FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Gadzooks, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GADZ)") else Response.Write("(NASDAQ: GADZ)") end if %>
4801 Spring Valley Road, Suite 108B
Dallas, TX 75244
(214) 991-5500

UNION CITY, Ca., November 22, 1996/FOOLWIRE/ --- Gadzooks reported their third quarter 1996 results last week on November 12th. Earnings per share for the quarter was $0.21 per share on net income of $1.9 million. That is up from $0.14 per share on $930,000 in net income last year. Sales for the quarter were $31.2 million or 53% ahead of the year ago quarter at $20.3 million. Comp store sales were up 5.9% over last year, a little bit ahead of where they originally anticipated at the beginning of the quarter.

MARGINS. Gross margin was 31.5% of sales, up from 30.8% last year. The improvement included some store occupancy leverage for the first time since they have been expanding their store base. They thought perhaps they could get some leverage there next year to help offset their higher distribution costs when they move into the new building next Spring and they think this quarter helped confirm that is, in fact, going to come together as they expected. Their product margins were quite strong throughout the quarter. They also had leverage in the buying and distribution component, but they expected that as they have continued to do that in each of the quarters this year.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Their SG&A was 22.6% of sales, in line with expectations. They were able to leverage both the store component of SG&A and their corporate overhead. Their new store volume coming online both late last year and this year has definitely helped reported gross margins and SG&A as a percent of sales because their run rates out of the box are helping push down their own component of SG&A and their own occupancy costs which is helping the overall average.

OPERATING INCOME/TAX RATE. Operating income was up very nicely at 8.9% of sales, a significant increase from the 7.8% a year ago. The tax rate is about 37% of pre-tax income and that is due to the impact of the non-taxable portion of interest income. Even though their is a lower tax rate, if you tax the pre-tax income at the full 38%+ level, they would still have been at $0.21 per share, so they are not trying to fiddle the tax rate around to make the bottom line look better, that is just the way it works out in terms of the non-taxable income.

CHANGING YEAR END DATE. One other note, they are making a slight change in the calendar as far as when they will end the financial year. They have been out of step with most other people, particularly the other retailers in their segment, all year long in that their quarter has been ending earlier. They want to change that to bring themselves in line with the NRF calendar. In order to do that, they will move their calendar further out by one week. Instead of ending the year on January 25th, they will end the year on February 1st as do most other retailers. That additional week will probably add about $1.3 million in sales volume. It doesn't add anything to the bottom line, in fact it is probably a negative because the week of January 25th - February 1st is when a lot of sales are going on to clean out end-of-season product and the volumes are very low during that time of year so the sales volume doesn't really carry enough to cover the SG&A costs and other expenses in that period. However, they do think that looking ahead at the estimates for Q4 that those probably are already sufficient to cover that. So, they don't suggest changing the financial models.

Gadzooks is very happy with the third quarter. The results were well above what most people expected. It was an interesting quarter when August started a little slower than they thought. When they went back and analyzed August and saw that, with the spreading out of Back-to-School season again, they tended to get a little more sales momentum going into September and October and that is how it played out for them. September finished pretty strong and October finished even stronger.

NEW OPENINGS. They will be opening a total of 57 stores this year and that will be their total for the year. Originally, at the beginning of the year, they were going to do 45-50 stores. As far as new markets, they are going to go into Minnesota, Michigan, Pennsylvania, and Virginia. They are looking at Colorado and a couple other fringe states. But within the next 90 days to 6 months they will make a decision whether they will enter the Northeast, the Northwest (which they consider to be from San Francisco northward), or the Southern California market (which would include Arizona and a few fringe states in that area). They will discuss that at their board meeting. They have seen more opportunities than they can use right now in terms of real estate.

NEW STORE PERFORMANCE. They had hoped to do 4-5% comps this year and they are at 7.2% through the third quarter for the three quarters combined. Their expense leveraging is much better than they had hoped from the beginning of the year and right now they are experiencing very good results on the new store volumes versus the original models they had. New stores last year and those they opened this time a year ago are just now finishing up their first 12-month period. That whole 1995 group is going to average just at $700,000 for their first year volumes. That is up pretty significantly from their past where their new store model was about $630,000. In looking at the Spring group from 1995 that are now starting to come into the comp base, they are continuing to show nice improvement as they come into their comp base. So, not only did they open up well, but they are going to continue to comp pretty much in line with what the stores in the past have. The stores opened in 1996 don't have a great deal of data, but if they annualized them over what they believe is the normal business trend, it appears they are going to do at least as good as the 1995 stores and may do better than that. Some of these are in new areas where trends aren't as well known, though. The 1996 stores may also benefit from better locations and better execution on the openings. The mix remains the same as far as the new stores too -- half middle and half major markets. The cost of new stores is lower than it has been. They had been spending up around $175,000 in the past. They will be down, including inventory, to just under $160,000 this year. So, first-year ROI is definitely up there.

INVENTORY IN PLACE FOR HOLIDAYS. Everything is very good for the first three quarters and they are expecting that to go up for the fourth quarter. They now have achieved 29 consecutive months in positive comp sales. They think that is a remarkable number for them. They're real positive with everything going into the fourth quarter. They think the buying job their buyers and merchandisers have done has been really outstanding. Inventories are in very good shape going into the fourth quarter so they are very optimistic about Christmas and finishing off the year pretty much the way the other three quarters have gone. They are looking for a 4-5% comp rather than the 2-3% comp they had originally thought for the Christmas season.

Their inventory numbers can appear a little on the low side because their ratio of good inventory to sale inventory is one of the best it's ever been in the company's history. The inventories are very clean. Inventory turns for stores that are already open is running ahead of a year ago. Their goal is to get it to 4 turns. They aren't there yet, but are trending in the right direction.

MINIMUM WAGE IMPACT. The company was asked to comment on how the change in minimum wage is impacting business. They responded that they can't make many comments about it quantitatively other than to say that there is a lot of bantering around in the market about how much more money is available for the teenage market to be spending. There is now $6 billion more in the market for teenagers to spend thanks to minimum wage increases. From a cost standpoint, they have managed to head off the minimum wage impact on their cost system. The 90 day exclusion has also helped them.

CASH FLOW AND CAPITAL EXPENSES. Capital expenditures next year will be in the $10-12 million range. That includes about $1.5 million that they will put into the new distribution center and some other related expenditures around $0.5 million. They are still opening stores with about $100,000 per store in inventory. They've made a couple of passes at the 1997 forecast. One more conservative view is that they think they are pretty close to cash equal next year even with some very conservative assumptions in expenditures. They have about $19 million cash in the bank. They don't have any bank debt. They think it would be preferable putting a little debt back on the balance sheet if they had to as opposed to raising more equity and taking on any dilution associated with that. But, they don't think that's going to come close to happening with the cash they have on hand and the cash flow they expect to generate. So they can fund all the capital expenses out of cash flow almost next year.

HOLIDAY SEASON. The company was asked what they expect the impact to be of the fewer shopping days during the holiday season this year. They responded that they think the 5 fewer days is a non-issue because there are also 5 more days between now and when Thanksgiving comes. They put a program together with their sales people and told them that regardless how many days there are between Thanksgiving and Christmas it shouldn't make any difference. When people come into the stores they have to buy and they are going to buy. They think of it as neutral. They don't think it is going to make any difference at all. As far as hot products for Christmas, mid-priced denim clothing is always popular. This year, wide-leg denim is hot.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.