Market Overview

Tilly's, Inc. Announces Revised Fiscal 2018 Third Quarter Results

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Comp Store Net Sales Increase 4.3%: EPS of $0.18

Non-GAAP EPS of $0.20 Excluding Secondary Offering Costs

Confirms Fourth Quarter Outlook

Tilly's, Inc. (NYSE:TLYS) today announced revised financial results for
the fiscal 2018 third quarter and year-to-date period ended November 3,
2018 in order to correct certain accounting entries relating to
inventory under the retail method, which had accumulated over several
fiscal periods, including the third quarter of fiscal 2018. This
correction resulted in a $2.1 million charge to cost of goods sold,
partially offset by a corresponding $0.6 million reduction in previously
recorded corporate bonus accruals within selling, general and
administrative expenses, resulting in a net charge of $1.5 million to
operating income, and a $1.1 million reduction in net income, or $0.03
per diluted share, for the quarter and year-to-date period ended
November 3, 2018.

Third Quarter Results Overview

The following comparisons refer to operating results for the third
quarter of fiscal 2018 versus the third quarter of fiscal 2017 ended
October 28, 2017:

  • Comparable store net sales, including e-commerce, increased 4.3%.
    Comparable store net sales in physical stores increased 1.3% and
    represented approximately 86% of total net sales. E-commerce net sales
    increased 26.7% and represented approximately 14% of total net sales.
    Comparable store net sales, including e-commerce, increased 1.5% in
    the third quarter last year.
  • Total net sales of $146.8 million decreased by $6.0 million, or 3.9%,
    from $152.8 million last year, due to the calendar shift impact of
    last year's 53rd week in the retail calendar. This retail calendar
    shift caused a portion of the back-to-school season to shift into the
    second quarter this year from the third quarter last year, reducing
    last year's comparable net sales base for the third quarter by
    approximately $14 million. This retail calendar shift impact was
    partially offset by an aggregate increase of approximately $8 million
    in comparable store net sales and net sales from seven net new stores.
  • Gross profit of $43.7 million decreased by $6.4 million, or 12.9%,
    from $50.1 million last year, primarily due to the calendar shift
    impact on net sales and the impact of the correction described above.
    Gross margin, or gross profit as a percentage of net sales, decreased
    to 29.7% from 32.8% last year. As expected, buying, distribution and
    occupancy costs deleveraged 190 basis points against lower total net
    sales primarily as a result of the retail calendar shift noted
    previously. Product margins declined 120 basis points primarily as a
    result of the correction described above.
  • Selling, general and administrative expenses ("SG&A") were $36.9
    million, or 25.1% of net sales, compared to $36.0 million, or 23.5% of
    net sales, last year. As expected, SG&A deleveraged 160 basis points
    compared to last year primarily due to the calendar shift impact on
    net sales described above. The $0.9 million increase in SG&A was
    primarily attributable to an increase in store payroll of $0.9 million
    due in part to minimum wage increases, expenses of $0.7 million
    associated with our secondary offering completed in early September
    2018, and increased online marketing costs of $0.6 million associated
    with e-commerce net sales growth. These increases were partially
    offset by a legal matter accrual of $0.7 million in the prior year,
    and a net year-over-year reduction in corporate bonus accruals of
    approximately $0.4 million as a result of the correction described
    above.
  • Operating income was $6.7 million, or 4.6% of net sales, compared to
    $14.1 million, or 9.2% of net sales, last year. The $7.4 million
    reduction in operating income was primarily attributable to the retail
    calendar shift impact on net sales, in addition to the net correction
    described above.
  • Income tax expense was $2.0 million, or 26.9% of pre-tax income,
    compared to $5.7 million, or 39.6% of pre-tax income last year. The
    reduction in this year's income tax rate was attributable to the
    change in corporate tax rates signed into law late last year.
  • Net income was $5.4 million, or $0.18 per diluted share, compared to
    $8.8 million, or $0.30 per diluted share, last year. The $0.12
    decrease in earnings per share was attributable to the combination of
    the retail calendar shift impact on net sales of approximately $0.11
    per diluted share, the impact of the correction described above of
    approximately $0.03 per diluted share, and costs associated with the
    secondary offering completed in early September 2018 of approximately
    $0.02 per diluted share. The remaining positive variance was primarily
    due to improved operating results driven by increased comparable store
    net sales. On a non-GAAP basis, excluding the impact of the secondary
    offering costs this year and the impact of the legal matter accrual
    last year, net income was $6.0 million, or $0.20 per diluted share,
    this year, which was at the low end of our original earnings per share
    outlook range of $0.20 to $0.24 per diluted share for the third
    quarter, compared to $9.2 million, or $0.31 per diluted share, last
    year.

Year-to-Date Results Overview

The following comparisons refer to operating results for the first three
quarters of fiscal 2018 versus the first three quarters of fiscal 2017
ended October 28, 2017:

  • Comparable store net sales, including e-commerce, increased 3.1%.
    Comparable store net sales in physical stores increased 2.2% and
    represented approximately 87% of total net sales. E-commerce net sales
    increased 9.2% and represented approximately 13% of total net sales.
    Comparable store net sales, including e-commerce, increased 1.5% in
    the first three quarters last year.
  • Total net sales of $427.9 million increased by $15.3 million, or 3.7%,
    from $412.6 million last year, primarily due to increased comparable
    store net sales and net sales from seven net new stores.
  • Gross profit of $128.7 million increased by $4.8 million, or 3.9%,
    from $123.9 million last year. Gross margin was 30.1% compared to
    30.0% last year, primarily due to leveraging lower total occupancy
    costs on higher total net sales, offset by lower product margins
    primarily as a result of lower initial markups associated with
    increased sales penetration of third-party branded products, and the
    impact of the correction described above.
  • SG&A was $108.2 million, or 25.3% of net sales, compared to $111.4
    million, or 27.0% of net sales, last year. Last year's SG&A included
    an estimated $6.8 million in provisions related to legal matters. This
    year's SG&A includes a $1.5 million reduction to such provisions as a
    result of the final settlement of the related legal matter in early
    August 2018, and $0.7 million in expenses associated with our
    secondary offering completed in early September 2018. The net
    year-over-year impact of these legal matter provisions, partially
    offset by our secondary offering expenses, accounted for the
    improvement in SG&A as a percentage of net sales. After consideration
    of the legal matter impacts and secondary offering costs, primary
    dollar increases in SG&A were attributable to an increase in store
    payroll of $2.1 million primarily due to minimum wage increases and
    higher comparable store net sales, increased online marketing costs of
    $1.1 million associated with e-commerce net sales growth, and
    increased corporate bonus provisions of $0.6 million due to improved
    operating results. On a non-GAAP basis, excluding the impact of legal
    provisions from both years and the secondary offering costs from this
    year, SG&A was $108.9 million, or 25.5% of net sales, compared to
    $104.6 million, or 25.3% of net sales, last year.
  • Operating income of $20.5 million, or 4.8% of net sales, increased by
    $8.0 million compared to $12.5 million, or 3.0% of net sales, last
    year. Of this $8.0 million improvement in year-over-year operating
    income, approximately $7.6 million was attributable to the net
    aggregate year-over-year impact of the legal matters and secondary
    offering expenses noted above, and approximately $0.4 million was
    attributable to increased comparable store net sales results and
    occupancy reductions. On a non-GAAP basis, excluding the impact of
    legal provisions from both years and the secondary offering costs from
    this year, operating income was $19.8 million, or 4.6% of net sales,
    compared to $19.4 million, or 4.7% of net sales, last year.
  • Income tax expense was $5.7 million, or 26.1% of pre-tax income,
    compared to $5.4 million, or 40.1% of pre-tax income, last year. The
    reduction in this year's income tax rate was primarily attributable to
    the change in corporate tax rates signed into law late last year. On a
    non-GAAP basis, excluding the impact of legal provisions from both
    years and the secondary offering costs from this year, income tax
    expense was $5.4 million compared to $8.0 million last year.
  • Net income was $16.3 million, or $0.55 per diluted share, compared to
    $8.0 million, or $0.28 per diluted share, last year. Of the $0.27
    improvement in year-over-year earnings per share, approximately $0.15
    per diluted share was attributable to the aggregate legal matter and
    secondary offering expenses noted above, and approximately $0.12 per
    diluted share was due to improved operating results driven primarily
    by increased comparable store net sales and occupancy reductions,
    partially offset by the impact of the correction described above. On a
    non-GAAP basis, excluding the impact of the legal provisions from both
    years and the secondary offering costs from this year, net income was
    $15.9 million, or $0.53 per diluted share, compared to $12.1 million,
    or $0.42 per diluted share, last year.

Balance Sheet and Liquidity

As of November 3, 2018, the Company had $120.5 million of cash and
marketable securities and no debt outstanding. This compares to $121.9
million of cash and marketable securities and no debt outstanding as of
October 28, 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 Fourth Quarter Outlook

The Company expects its fourth quarter total net sales to range from
approximately $163 million to $168 million based on an assumed 2% to 5%
increase in comparable store net sales. Last year's fourth quarter
included an extra week as a result of the 53rd week in last year's
retail calendar, which accounted for approximately $7.1 million in added
sales for such quarter versus the comparable 13-week period this year.
The Company expects fourth quarter operating income to range from
approximately $8.5 million to $10.0 million, and earnings per diluted
share to range from $0.22 to $0.26. This outlook assumes an anticipated
effective tax rate of approximately 26% and weighted average shares of
approximately 30.1 million.

Pursuant to the settlement terms of the previously noted legal matter,
the Company issued non-transferable discount coupons to approximately
612,000 existing Tillys customers in early September 2018 which allows
for a one-time 50% discount on a single, future purchase transaction of
up to $1,000. Any unused coupons will expire on September 4, 2019. To
date, less than 1% of these coupons have been redeemed, resulting in no
material impact to the Company's comparable store net sales or operating
results as a whole. Although redemptions have been very low in number
thus far, there can be no assurance that the impact of any future coupon
redemptions during the 2018 holiday season, or during fiscal 2019, will
remain immaterial. Our fourth quarter outlook does not contemplate any
specific impacts from future usage of these coupons.

Preliminary Fiscal 2019 New Store, Capital Expenditure and Expense
Expectations

The Company expects to open up to 15 to 20 new, full-size stores and an
as-yet undetermined number of RSQ-branded pop-up shops during fiscal
2019, in each case assuming appropriate lease economics are obtained.
The specific timing of any new store openings is not yet known. The
Company expects total capital expenditures for fiscal 2019 not to exceed
$25 million, comprised primarily of new store costs supplemented by
continuing technology investments. Finally, the Company expects the
impact of legislated minimum wage increases, merit increases, new
systems costs, and the new lease accounting standard to result in an
aggregate increase of approximately $6 million in its annualized
operating costs before consideration of any comparable store net sales
assumption. The Company estimates that its fiscal 2019 comparable store
net sales would need to increase by approximately 3% in order to absorb
these anticipated cost increases without creating any deleverage of
expenses as a percentage of net sales.

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,
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.

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 229 total stores, including four RSQ
pop-up stores, across 33 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
net 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,
future capital expenditures, 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)

November 3,
2018
    February 3,
2018
    October 28, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 24,751 $ 53,202 $ 38,912
Marketable securities 95,766 82,750 82,961
Receivables 7,633 4,352 3,647
Merchandise inventories 71,488 53,216 62,242
Prepaid expenses and other current assets 10,707   9,534   9,759
Total current assets 210,345 203,054 197,521
Property and equipment, net 78,679 83,321 87,576
Other assets 3,667   3,736   7,805
Total assets $ 292,691   $ 290,111   $ 292,902
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,352 $ 21,615 $ 27,329
Accrued expenses 19,895 22,731 31,854
Deferred revenue 7,172 10,879 8,335
Accrued compensation and benefits 8,690 6,119 6,005
Dividends payable 29,067
Current portion of deferred rent 5,466 5,220 5,762
Current portion of capital lease obligation     155
Total current liabilities 75,575 95,631 79,440
Long-term portion of deferred rent 31,624 31,340 31,377
Other 1,997   2,715   2,955
Total liabilities 109,196 129,686 113,772
Stockholders' equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized;
21,536, 14,927 and 14,357 shares issued and outstanding, respectively
21 15 14
Common stock (Class B), $0.001 par value; 35,000 shares authorized;
7,944, 14,188 and 14,488 shares issued and outstanding, respectively
8 14 15
Preferred stock, $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding
Additional paid-in capital 149,141 143,984 140,240
Retained earnings 34,111 16,398 38,765
Accumulated other comprehensive income 214   14   96
Total stockholders' equity 183,495   160,425   179,130
Total liabilities and stockholders' equity $ 292,691   $ 290,111   $ 292,902

Tilly's, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

Three Months Ended       Nine Months Ended
November 3,
2018
    October 28,
2017
November 3,
2018
    October 28,
2017
Net sales $ 146,826 $ 152,824 $ 427,866 $ 412,581
Cost of goods sold (includes buying, distribution, and occupancy
costs)
103,170   102,730   299,127   288,653
Gross profit 43,656 50,094 128,739 123,928
Selling, general and administrative expenses 36,919   35,982   108,193   111,384
Operating income 6,737 14,112 20,546 12,544
Other income, net 585   375   1,457   810
Income before income taxes 7,322 14,487 22,003 13,354
Income tax expense 1,967   5,730   5,737   5,354
Net income $ 5,355   $ 8,757   $ 16,266   $ 8,000
Basic income per share of Class A and Class B common stock $ 0.18 $ 0.30 $ 0.56 $ 0.28
Diluted income per share of Class A and Class B common stock $ 0.18 $ 0.30 $ 0.55 $ 0.28
Weighted average basic shares outstanding 29,373 28,782 29,221 28,746
Weighted average diluted shares outstanding 30,075 29,031 29,746 28,954

Tilly's, Inc.

Supplemental Financial Information

Reconciliation of Select GAAP Financial Measures to Non-GAAP
Financial Measures

(In thousands, except per share data)

(unaudited)

Third Quarter Ended   Nine Months Ended
November 3,
2018
  October 28,
2017
November 3,
2018
  October 28,
2017
Selling, general and administrative, as reported $ 36,919 $ 35,982 $ 108,193 $ 111,384
Legal settlement (650 ) 1,458 (6,816 )
Secondary offering costs (714 )   (714 )  
Non-GAAP selling, general and administrative $ 36,205   $ 35,332   $ 108,937   $ 104,568  
 
Operating income, as reported $ 6,737 $ 14,112 $ 20,546 $ 12,544
Legal settlement 650 (1,458 ) 6,816
Secondary offering costs 714     714    
Non-GAAP operating income $ 7,451   $ 14,762   $ 19,802   $ 19,360  
 
Income tax expense, as reported $ 1,967 $ 5,730 $ 5,737 $ 5,354
Income tax effect of legal settlement (1) 255 (386 ) 2,679
Income tax effect of secondary offering costs (1) 189 189
Income tax effect of non-deductibility of a portion of secondary
offering costs (1)
(165 )   (165 )  
Non-GAAP income tax expense $ 1,991   $ 5,985   $ 5,375   $ 8,033  
 
Net income, as reported $ 5,355 $ 8,757 $ 16,266 $ 8,000
Legal settlement 650 (1,458 ) 6,816
Secondary offering costs 714 714
Less: Income tax effects (1) (24 ) (255 ) 362   (2,679 )
Non-GAAP net income $ 6,045   $ 9,152   $ 15,884   $ 12,137  
 
Diluted income per share, as reported $ 0.18 $ 0.30 $ 0.55 $ 0.28
Legal settlement, net of taxes (1) 0.01 (0.04 ) 0.14
Secondary offering costs, net of taxes (1) 0.02     0.02    
Non-GAAP diluted income per share $ 0.20   $ 0.31   $ 0.53   $ 0.42  
 
Weighted average basic shares outstanding 29,373 28,782 29,221 28,746
Weighted average diluted shares outstanding 30,075 29,031 29,746 28,954

(1) The effective tax rate applied to the $0.7 million of secondary
offering costs for the third quarter and nine months ended November 3,
2018 was 26.5%. Additionally, this year's income tax expense includes
approximately $0.2 million due to the non-deductibility of a portion of
the secondary offering costs.

The effective tax rate applied for the third quarter and nine months
ended October 28, 2017 was 39.3%.

Tilly's, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Nine Months Ended
November 3,
2018
  October 28,
2017
Cash flows from operating activities  
Net income $ 16,266 $   8,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16,966 17,644
Stock-based compensation expense 1,662 1,773
Impairment of assets 786 848
Loss on disposal of assets 11 170
Gain on marketable securities (983 ) (510 )
Deferred income taxes (419 ) (1,194 )
Changes in operating assets and liabilities:
Receivables (3,281 ) 342
Merchandise inventories (18,462 ) (14,474 )
Prepaid expenses and other assets (1,290 ) (777 )
Accounts payable 12,859 9,177
Accrued expenses (6,403 ) 4,202
Accrued compensation and benefits 2,571 (1,254 )
Deferred rent 530 (4,394 )
Deferred revenue (1,534 ) (1,868 )
Net cash provided by operating activities 19,279   17,685  
Cash flows from investing activities
Purchase of property and equipment (10,394 ) (9,716 )
Purchases of marketable securities (116,442 ) (112,612 )
Proceeds from marketable securities 104,678   85,134  
Net cash used in investing activities (22,158 ) (37,194 )
Cash flows from financing activities
Dividends paid (29,067 ) (20,080 )
Proceeds from exercise of stock options 3,606 288
Taxes paid in lieu of shares issued for stock-based compensation (111 ) (101 )
Payment of capital lease obligation   (680 )
Net cash used in financing activities (25,572 ) (20,573 )
Change in cash and cash equivalents (28,451 ) (40,082 )
Cash and cash equivalents, beginning of period 53,202   78,994  
Cash and cash equivalents, end of period $ 24,751   $ 38,912  

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 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
2018 Q3 226 5 4 227 1,693

Note: Total stores opened during
fiscal 2018 includes four RSQ-branded, pop-up stores.

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