Market Overview

Tilly's, Inc. Announces Fiscal 2018 Second Quarter Results

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Second Quarter Comp Store Net Sales Increase 4.4%

EPS of $0.33; Non-GAAP EPS of $0.29 Excluding Legal Matter

Introduces Fiscal 2018 Third Quarter Outlook

Tilly's, Inc. (NYSE:TLYS) today announced financial results for the
second quarter and first half of fiscal 2018 ended August 4, 2018.

"Tillys delivered its strongest comparable store net sales result since
the third quarter of fiscal 2016, and we believe we have our e-com
business back on track," commented Ed Thomas, President and Chief
Executive Officer. "The back-to-school season is off to a strong start,
and we feel optimistic about the back half of fiscal 2018."

Second Quarter Results Overview

The following comparisons refer to operating results for the second
quarter of fiscal 2018 versus the second quarter of fiscal 2017 ended
July 29, 2017:

  • Total net sales were $157.4 million, an increase of $18.6 million, or
    13.4%, from $138.8 million last year. As a result of the calendar
    shift impact of last year's 53rd week in the retail calendar, which
    caused a portion of the back-to-school season to shift into the second
    quarter, approximately $12.3 million of comparable net sales were
    realized in the second quarter this year rather than in the third
    quarter. The remaining net sales increase of approximately $6.3
    million was primarily attributable to increased comparable store net
    sales and net sales from five net new stores.
  • Comparable store net sales, which includes e-commerce net sales,
    increased 4.4% in total. Comparable store net sales in physical stores
    increased 3.8%. E-commerce net sales increased 8.1%. Comparable store
    net sales increased 2.1% in the second quarter last year.
  • Gross profit was $50.1 million, an increase of 22.4% from $40.9
    million last year, primarily due to the calendar shift noted above and
    increased comparable store net sales. Gross margin, or gross profit as
    a percentage of net sales, increased to 31.8% from 29.5% last year.
    This 230 basis point improvement in gross margin was primarily
    attributable to leveraging lower total occupancy costs on higher total
    net sales. Product margins were approximately flat.
  • Selling, general and administrative expenses ("SG&A") were $37.6
    million, or 23.9% of net sales, compared to $42.2 million, or 30.4% of
    net sales, last year. Last year's SG&A included an estimated $6.2
    million provision related to a legal matter. This year's SG&A includes
    a $1.5 million reduction to this same provision as a result of the
    final settlement of the related legal matter in early August 2018.
    Taken together, these legal matter impacts accounted for 540 basis
    points of the total 650 basis point improvement in SG&A. The remaining
    110 basis point improvement in SG&A was primarily due to leveraging
    store and corporate payroll costs against higher total net sales. On a
    non-GAAP basis, excluding the noted legal matter impacts from both
    years, SG&A increased to $39.1 million, or 24.8% of net sales,
    compared to $36.0 million, or 25.9% of net sales, last year. Primary
    dollar increases in SG&A were attributable to certain marketing and
    other selling expenses associated with a portion of the back-to-school
    season shifting from the third quarter to the second quarter, store
    payroll increases due to higher net sales and minimum wage increases,
    and corporate bonus provision increases due to improved year-over-year
    operations.
  • Operating income was $12.5 million, or 7.9% of net sales, compared to
    an operating loss of $(1.2) million, or (0.9)% of net sales, last
    year. Of this $13.7 million improvement in year-over-year operating
    income, approximately $7.6 million was attributable to the aggregate
    year-over-year impact of the legal matter noted above, approximately
    $4.2 million was attributable to the retail calendar shift impact
    noted earlier, and approximately $1.9 million was attributable to
    increased comparable store net sales results. On a non-GAAP basis,
    excluding the legal matter impacts from both years, operating income
    was $11.0 million, or 7.0% of net sales, compared to $4.9 million, or
    3.5% of net sales, last year.
  • Income tax expense was $3.3 million, or 25.3% of pre-tax income,
    compared to income tax benefit of $(0.4) million, or 42.8% of pre-tax
    loss last year. Income tax expense/(benefit) includes certain discrete
    items associated with employee stock-based award activity in both
    periods.
  • Net income was $9.7 million, or $0.33 per diluted share, compared to a
    net loss of $(0.6) million, or $(0.02) per share, last year. Of the
    $0.35 improvement in year-over-year earnings per share, approximately
    $0.17 was attributable to the aggregate legal matter impacts noted
    above, approximately $0.10 was attributable to the retail calendar
    shift impact noted earlier, and the remaining $0.08 was due to
    improved operating results. On a non-GAAP basis, excluding the impacts
    of the legal matter from both years, net income was $8.6 million, or
    $0.29 per diluted share, compared to net income of $3.1 million, or
    $0.11 per diluted share, last year.

First Half Results Overview

The following comparisons refer to operating results for the first half
of fiscal 2018 versus the first half of fiscal 2017 ended July 29, 2017:

  • Total net sales were $281.0 million, an increase of $21.3 million, or
    8.2%, from $259.8 million last year. As a result of the calendar shift
    impact of last year's 53rd week in the retail calendar, a net increase
    of approximately $15.2 million of comparable net sales were realized
    in the first half. The remaining net sales increase of $6.1 million
    was primarily attributable to increased comparable store net sales and
    net sales from five net new stores.
  • Comparable store net sales, which includes e-commerce net sales,
    increased 2.4% in total. Comparable store net sales in physical stores
    increased 2.7%. E-commerce net sales increased 0.9%. Comparable store
    net sales increased 1.4% in the first half last year.
  • Gross profit was $85.1 million, an increase of 15.2% from $73.8
    million last year, primarily due to the calendar shift noted above and
    increased comparable store net sales. Gross margin increased to 30.3%
    from 28.4% last year. This 190 basis point improvement in gross margin
    was primarily attributable to leveraging lower total occupancy costs
    on higher total net sales. Product margins were flat.
  • SG&A was $71.3 million, or 25.4% of net sales, compared to $75.4
    million, or 29.0% of net sales, last year. Last year's SG&A included
    an estimated $6.2 million provision related to a legal matter. This
    year's SG&A includes a $1.5 million reduction to this same provision
    as a result of the final settlement of the related legal matter in
    early August 2018. Taken together, these legal matter impacts
    accounted for 290 basis points of the total 360 basis point
    improvement in SG&A. The remaining 70 basis point improvement in SG&A
    was primarily due to leveraging store and corporate payroll costs
    against higher total net sales. On a non-GAAP basis, excluding the
    legal matter impacts from both years, SG&A increased to $72.7 million,
    or 25.8% of net sales, compared to $69.2 million, or 26.7% of net
    sales, last year. Primary dollar increases in SG&A were attributable
    to store payroll increases due to higher net sales and minimum wage
    increases, certain marketing and other selling expenses associated
    with a portion of the back-to-school season shifting from the third
    quarter to the second quarter, and corporate bonus provision increases
    due to improved year-over-year operations.
  • Operating income was $13.8 million, or 4.9% of net sales, compared to
    an operating loss of $(1.6) million, or (0.6)% of net sales, last
    year. Of this $15.4 million improvement in year-over-year operating
    income, approximately $7.6 million was attributable to the aggregate
    year-over-year impact of the legal matter noted above, approximately
    $5.2 million was attributable to the retail calendar shift impact
    noted earlier, and approximately $2.6 million was attributable to
    increased comparable store net sales results. On a non-GAAP basis,
    excluding the legal matter impacts from both years, operating income
    was $12.4 million, or 4.4% of net sales, compared to $4.6 million, or
    1.8% of net sales, last year.
  • Income tax expense was $3.8 million, or 25.7% of pre-tax income,
    compared to income tax benefit of $(0.4) million, or 33.2% of pre-tax
    loss, last year. Income tax expense/(benefit) includes certain
    discrete items associated with employee stock-based award activity in
    both periods.
  • Net income was $10.9 million, or $0.37 per diluted share, compared to
    a net loss of $(0.8) million, or $(0.03) per share, last year. Of the
    $0.40 improvement in year-over-year earnings per share, approximately
    $0.17 was attributable to the aggregate legal matter impacts noted
    above, approximately $0.13 was attributable to the retail calendar
    shift impact noted earlier, and the remaining $0.10 was due to
    improved operating results. On a non-GAAP basis, excluding the impact
    of the legal matter from both years, net income was $9.8 million, or
    $0.33 per diluted share, compared to $3.0 million, or $0.10 per
    diluted share, last year.

Balance Sheet and Liquidity

As of August 4, 2018, the Company had $124.2 million of cash and
marketable securities and no debt outstanding under its revolving credit
facility. This compares to $109.6 million of cash and marketable
securities and no debt outstanding under its revolving credit facility
as of July 29, 2017. The Company paid special cash dividends to its
stockholders of approximately $29.1 million and $20.1 million in the
aggregate during February of 2018 and 2017, respectively.

Fiscal 2018 Third Quarter Outlook

As a result of the calendar shift impact of last year's 53rd week in the
retail calendar, the Company expects its third quarter total net sales
to range from approximately $145 million to $151 million based on an
assumed three to six percent increase in comparable store net sales. We
expect this calendar shift to result in a net decrease of approximately
$13.9 million in last year's comparable sales base and approximately
$0.11 of diluted earnings per share for third quarter comparability.
This is due to a portion of the back-to-school season shifting into the
second quarter this year versus being in the third quarter last year.
The Company expects third quarter operating income to range from
approximately $8.0 million to $9.5 million, and earnings per diluted
share to range from $0.20 to $0.24. This outlook assumes an anticipated
effective tax rate of approximately 27% and weighted average shares of
approximately 30.0 million.

Pursuant to the settlement terms of the previously noted legal matter,
the Company will be issuing non-transferable discount coupons to
approximately 612,000 existing Tillys customers in early September 2018
which will allow for a one-time 50% discount on a single, future
purchase transaction of up to $1,000. Any unused coupons will expire
upon the one year anniversary of coupon issuance. We cannot reasonably
estimate the number of coupons that will be utilized, the timing of any
coupon usage, the average transaction value utilizing these coupons, or
the potential impact of their usage on our reported comparable store net
sales, product margins and earnings per share over the course of the
next twelve months, but the potential impact could be material and
adverse. In particular, we generally expect that the usage of these
coupons will have a positive impact on our comparable store net sales,
and a negative impact on our product margins, although we cannot
reasonably estimate the magnitude of such impacts. The potential impact
on our operating income will depend on a variety of factors that cannot
be reasonably estimated at this time, including but not limited to the
factors described above. As a result of the uncertainty related to the
potential impact of these coupons, our third quarter outlook does not
contemplate any projected impacts from the future usage of these coupons.

Non-GAAP Financial Measures

In addition to reporting financial measures in accordance with GAAP, the
Company is providing certain non-GAAP financial measures including
"non-GAAP SG&A," "non-GAAP operating income," "non-GAAP income tax
expense," "non-GAAP net income," and "non-GAAP income per diluted
share." These amounts are not in accordance with, or an alternative to,
the corresponding financial measures reported in accordance with GAAP.
The Company's management believes that these measures help provide
investors with insight into the underlying comparable financial results,
excluding items that may not be indicative of, or are unrelated to, the
Company's core day-to-day operating results.

For a description of these non-GAAP financial measures and
reconciliations of these non-GAAP financial measures to the most
directly comparable financial measures prepared in accordance with GAAP,
please see the accompanying table titled "Supplemental Financial
Information; Reconciliation of Select GAAP Financial Measures to
Non-GAAP Financial Measures" contained in this press release.

Conference Call Information

A conference call to discuss these financial results is scheduled for
today, August 29, 2018, at 4:30 p.m. ET (1:30 p.m. PT). Investors and
analysts interested in participating in the call are invited to dial
(877) 407-4018 at 4:25 p.m. ET (1:25 p.m. PT). The conference call will
also be available to interested parties through a live webcast at www.tillys.com.
Please visit the website and select the "Investor Relations" link at
least 15 minutes prior to the start of the call to register and download
any necessary software.

A telephone replay of the call will be available until September 12,
2018, by dialing (844) 512-2921 (domestic) or (412) 317-6671
(international) and entering the conference identification number:
13682205. Please note participants must enter the conference
identification number in order to access the replay.

About Tillys

Tillys is a leading specialty retailer of casual apparel, footwear and
accessories for young men, young women, boys and girls with an extensive
assortment of iconic global, emerging, and proprietary brands rooted in
an active and social lifestyle. Tillys is headquartered in Irvine,
California and currently operates 226 total stores, including three RSQ
pop-up stores, across 31 states and its website, www.tillys.com.

Forward-Looking Statements

Certain statements in this press release and oral statements made from
time to time by our representatives are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. In particular, statements regarding our future financial and
operating results, including but not limited to future comparable store
sales, future operating income, future net income, future earnings per
share, future gross, operating or product margins, anticipated tax rate,
future impacts of legal settlements, future inventory levels, and market
share and our business and strategy, including but not limited to
expected store openings and closings, expansion of brands and exclusive
relationships, development and growth of our e-commerce platform and
business, promotional strategy, and any other statements about our
future expectations, plans, intentions, beliefs or prospects expressed
by management are forward-looking statements. These forward-looking
statements are based on management's current expectations and beliefs,
but they involve a number of risks and uncertainties that could cause
actual results or events to differ materially from those indicated by
such forward-looking statements, including, but not limited to, our
ability to respond to changing customer preferences and trends, attract
customer traffic at our stores and online, execute our growth and
long-term strategies, expand into new markets, grow our e-commerce
business, effectively manage our inventory and costs, effectively
compete with other retailers, enhance awareness of our brand and brand
image, general consumer spending patterns and levels, the effect of
weather, and other factors that are detailed in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission ("SEC"),
including those detailed in the section titled "Risk Factors" and in our
other filings with the SEC, which are available from the SEC's website
at www.sec.gov
and from our website at www.tillys.com
under the heading "Investor Relations". Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as
of the date of this press release. We do not undertake any obligation to
update or alter any forward-looking statements, whether as a result of
new information, future events or otherwise. This release should be read
in conjunction with our financial statements and notes thereto contained
in our Form 10-K.

         
Tilly's, Inc.
Consolidated Balance Sheets

(In thousands, except par value)

(unaudited)

 
August 4,
2018
February 3,
2018

July 29,
2017

ASSETS
Current assets:
Cash and cash equivalents $ 45,638 $ 53,202 $ 43,567
Marketable securities 78,588 82,750 66,064
Receivables 11,182 4,352 6,829
Merchandise inventories 74,815 53,216 75,033
Prepaid expenses and other current assets 9,062   9,534   9,391
Total current assets 219,285 203,054 200,884
Property and equipment, net 78,906 83,321 89,130
Other assets 3,391   3,736   6,843
Total assets $ 301,582   $ 290,111   $ 296,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,786 $ 21,615 $ 41,729
Accrued expenses 29,521 22,731 29,097
Deferred revenue 7,193 10,879 9,277
Accrued compensation and benefits 7,392 6,119 7,834
Dividends payable 29,067
Current portion of deferred rent 5,868 5,220 5,836
Current portion of capital lease obligation     386
Total current liabilities 92,760 95,631 94,159
Long-term portion of deferred rent 31,239 31,340 33,080
Other 2,236   2,715  
Total liabilities 126,235 129,686 127,239
Stockholders' equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized;
15,599, 14,927 and 13,864 shares issued and outstanding, respectively
15 15 14
Common stock (Class B), $0.001 par value; 35,000 shares authorized;
13,708, 14,188 and 14,958 shares issued and outstanding, respectively
14 14 15
Preferred stock, $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding
Additional paid-in capital 146,476 143,984 139,479
Retained earnings 28,756 16,398 30,008
Accumulated other comprehensive income 86   14   102
Total stockholders' equity 175,347   160,425   169,618
Total liabilities and stockholders' equity $ 301,582   $ 290,111   $ 296,857
 
       
Tilly's, Inc.
Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 
Three Months Ended Six Months Ended
August 4,
2018
  July 29,
2017
August 4,
2018
  July 29,
2017
Net sales $ 157,406 $ 138,810 $ 281,040 $ 259,757
Cost of goods sold (includes buying, distribution, and occupancy
costs)
107,301   97,881   195,957   185,923  
Gross profit 50,105 40,929 85,083 73,834
Selling, general and administrative expenses 37,627   42,168   71,275   75,402  
Operating income/(loss) 12,478 (1,239 ) 13,808 (1,568 )
Other income, net 490   197   873   435  
Income/(loss) before income taxes 12,968 (1,042 ) 14,681 (1,133 )
Income tax expense/(benefit) 3,279   (446 ) 3,770   (376 )
Net income/(loss) $ 9,689   $ (596 ) $ 10,911   $ (757 )
Basic income/(loss) per share of Class A and Class B common stock $ 0.33 $ (0.02 ) $ 0.37 $ (0.03 )
Diluted income/(loss) per share of Class A and Class B common stock $ 0.33 $ (0.02 ) $ 0.37 $ (0.03 )
Weighted average basic shares outstanding 29,209 28,751 29,145 28,728
Weighted average diluted shares outstanding 29,681 28,751 29,567 28,728
 
       
Tilly's, Inc.
Supplemental Financial Information
Reconciliation of Select GAAP Financial Measures to Non-GAAP
Financial Measures

(In thousands, except per share data)

(unaudited)

 
Three Months Ended Six Months Ended
August 4,
2018
  July 29,
2017
August 4,
2018
  July 29,
2017
Selling, general and administrative expenses, as reported $ 37,627 $ 42,168 $ 71,275 $ 75,402
Adjustment for legal settlement benefit/(provision) 1,458   (6,166 ) 1,458   (6,166 )
Non-GAAP selling, general and administrative expenses $ 39,085   $ 36,002   $ 72,733   $ 69,236  
 
Operating income/(loss), as reported $ 12,478 $ (1,239 ) $ 13,808 $ (1,568 )
Adjustment for legal settlement (benefit)/provision (1,458 ) 6,166   (1,458 ) 6,166  
Non-GAAP operating income $ 11,020   $ 4,927   $ 12,350   $ 4,598  
 
Income tax expense/(benefit), as reported $ 3,279 $ (446 ) $ 3,770 $ (376 )
Adjustment for income tax effect of legal settlement
(benefit)/provision (1)
(385 ) 2,447   (385 ) 2,447  
Non-GAAP income tax expense $ 2,894   $ 2,001   $ 3,385   $ 2,071  
 
Net income/(loss), as reported $ 9,689 $ (596 ) $ 10,911 $ (757 )
Adjustment for legal settlement (benefit)/provision (1,458 ) 6,166 (1,458 ) 6,166
Adjustment for income tax effect of legal settlement
benefit/(provision) (1)
385   (2,447 ) 385   (2,447 )
Non-GAAP net income $ 8,616   $ 3,123   $ 9,838   $ 2,962  
 
Diluted income/(loss) per share, as reported $ 0.33 $ (0.02 ) $ 0.37 $ (0.03 )
Adjustment for legal settlement (benefit)/provision, net of taxes (1) (0.04 ) 0.13   (0.04 ) 0.13  
Non-GAAP diluted income per share $ 0.29   $ 0.11   $ 0.33   $ 0.10  
 
Weighted average basic shares outstanding 29,209 28,751 29,145 28,728
Weighted average diluted shares outstanding 29,681 28,923 29,567 28,912
(1)   The effective tax rate applied for the three and six months ended
August 4, 2018 was 26.4%. The effective tax rate applied for the
three and six months ended July 29, 2017 was 39.7%.
 
     
Tilly's, Inc.
Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 
Six Months Ended
August 4,
2018
  July 29,
2017
Cash flows from operating activities  
Net income/(loss) $ 10,911 $ (757 )
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities:
Depreciation and amortization 11,503 11,904
Stock-based compensation expense 1,127 1,195
Impairment of assets 786 451
Loss on disposal of assets 17 16
Gain on sales and maturities of marketable securities (599 ) (266 )
Deferred income taxes (203 ) (364 )
Changes in operating assets and liabilities:
Receivables (6,830 ) (2,840 )
Merchandise inventories (21,789 ) (27,265 )
Prepaid expenses and other assets 461 (280 )
Accounts payable 21,571 24,116
Accrued expenses 4,688 (74 )
Accrued compensation and benefits 1,273 575
Deferred rent 547 (2,617 )
Deferred revenue (1,513 ) (926 )
Net cash provided by operating activities 21,950     2,868  
Cash flows from investing activities
Purchase of property and equipment (6,668 ) (6,954 )
Purchases of marketable securities (79,822 ) (62,898 )
Proceeds from marketable securities 84,678   52,082  
Net cash used in investing activities (1,812 ) (17,770 )
Cash flows from financing activities
Dividends paid (29,067 ) (20,080 )
Proceeds from exercise of stock options 1,476 105
Taxes paid in lieu of shares issued for stock-based compensation (111 ) (101 )
Payment of capital lease obligation   (449 )
Net cash used in financing activities (27,702 ) (20,525 )
Change in cash and cash equivalents (7,564 ) (35,427 )
Cash and cash equivalents, beginning of period 53,202   78,994  
Cash and cash equivalents, end of period $ 45,638   $ 43,567  
 
             
Tilly's, Inc.
Store Count and Square Footage
 

Stores
Open at
Beginning of
Quarter

Stores
Opened
During
Quarter

Stores
Closed
During
Quarter

Stores
Open at
End of
Quarter

Total Gross
Square Footage
End of
Quarter

(in thousands)

2017 Q2 222 1 221 1,690
2017 Q3 221

1 220 1,681
2017 Q4 220 2 3 219 1,668
2018 Q1 219 4 1 222 1,675
2018 Q2 222 4 226 1,698

Note: Total stores opened
during the first quarter of fiscal 2018 includes three
RSQ-branded, pop-up stores.

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