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Edited Transcript of TLYS earnings conference call or presentation 3-Jun-20 8:30pm GMT

Q1 2020 Tillys Inc Earnings Call

Irvine Jun 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Tillys Inc earnings conference call or presentation Wednesday, June 3, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edmond S. Thomas

Tilly's, Inc. - President, CEO & Director

* Michael L. Henry

Tilly's, Inc. - Executive VP, CFO & Corporate Secretary

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Conference Call Participants

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* David Loughran Buckley

BofA Merrill Lynch, Research Division - Analyst

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Mitchel John Kummetz

Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

* Gar Jackson

Global Ir Group - Founder & President

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Presentation

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Operator [1]

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Greetings. Welcome to Tilly's Inc. First Quarter 2020 Earnings Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Gar Jackson. You may begin.

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Gar Jackson, Global Ir Group - Founder & President [2]

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Good afternoon, and welcome to the Tilly's Fiscal 2020 First Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company's results and then host a Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at tillys.com.

From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, June 3, 2020, and actual results may differ materially from current expectations based on various factors affecting Tilly's business, including impacts of and the company's actions in response to the current COVID-19 pandemic.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2020 first quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer.

Today's call will be limited to 1 hour and will include a Q&A session after our prepared remarks. I now will turn the call over to Ed.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [3]

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Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. First, we hope everyone listening and their families are well. We continue to be in unprecedented times due to the COVID-19 pandemic, which has had significant health, social and economic impacts throughout the world. I'll spend a significant portion of our time today updating you on how this pandemic has impacted our business to date. Following my prepared remarks, I will turn the call over to Mike, who will go into more details about our financial results.

As previously announced, we temporarily closed all 239 of our retail stores on March 18. And through the end of the first quarter, in order to protect our employees and communities from the continuing spread of COVID-19, we also shifted our corporate offices from -- to a work-from-home status and substantially closed our stores' distribution center. Driven by the temporary store closures, we experienced a 40.7% decrease in total net sales for the first quarter. Net sales in physical stores decreased by 57.5% for the first quarter due to being closed for the final 45 days of the 91-day quarter.

Comp sales in stores were up 1% in February, then down 23% during the period from March 1 through March 18 as the impacts of the pandemic on our business, and the retail industry in general, meaningfully began. E-commerce responded very well with a 54.2% increase in net sales for the quarter, accelerating significantly following our store closures. By month, e-commerce net sales increased by 9.6% in February, then by 49.3% in March and by 90% in April. However, these increases in e-commerce sales were not nearly enough to make up for the loss of store sales in the back half of the quarter.

So far in the second quarter, local governments have eased restrictions that have allowed us to reopen a significant number of our stores in the last 3 weeks following the implementation of certain new health and safety protocols, including significant restrictions on customers' traffic within our stores. We began the reopening process with our first 25 stores on May 15 and have now reached 160 total stores reopened as of yesterday or 67% of our total 239 stores. Overall, the sales results in the reopened stores have been better than we expected so far, but with a very high degree of disparity between individual stores and markets.

Generally speaking, reopened stores in California and Arizona have been surprisingly good. While reopened stores in Florida and Texas have been very weak. Mike will provide more details a bit later. We continue to carefully monitor local state and federal government orders as well as announcements made by mall landlords to determine when additional stores may be able to reopen after ensuring applicable health and safety protocols are in place. With regard to store leases, as we believe this is the case with many other similar retailers in order to protect our liquidity in this completely unpredictable environment, we elected to withhold payment of our contractual store lease obligations for April and May, given that we could not safely operate our stores as originally intended when the respective leases were signed, and we did not know when our stores would be able to reopen.

With stores that we have been able to reopen, we have paid June rents. We intend to continue to work with our landlords to attempt to find an acceptable solutions to address the impacts of the pandemic on our respective businesses. We view these solutions as critical to our long-term well-being as a business as they have a direct impact upon the preservation of our liquidity in this uncertain environment, which in turn, impacts our landlords.

Our normal cash burn for all of the contractual store lease obligations is nearly $7 million per month. At this time, we have reached compromises with a small number of landlords, but cannot predict, with any certainty, what solutions will be acceptable to any other landlords, if anything at all, to help reduce our cash lease costs, while stores remain closed or where sales activity remains significantly below prior year levels upon reopening. At this time, we believe the most likely outcome is that we will have to pay these withheld rents sooner or later, although we do not believe that the payment deferral alone is an acceptable long-term answer for us.

Moving to -- on to inventory management. Upon closing our stores in mid-March, a significant portion of our total inventory became largely inaccessible to us for several weeks. To avoid creating a bigger inventory problem going forward, we canceled or deferred substantially all orders for new inventory receipts from April through June and significantly reduced future on order for the remainder of fiscal 2020. The only exceptions to this were for items that we consider to be essential to maintain our e-commerce business and key programs for the potential back-to-school season. We have, from time to time, been able to access certain stores to ship small portions of product back to our distribution centers and serve certain e-commerce orders to help supplement our e-commerce business. We ended the first quarter with total inventories up 10.8% on a per square foot basis compared to last year. However, given the amount of order cancellations we have already made, we entered fiscal June with inventories per square foot down 10.5% on a per square foot basis compared to last year. We will continue to closely monitor and adjust future inventory commitments as we determine it to be necessary relative to our expectations for the timing of store reopenings and subsequent sales levels. We expect that industry promotional levels will be well above normal as stores are able to reopen in light of a large amount of inventory that has been idle within closed stores for the apparel industry as a whole.

Turning to payroll management. We furloughed approximately 91% of our employee workforce following the closure of our stores in mid-March. And all corporate management agreed to take a temporary pay cut on a graduated scale according to annual salary, ranging from 10% to 50%. Our Executive Chairman, Hezy Shaked, in his capacity as an employee and the independent members of our Board of Directors, have elected to forgo the entirety of their respective cash compensation until our business substantially resumes. Our weekly cash burn from employee compensation was reduced to approximately 24% of normal, resulting in a weekly savings of approximately $1.4 million per week since the first week of April compared to normal levels, while stores remain closed.

However, as stores have reopened, we have brought back our store teams and portions of other corporate support functions necessary to conduct our business. There can be no guarantee that sales levels will be sufficient to support our corporate infrastructure profitability over the near term. Beyond compensation, we have implemented policies to reduce or eliminate nonessential expenses where possible, while our stores remain closed. This includes all travel, all forms of print marketing, all store services typically utilized under normal operating conditions, among other expenses. Assuming these policies continue for the remainder of fiscal 2020, we estimate that these reductions will save up to approximately $10 million over the remainder of fiscal 2020.

In terms of new stores and other capital expenditures, we had 9 signed new store leases before the pandemic hit us, but we are seeking to defer all new store openings into 2021, given the current market conditions. We continue to invest in IT infrastructure and other customer-facing projects during this time to help enhance our e-commerce business and to promote further improvement of our in-store experience and customer loyalty as stores reopen.

We launched Afterpay online during the first quarter, which allows customers to defer payments over several weeks, while we receive payment for the purchase within days. We have been very pleased with the results so far. We also just launched a new financial accounting system at the beginning of the second quarter to replace our prior system. Assuming all new store activity is deferred until 2021, which is not guaranteed as it requires landlord consent, we would not expect total capital expenditures for fiscal 2020 to exceed approximately $7 million. With no deferral of new stores, we would expect fiscal 2020 capital expenditures to be approximately $14 million.

Finally, in order to increase our liquidity in light of the uncertainties caused by COVID-19 pandemic, we borrowed approximately $23.7 million in late March under our revolving credit facility, which was the maximum amount available thereunder.

Turning now to merchandising. I'd like to acknowledge the significant progress made on our merchandising initiatives, led by our Chief Merchandising Officer, Tricia Smith. Despite the impacts of the pandemic on our business, she has initiated meaningful changes in our merchandising approach that we believe will serve us well to remain competitive during this pandemic and as the environment moves back to a normal. She has worked towards changing our merchandising team's mindset towards thinking digital first, which has had an impact on our online business during this pandemic. This has resulted in an expanded selection of merchandise and new categories launched online, which has helped produce higher sales, incremental customers and improved e-comm merchandise margins. Her impact has also helped us attract new brands to our merchandise assortments that we could not get previously. She's only been here for 8 months, but she's made a big impact so far, and we are excited to have her as part of our team. That's our story for now. So much remains unpredictable at this time, but we are excited to be reopening stores and bringing our people back to work. We hope everyone in the Tilly's family is well out there. We are and have been thinking of all of you every day with every business decision we make. Mike will now provide more details on our first quarter operating performance, balance sheet and liquidity and will discuss certain forward-looking items concerning the remainder of fiscal 2020. Mike?

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [4]

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Thanks, Ed. Good afternoon, everyone. Our fiscal 2020 first quarter operating results were severely impacted by the COVID-19 pandemic and continue to be thus far in the second quarter. Details of our first quarter operating results compared to last year's first quarter were as follows. As a result of all stores being closed to the public from March 18 and through the end of the quarter, total net sales decreased to $77.3 million, a reduction of $53 million or 40.7% from $130.3 million last year. Total net sales from physical stores decreased by 57.5% to $47 million from last year's $110.6 million for the first quarter. Net sales from stores represented 60.8% of total net sales for the quarter compared to 84.9% of total net sales last year. Prior to the shutdown, our stores delivered a positive 1% comp in the month of February, but sales began to quickly decline after the first week of March.

E-commerce net sales increased by 54.2% to $30.3 million from last year's $19.7 million for the first quarter. E-commerce net sales represented 39.2% of total net sales for the quarter compared to 15.1% last year. We ended the first quarter with 239 total stores, including 1 rescue-branded pop-up store, all of which were closed at the time in response to the COVID-19 pandemic compared to 229 total stores last year, including 3 rescue-branded pop-up stores.

Gross profit, including buying, distribution and occupancy expenses, was $1.6 million or 2.1% of net sales compared to gross profit of $35.7 million or 27.4% of net sales last year. This unusual result was primarily due to an estimated inventory valuation reserve of $4.7 million and significant deleverage of buying, distribution and occupancy costs on significantly lower net sales. Before this estimated inventory reserve, our product margins decreased by 160 basis points due to increased markdowns. Buying, distribution and occupancy costs also delevered significantly against lower total sales. Occupancy costs deleveraged by 1,250 basis points despite being $0.5 million below last year's levels. Although we withheld actual payment of April and may rents, expense recognition continues as normal. Distribution expenses deleveraged by 440 basis points, primarily due to an increase in e-comm shipping costs of $0.9 million, which was partially offset by labor savings resulting from the near total shutdown of our stores' distribution center midway through the quarter. Buying costs deleveraged by 70 basis points against lower total net sales despite being $0.1 million below last year's levels.

Total SG&A expenses were $30 million or 38.8% of net sales compared to $35.5 million or 27.3% of net sales last year. Although SG&A was reduced by $5.5 million, these expenses deleveraged against lower total sales by 1,150 basis points. Store payroll was the largest single expense decrease of $4.9 million, resulting from all stores being closed beginning March 18 and our furloughing of a substantial majority of our store employees in late March. Most other expenses were reduced compared to last year, but the decrease in expenses was outpaced by the total sales decrease. The exceptions to this were increased e-comm fulfillment and marketing expenses of $1.3 million due to the significant growth in e-commerce orders and noncash store asset impairment charges of $0.3 million resulting from the COVID-19 shutdown impact on certain of our stores. Our operating loss was $28.4 million or 36.7% of net sales compared to operating income of $0.1 million or 0.1% of net sales last year. This decline in operating results was directly attributable to the impact of the COVID-19 pandemic, resulting in the closure of all of our retail stores on March 18. Other income decreased to $0.4 million from $0.8 million last year, primarily due to having lower total cash and marketable securities compared to last year. Our income tax benefit was $10.6 million or 37.9% of our pretax loss compared to income tax expense of $0.3 million or 30.6% of pretax income last year. This year's income tax rate was higher due to the anticipated benefit from the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates than the current year.

We cannot accurately predict what our effective income tax rate will be going forward as it is dependent upon our operating results and whether additional operating losses may or may not occur that could also be carried back to prior tax years. Net loss was $17.4 million or $0.59 per share compared to net income of $0.7 million or $0.02 per diluted share last year. Weighted average shares for the quarter were 29.7 million versus 29.8 million diluted shares last year.

Turning to our balance sheet. We ended the first quarter with cash and marketable securities totaling $111.1 million including $23.7 million borrowed under our revolving credit facility and approximately $13.3 million of withheld store lease payments. This compares to the total cash and marketable securities of $109.8 million and no debt or withheld store lease payments last year. In February 2020, we paid a special dividend to stockholders for the fourth consecutive year. This year's special dividend totaled approximately $29.7 million in the aggregate or $1 per share. We ended the quarter with inventories per square foot up 10.8%, primarily due to all stores being suddenly closed on March 18 and through the end of the quarter. However, with all of the inventory actions we have taken to date that Ed referenced earlier, we entered fiscal June with inventories per square foot down 10.5% to last year. Total capital expenditures were $3.5 million compared to $3.1 million last year.

Now I'd like to share some details on the performance of our reopened stores so far in the second quarter that Ed referenced earlier. Since reopening them through June 1 compared to the respective comparable prior year periods for each reopened store, customer traffic in the reopened stores has decreased by 34% collectively yet comparable store net sales have increased by 1.2% collectively. The range of comp sales results by store is very wide, ranging from a decrease of 91% to an increase of 160% with 78 stores comping positive and 73 stores comping negative. Again, these numbers I've just shared are only since stores reopened and do not include the negative impact of the period of time stores were closed during the quarter. In the aggregate, including e-commerce and the periods for which stores were temporarily closed due to the COVID-19 pandemic, total comparable store net sales for the second quarter of fiscal 2020 through June 1 and were $28.2 million, a decrease of $13.6 million or 32.6% compared to $41.8 million for the comparable prior year period. Comparable store net sales from physical stores were $8.2 million, a decrease of $27.7 million or 77.1% compared to $35.9 million for the comparable period last year. Net sales from e-commerce were $20 million, an increase of $14 million or 236.8% compared to $5.9 million for the comparable period last year. As of June 1, 2020, our total cash and marketable securities were $113.9 million, including $23.7 million borrowed under our revolving credit facility and approximately $15 million of withheld store lease payments. This compares to total cash and marketable securities of $113.1 million and no debt or withheld store lease payments as of June 3, 2019, which is the comparable date. At this time, we cannot predict with any certainty what our financial results will be for the second quarter as we cannot be sure if these recent reopening results will be indicative of future results or if reopened stores will be able to remain open consistently.

Operator, we'll now go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jeff Van Sinderen from B. Riley.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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My first question really is about what you're seeing in the reopened stores, particularly the differences in performance between mall and off-mall. And then regionally, I'm just wondering, I know you pointed out some areas that were a lot different. But also in terms of the states that are reopening early versus later stage reopening states? Just any more color you can give us there would help.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [3]

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Sure. Jeff, the first set of stores that we opened were primarily in Florida and Texas. And those have been our softest results to date. As we open in other geographic areas, the results start to get better. The results are a little bit better in parts of Texas and Florida. I think part of Florida performance is due to the theme parks being closed. We have a number of stores, for example, in Orlando, which definitely get the tourist traffic. So as we open across the country in different areas, we saw the results start to get a lot better. California, in particular, has been good. And performance off-mall versus mall, off-mall is definitely better. But we've seen wide variances and performance between mall and off-mall in the same geographic area, it really -- there's no identifiable pattern to either one. But overall, I think the results overall have been better than what we initially expected.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Okay, good. And then if we could just turn to e-commerce for a minute, given the strong performance there, can you speak more about the profitability of that business? Like maybe in terms of how you might enhance profitability? I know you mentioned shipping some product from stores that you could get into. But just thinking about profitability as that business scales, it seems to be growing really well, maybe generally, how you're leading into being a digital-first organization?

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [5]

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Sure. Yes, Jeff, it is more profitable than it was at this time last year. As we noted in our prepared remarks, with a number of changes and new introductions that have been brought forth our product margins on e-commerce have been meaningfully better than they were last year. And given the volume of business that's done at this stage, it is more profitable than it was at this time last year. So looking good thus far, and we're hoping we can have that continue. E-comm has been slowing down in its rate of growth. I'd acknowledge as we've reopened stores, even though it's still very, very nice right now. We acknowledged how far up it is so far in the current quarter. But for each of the last 4 weeks, it's been slowing down a little bit in its rate. So as we think ahead, we think that the rate of growth is likely to slow, but we expect it to continue to be quite good.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [6]

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Yes. And just to add to that, even though it slowed down in the last few weeks, we also decreased the amount of promotional activity on the site. It was never drastically promotional, but certainly, it was more promotional a month ago than it has been in the last 4 weeks. But we're still really encouraged by the strength of our numbers on e-comm.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [7]

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Okay. So e-comm may not be up 200% -- may not continue to grow at 260%. Just one more quick one if I could squeeze it in. Anything -- I know it's really hard, it's a tough question, but any thoughts on gross margin for Q2?

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [8]

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We're both shrugging our shoulders.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [9]

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No.

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [10]

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Just too many unknowns, too many variables to stay with any certainty. It depends on how well the store comp results hold up. If we're able to get the remainder of our stores open, how healthy e-comm stays. I mean there's just so many questions and variables in that. That's why we're not providing any forward-looking guidance. There's just too many unknowns at this stage.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [11]

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Yes. I mean one of the -- like many other retailers, one of the situations that we've been faced with in most recently is some of the stores that have reopened that were very strong, a couple of the malls were shut down because of the protests that are going on. So there's tension and things like that, but I'm expecting it to stabilize over the period of next few weeks, and we should be okay.

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Operator [12]

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Our next question is from David Buckley from Bank of America.

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David Loughran Buckley, BofA Merrill Lynch, Research Division - Analyst [13]

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First off, how are you planning for and thinking about buying for back to school this year? You've obviously done a good job reducing your inventory intra-quarter here. But how are you thinking about the back-to-school shopping period this year?

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [14]

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Well, we jumped on the inventory adjustments very early, which is the reason why the inventory came in pretty much in line better than what it could have been. Especially with so much inventory being idle for so long in the closed stores. But I would say that the approach towards inventory management has been very surgical and will continue to be that way until we get a little bit more visibility in -- we don't even know at this point what back-to-school is going to be? I mean -- and I'm sure you're aware, there's a lot of schools still unannounced whether when they're going back to school, some are going to start -- try to stay to their schedule. So we'll be okay in terms of -- we're managing to whatever we know. And I think our approach is kind of -- in terms of inventory is going to continue to be conservative, but well thought out.

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David Loughran Buckley, BofA Merrill Lynch, Research Division - Analyst [15]

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Okay. And then Mike, just on SG&A in the second quarter and second half of the year. Obviously, you're entering the quarter in a much different position than the first quarter started. How should we think about the potential SG&A decline in 2Q and second half?

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [16]

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Well, again, just like the gross margin question. At this stage, there's too many unknowns. Depending on whether -- again, whether we get the rest of our stores open or not, whether stores are able to stay open or not. We don't -- we have been bringing our store teams back as we acknowledged, we've brought back a portion of our corporate office team at this stage, to help calibrate. We made -- mentioned that when we first did furloughs and pay cuts, we were about $1.4 million below normal cash burn for payroll. That is now at about a $600,000 level. Just looking at last week, for example, we were just looking at those numbers yesterday or the day before. So as we brought people back and brought store teams back, that's kind of where we are at the moment, but everything is changing by the day. And even in the day at times, as we plan to open certain stores and something happens and we have to defer it by a day or 2. There's just too many moving parts right now to provide any specific guidance.

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Operator [17]

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Our next question is from Sharon Zackfia from William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [18]

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I guess to -- piggybacking on the last question, I get that there's a lot of uncertainty, but what is your cash burn rate right now kind of on a weekly basis? Just given 2/3 of stores open and just assuming we kind of stop at this point. And then on the 70 stores that haven't opened yet, is there any line of sight from the governors of the states on when they might be able to be opened?

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [19]

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Yes. I'll answer the second part of the question, and Mike can talk about the cash burn. But we're going to have substantially all the stores -- our stores reopened by June 15. There's 22 stores that remain in question in terms of the timing. But the majority of the chain will be open. So by June 15. So there's -- we've had to do a lot of different stages. But certainly, I think we'll be in pretty good shape. Mike can address the cash burn.

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [20]

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Yes. On the cash, the way -- I mean there isn't any one number I can give you because, again, too many variables. What happens in e-comm? What happens in stores? Is it a payroll week or not a payroll week? And all matter of payroll items. So -- but what I -- what we tried to do in our release is we did give a cash update as of June 1, so that you can see from the end of the quarter, which was essentially the beginning of May to the beginning of June, we actually slightly increased cash over the course of the month. So that's a 4-week span of time where we stabilized our cash position. Now some of that certainly has withheld rents in it. We have slowed down our payables intentionally just to try to protect our cash position as best as we can. But with the number of stores that we now have open, we've stabilized our cash position. And certainly, as long as things hold the way they are, we certainly wouldn't expect to have the level of drop off. When you look at our cash position, take out the borrowed cash, take out the withheld rents, you'd see year-over-year that we dropped, as of June 1, about $38 million during this period of time that all of this has been going on. But so long as things can stabilize in stores and e-comm, the way they have, during this last 4-week period, we didn't lose any additional cash. So that's a good sign. We're just hopeful that everything can hold together. We're fearful of the idea that what if there's a second wave of cases and all those things. So we're still thinking very conservatively. We're still managing our business in crisis mode and trying to be very, very thoughtful about every decision that we make.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [21]

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That's really helpful. I think my last question would be, obviously, it's crisis mode. So this isn't something you'll be doing today. But I know you've been very diligent and stringent on your ideas on what's reasonable rent for new stores. And so on the other side of this tunnel, whenever it ends, how do you feel the real estate landscape will look for you? And is there an opportunity later on to be more opportunistic and grow faster than maybe you've been willing to do in the last few years?

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [22]

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Well, I think this whole situation is going to force rents to come down further than what we've seen them come down. And that's not just for us. It's for a lot of people, I think most. And honestly, I think that's the single biggest thing that can help the industry, is for rents to come down. So I think that's a really, really important factor. As far as us, we still feel that putting what's happened recently aside, we still feel that there's decent growth ahead of us in terms of physical stores. But obviously, the landscape has changed pretty rapidly, and you're going to see vacancies go way up in a lot of centers, not just malls. So it's going to be a slow process before we really figure out -- we figure out how many stores we do and the timing of the stores, but I think it's -- it will all play out probably okay. It's -- they're going to take time.

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Operator [23]

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Our next question is from Mitch Kummetz from Pivotal Research.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [24]

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I just want to drill down a little bit more on kind of the performance that you're seeing as you're reopening stores. So maybe just from a category standpoint. Actually, maybe this question goes beyond just the stores. But just in the last couple of months in kind of a COVID environment, can you maybe speak to some of the category of performance that you're experiencing? Other retailers have talked about, with these stay-at-home orders and things like that, that certain categories have trended better, whether it's like loungewear or athletic things.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [25]

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Sure. Well, women's category in general has performed well for us on actually a down inventory. Tops are good. It's not just casual wear. Men's has also been up on also a little bit of a down inventory since the stores reopened. And that's pretty much across the board with tees being the strongest category for us. And footwear has been a little bit slightly down, almost flat during the reopen period. And there's no one particular brand or anything that's caused that because the brands that were strong are still good, like Vans and Nike.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [26]

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Got it. And then on the kind of the store performance as you're reopening. Again, you called out 78 comping positive, 73 down. You've got this huge variability in terms of the comp performance. I'm just wondering again, if there are any sort of common denominators between the stores that are doing well versus the stores that aren't doing well. You kind of called out off-mall, you talked about some -- the issues in Florida with the theme parks, but I'm wondering if there's -- if you're seeing anything, whether it's stores in a more potentially populated metro area versus more partially populated suburban area or something that's more kind of a tourist location or more versus like what people might call it community location? Are you seeing trends across those as you're sort of slicing and dicing your store base into different buckets?

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [27]

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From a merchandise category standpoint, no, we're not seeing any...

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [28]

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No, just in terms of comp performance. Just in terms of kind of the comp performance as you're opening stores.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [29]

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Well, it's just -- I'll give you an example. I mean I mentioned Orlando. Orlando has been extremely soft for us, and it's across the board, all categories, it's traffic. The traffic was down probably more than 40% or 50% in those stores alone. So it's very traffic related. We're expecting that to bounce back where the stores haven't been reopened long enough to really say, okay, it's going to -- we expect it to be back or we're seeing it come back. I think Orlando, again, I'll just use that as an example. I think Disney World reopens on the 11th. And so we'll see the lot of -- some of the surrounding colleges there are closed. So it's really more -- what we're seeing is where the performance has not been good. It's really more geographic and what's surrounding that geographic area, like the theme parks and like more tourist related than not.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [30]

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Okay. And then maybe, Mike, on the inventory, I don't know if you can access the quality of the -- assess the quality of the inventory. Is there any way you can sort of speak to the inventory that you guys are holding? What percent is sort of seasonal warm weather that maybe doesn't have the longest shelf life to it? And sort of how are you managing any excess of seasonal versus -- are you going to carry things over? Or are you just going to liquidate it? And how much pressure might we see on liquidation as in the second quarter versus what you already experienced in the first quarter?

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Michael L. Henry, Tilly's, Inc. - Executive VP, CFO & Corporate Secretary [31]

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Yes. We're not expecting to have to slash and burn anything. We feel reasonably good about our inventory positioning right now. We acknowledge that at the end of the quarter, we were up almost 11%. We finished the most recent month fiscal May, down 10.5%. So as Ed mentioned, we are very aggressive immediately at trying to limit the opportunity for a much bigger problem. Now that 2/3 of our stores are open, that's certainly helping to move through a lot of that seasonal merchandise. So we're hopeful that stores can stay open and that the performance we've seen so far can continue, and we can have something similar to a normal type of approach to Q2 business so long as that can be the case. But certainly not expecting to have to slash and burn. Part of the reserve that we acknowledge taking in inventory was to acknowledge some potential areas where we might expect some additional promotional activities. That was factored in and covered in that reserve because we do have some concern about things like swim and board shorts and more seasonal things like that. But now that we've gotten 2/3 of our stores open and expect to have probably another 3 dozen or so open here in the next 10 days to 2 weeks, we're not expecting anything highly unusual in the inventory area at this time with what we know.

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Operator [32]

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And we have reached the end of the question-and-answer session, and I will now turn the call over to Ed Thomas for closing remarks.

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Edmond S. Thomas, Tilly's, Inc. - President, CEO & Director [33]

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I want to take a moment to express my sincere gratitude to our management -- our corporate staff, both management and the whole team, field management team and all of our store teams who have been working tirelessly to support our company and to get our stores safely reopen. I am so thankful for and proud of all of you for your commitment during this extremely challenging time. Thank you all for joining us on the call today. We hope everyone stays safe and well in the weeks and months to come. Have a good evening.

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Operator [34]

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This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.