened in Finland here in the last quarter, which will be our fifth market here in Europe, which will be -- starting in Austria. We added Germany, Swiss, the Netherlands and now Finland, and we've seen some really good early indications from that market. So really happy with that. And as Rick pointed out in his comments, International is super important to our global footprint and really meeting the expectations of the customer, on how trends emerge around the world and then obviously serving our brand partners as well. So happy with how that's moving forward and we'll look forward to giving you guys more of an update here on our Q4 call.
Richard M. Brooks -- Chief Executive Officer
Yeah, and Mitch, I'll just add just for flavor to this comment about international is, when we talk about needing to invest in the current business, thinking about the long-term nature of driving profitability in -- all within announced markets take investment [Phonetic] because for us to roll out then our omni-tools practice, processes and the tools themselves requires scale in the marketplace. So when we -- when we launched in Canada, our first international market, we had to make those investments. We really lost money in our initial years in Canada, and then as we were able to gain the scale that we have in Canada today, we are able to turn on all our omnitools, serve the customers at all new levels, and actually we have a pretty strong business in Canada these days, and that's what you're seeing us do globally, as we think about the business here. Europe is a really big market, so it requires that we make those investments, we are making investments as we go along, while delivering good, long-term results, as we execute and develop new tools and new ways to serve customers in our most mature markets. By investing in growth in those markets to gain scale, then allowing us to implement our omni tools, which are now [Indecipherable] to do in parts of Europe, where we're building up models, and seeing the benefits of the omni tools play out. So again this year, I want for all of us to think about this as the continuum, that we are making investments today, that are going to pay off in the future.
Mitch Kummetz -- Pivotal Research -- Analyst
Great. All right, thanks guys, good luck this holiday.
Richard M. Brooks -- Chief Executive Officer
Thanks Mitch.
Operator
Thank you. Our next question comes from the line of Jonathan Komp from Baird. Your line is now open.
Jonathan Komp -- Robert W. Baird & Co., Inc. -- Analyst
Yeah, hi. Thank you. I just wanted to follow up on some of the category performance, and I guess I'm just wondering, when you look at the current mix hardgoods, accessories, footwear, to a lesser extent, can you maybe just comment more on maybe the duration of that mix of drivers, and is there a point in the future where you think you need to get apparel back, working better to sustain the comps performance, or how are you thinking about that?
Richard M. Brooks -- Chief Executive Officer
Sure Jon. Again, as we think about this portfolio approach, we've always been -- we've got to own the wallet share for our consumers, and there's not many years that we don't -- in fact, not many years that we not only don't own our share, but I think we're gaining more share of their wallet, as we move forward. So I would tell you that, in peaks, we've seen better performance of the men's apparel already and, as Chris said, I think where we found some new brands move into the play, that's been very impactful on the men's apparel line and probably again indirectly on women's too, because I believe that to some extent, it's women buying the smaller size of some of these new men's brands.
But that being said, again we listen to the consumer, we follow what the consumer says, I think some trend cycles move at different speeds. The fastest trend cycles have to do with just fashion trend versus a brand cycle, which tends to be longer in duration. And I would tell you that I think a skate cycle, like we're in here, those historically for us have been long cycles, both on the upside and the downside. As you recollect, I think our last peak in skate was in 2015 approximately, had a tough '16, and then we had tough years in skate. In fact, we're running down skate year ago. So they tend to be a multiyear cycle is what we've seen -- tend to see whether it's a department driven cycle like that. Now that doesn't mean we're going to run up in the skate as big as we are this year and next year to be clear. But I think -- if you thought about in terms of recapturing percentage mix of the business in skate, you could expect over a period of time, over a period of years, we would achieve that penetration again, that we've historically achieved in skate hardgoods. So each of the different kinds of trend cycles move at different speeds, and I would expect because the fashion trends that move faster, we will see some things trend down. In the next 18 months, and we will see all new things being introduced.
Brand cycles, I think as we said earlier, we feel good about the pipeline where we're at. We've had some good success with new brands this year in the business. So I think, I don't have any major negative for you there and then on the category type of -- department category kind of combination, so those tend to be longer-lasting as has been our history, multi-year cycles, and again, so I think we've got some -- somewhere and with skate to go and I think the right way to think about it is, do we get back to the peak penetration we hit in prior cycles.
Jonathan Komp -- Robert W. Baird & Co., Inc. -- Analyst
And that's where I wanted to follow-up, actually on the skate, I guess two questions. Is skate -- first, is skate item that's gifted for holiday, or is that a business that kicks back in next spring? And then just any color or commentary on what you observe in terms of the competitive set, following the last down cycle. Would that be a case where you could maybe go deeper, capture more of the share in an up cycle, if the competitive set has changed?
Richard M. Brooks -- Chief Executive Officer
Yeah, good questions, and I would tell you that I think that skate cycle, there are fewer competitors today in the skate hardgoods world than there were in the last cycle. And so, I think that we've talked about whether or not we achieve a greater deeper penetration. I think the evidence, we're going to have to wait to see that play out and to see if that is going to be true, but I think that the rate that skate is growing for us is pretty phenomenal, and it would tend to indicate to me that, we own a bigger share, I think this is a good example of that. Jonathan, where we do -- I believe own a bigger share than -- I believe our skate business is growing faster than most of -- the rest of the marketplace. And I think we just on scale, I don't know who -- when you come to actual lifestyle skateboard retailing, where you're assembling components and boards, I don't know of anyone bigger than us in the world doing it today. So this is an area that's definitely a strength of ours. We'll see. We've had some competition internally, we might reach a new peak here. think we just have the evidence [48:22] play that out.
Jonathan Komp -- Robert W. Baird & Co., Inc. -- Analyst
Okay. And just on the holiday. Is that something that's a gifted or should we think about it next...
Richard M. Brooks -- Chief Executive Officer
No it is definitely a gift item. So I think now, also t-shirts run bigger in the holiday season, it's a good -- obviously a good gift item, to accessory groupings. But no skate has always been a good gift item. It may not run up as high as it does in the spring, just relative to mix, because other categories like t-shirts and accessories run higher, but it is a good gifting item.
Jonathan Komp -- Robert W. Baird & Co., Inc. -- Analyst
Okay. Great. That's all really helpful. Thank you.
Richard M. Brooks -- Chief Executive Officer
You bet.
Operator
Thank you. Our next question is from John Morris from DA Davidson. Your line is now open.
John Morris -- D.A. Davidson -- Analyst
Hi, thanks. Hey Chris, hey Rick. So really nice work here, and I'm thinking, the inventory levels. It's really great that you guys were able to put up these kinds of numbers with lower inventory actually, at the end of the quarter. So any more added color there, is that where you're getting a lot of the efficiency that we're talking about and where -- what should we be thinking about how inventories look at the end of the year. And you know, just kind of turning it around, do you feel like you could drive more sales, if you decide to release more inventory into the pipeline? I'm thinking from the perspective of not so much Q4 now, but how you might manage the business differently into next year. So sort of all of that inventory discussion? Nice work.
Christopher C. Work -- Chief Financial Officer
Sure. I appreciate it, John, and I'll jump in here and then let Rick add anything at the end, if he'd like. I think from, let's say -- if we just step back and kind of talk long term. Obviously going to localize fulfillment was a big benefit in inventory to us overall. Now that's not going to directly attribute to the year-over-year here, but I do want to just focus on -- when we close our fulfillment center and we pushed a portion of that inventory out to stores. It has really allowed us to optimize and thinking about inventory differently over the last couple of years. And Rick even talked about in his prepared comments of the -- it has benefited the experience of the physical stores, because your online demand is effectively carried in the local stores, which makes -- as you match those together from a planning and fulfill -- and a planning and allocation perspective, it just brings a better in-store experience overall.
So we're really happy with the inventory management. I think our buying teams and our store teams and our web teams, and everybody working together has really, really optimized inventory and we have a ways to go. We have a ton of opportunities as well. So we're very pleased with the inventory management. I think if you look at growth rates, I would just say, let's look at it over a multi-year period. Last year at this point, we saw inventory increase 19.1% at the same quarter. So over a couple year period, our two-year stack, and this is still a pretty good increase for us. But really, that's just a factor of doing. I think what you're asking in the latter part of your question, if you had more inventory, could you do more? And what we got to last year, was that by increasing more inventory, bringing in more Q3 receipts and getting that inventory in a better balanced position, heading into holiday, we did think we could do more, and I think, it showed good results last year and as we manage through this year, we thought we could take it down a little bit, and we did that. But overall, we feel like inventory is in a really good spot. We're more current than we were a year ago, across all of our entities. So the health of the inventory is in a good spot, and we're excited to see how this fourth quarter plays out.
Richard M. Brooks -- Chief Executive Officer
And the only thing I'd add John, to Chris' comments is, again I just want to reemphasize that the quality of inventory is really strong. Again, we're more current as Chris said, across all of our entities. So we really feel good about that. The teams have worked hard, about keeping things -- keeping things in good current positions, which of course is going to be -- helps us offset some of the margin challenges relative to mix and shift in the business.
The other thing I would tell you that is a positive for us in a cycle like this, and although it's a small, still overall small percentage of our business relative to men's or women's apparel, for example, skate hardgoods is a quick turning business. So if you actually looked at our inventory there, we're running down actually -- significantly there in inventory, relative to that a significant gain. Its just -- we are able to program that, work closely with our brand partners. We are a very important retailer for our brand partners. And so we're able to turn -- that's actually a faster turning category for us because we have land -- we got land decks every week, and we literally build plans with our partners, as to what we're going to need and when we're going to need it. And so we work really well together with our partners, and that tends to be faster turning business-wise. So a small part of our overall inventory position. We are, I can tell you have larger -- we are down more in skate inventory, while running up a huge amount. So it's just a quick turn -- the fact is, that a trendy business for us helps us a little bit, just because it's a quick turn business.
John Morris -- D.A. Davidson -- Analyst
Yeah. And we can see that better inventory in the stores. They look great. One other quick question, Chris, on the tax rate for the fourth quarter, can you just true it up for us for Q4, because it looks like the full year, I think you said would be 25%. So that would imply Q4 would be down quite a bit too, and I just want to check that number with you?
Christopher C. Work -- Chief Financial Officer
That's correct. Yeah, we would expect Q4 to be down even significantly to our Q3 rate, which was 25%, and I think the big challenge here -- and actually the benefit we've had throughout the year is, is really most closely tied to our international business. As you guys know, we do have a valuation allowance on the losses that we've sustained in Europe, which means we cannot recognize any tax benefit in the losses to operating profit flow straight to the bottom line. So that has a inverse impact in the fourth quarter, where this is the quarter that our operations there make money, it's their largest quarter, and so we're going to see a positive benefit to the bottom line of -- to see operating profit drop straight down to net income, and offset some of the net operating losses we have in the entity. So you will see that benefit, which is obviously driving the lower tax rate in the fourth quarter, and then to our annual guide of -- that we gave in our script.
John Morris -- D.A. Davidson -- Analyst
Should we be thinking about next year, around 25%? Would it be a working tax number?
Christopher C. Work -- Chief Financial Officer
I think where we land here for 2019 will be a good draft for where we will be long-term. Obviously, the more profitable that we can make our international operations, the more benefit we should have there. And so, yes, I think this is probably a good benchmark to start with for 2020 and we'll try to provide some more color as we get to our Q4 call.
John Morris -- D.A. Davidson -- Analyst
Got it. Thanks and good luck for holiday, guys, thanks.
Christopher C. Work -- Chief Financial Officer
Appreciate it.
Operator
[Operator Instructions]. At this time, I'm showing no further questions. I would like to turn the call back over to Rick Brooks for closing remarks.
Richard M. Brooks -- Chief Executive Officer
All right, thank you very much and we appreciate everyone's interest in Zumiez and thanks for all your questions today. And of course we wish you all the best in the holiday season, and we'll look forward to talking to you again with our fourth quarter results in March. Thanks everybody.
Operator
[Operator Closing Remarks].
Duration: 56 minutes
Call participants:
Richard M. Brooks -- Chief Executive Officer
Christopher C. Work -- Chief Financial Officer
Sharon Zackfia -- William Blair -- Analyst
Richard Magnusen -- B. Riley FBR -- Analyst
Janine Stichter -- Jefferies -- Analyst
Mitch Kummetz -- Pivotal Research -- Analyst
Jonathan Komp -- Robert W. Baird & Co., Inc. -- Analyst
John Morris -- D.A. Davidson -- Analyst
