Tilly's Inc (TLYS) Q2 2019 Earnings Call Transcript
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Tilly's Inc (NYSE: TLYS)
Q2 2019 Earnings Call
Aug 28, 2019, 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings and welcome to Tilly's Inc. Second Quarter 2019 Earnings Results Conference Call.
[Operator Instructions]
I'd now like to turn the conference over to your host, Gar Jackson with Investor Relations. Please go ahead.
Gar Jackson -- Investor Relations
Good afternoon and welcome to the Tilly's fiscal 2019 second quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company's results and then host the 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 August 28, 2019 and actual results may differ materially from current expectations based on a number of factors affecting Tilly's business.
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 2019 second quarter earnings release, which was 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 one hour and will include a Q&A session after our prepared remarks.
I'll now turn the call over to Ed.
Edmond Thomas -- President and Chief Executive Officer
Thanks, Gar. Good afternoon, everyone and thank you for joining us today. Following a tough start to the second quarter in May, we posted positive comps both in stores and online during each of June and July to finish the quarter with better than expected comps, product margins and earnings per share. The second quarter was our 13th consecutive quarter with flat to positive comps. Footwear, boys, accessories and men's all posted positive comps for the quarter, women's and girls were negative.
As of the back-to-school season our positive momentum has continued and we are most encouraged that our women's business has turned positive and has been one of our better performing departments in recent weeks. Total company comps are up 4.2% through August 26, with both stores and online comping positive.
These results give us optimism for the third quarter and the back half of fiscal 2019, despite going up against some tougher comp comparisons. Turning to real estate, we expect to open four new full-size Tilly's stores. During the third quarter, one of which is already open, and seven more during the fourth quarter prior to thanksgiving, for a total of 13 new store openings for the year.
Our store growth continues to be primarily focused on expanding our presence in existing markets, in which we believe that we can achieve further market penetration. Particularly within the Texas and Chicago markets.
We also plan to open our first permanent RSQ branded store at the Irvine Spectrum here in California in May of 2020. In terms of existing stores, we have addressed approximately 70% of our lease decisions for this year, continuing our efforts to improve our go-forward occupancy cost structure, considering the current and anticipated retail environment.
We have no known store closures for the remainder of the year at this time. Although it is possible that some may still occur, as we finalize our remaining leasing decision. Turning to technology, we launched an enhanced loyalty program during the second quarter that includes an instant redeem feature for customers to take advantage of their rewards faster than before, which has been very well received.
We also expect to launch a buy now, pay later program before the holiday season. We remain committed to investing in customer facing technologies to further strengthen customer engagement and convenience with the goal of driving more sales.
In closing, as I noted earlier, the third quarter is off to a promising start, leaving us optimistic about our prospects for the third quarter and the back half of 2019.
Mike will now provide more details on our second quarter operating performance and introduce our third quarter earnings outlook. Mike?
Mike Henry -- Chief Financial Officer
Thanks, ED. Our fiscal 2019 second quarter operating results compared to last year's second quarter were as follows. Total net sales of $161.7 million increased by $4.3 million or 2.8% from $157.4 million last year. Total comparable store net sales, including e-commerce, were up 0.6% on top of last year's increase of 4.4%.
E-Comm net sales increased 15.7% and represented approximately 14.1% of our total net sales this year compared to an increase of 8.1% and a 12.5% share of our total net sales last year. Comps in physical stores were down 1.5% for the quarter, but were positive in each of June and July after having started the quarter with negative high-single digits in May. Stores represented approximately 85.9% of our total net sales this year, compared to 87.5% of total net sales and a comp increase of 3.8% in stores last year.
We ended the quarter with 229 total stores, including two RSQ-branded pop-up shops compared to 226 total stores last year, which included three RSQ shops. Gross profit, including buying, distribution and occupancy expenses, was $51.7 million or 32% of net sales compared to $50.1 million or 31.8% of net sales last year.
Product margins were flat as a percentage of net sales, which was better than we expected considering our soft start to the quarter. Buying, distribution and occupancy costs leveraged 10 basis points in total. Improved leverage of buying and occupancy costs offset a $0.9 million increase in e-Comm shipping costs associated with the 15.7% e-commerce net sales growth.
Regarding the legal settlement coupons we issued last year, approximately 2.1% have been redeemed life-to-date, resulting in no material impact on our business. All such coupons expire on September 4 next week.
Total SG&A expenses were $39.6 million or 24.5% of net sales compared to $37.6 million or 23.9% of net sales last year. The $2 million increase in SG&A was primarily due to a $1.5 million credit in last year's SG&A, attributable to the favorable resolution of our previously disclosed legal matter. The current year also included higher e-comm marketing and fulfillment expenses of approximately $1 million associated with e-comm net sales growth and higher store payroll costs of approximately $0.9 million arising from minimum wage and annual merit increases. These increases were primarily offset by lower bonus expenses of $1.2 million and lower non-cash charges of $0.5 million. Operating income was $12.1 million or 7.5% of net sales compared to $12.5 million or 7.9% of net sales last year. This slight decline in operating income was primarily attributable to last year's $1.5 million legal matter credit.
Income tax expense was $3.4 million or 26.8% of pre-tax income compared to $3.3 million or 25.3% of pre-tax income last year. Net income was $9.3 million or $0.31 per diluted share compared to $9.7 million or $0.33 per diluted share last year. Last year, net income includes approximately $1.1 million after tax or $0.04 per diluted share relating to the favorable resolution of the previously disclosed legal matter. Weighted average diluted shares for the quarter were $29.7 million consistent with last year.
Turning to our balance sheet. We ended the quarter with cash and marketable securities totaling $124.8 million and no debt compared to $124.2 million and no debt last year. We ended the quarter with inventories per square foot, down 3.6% to last year. Total capital expenditures were $4.8 million compared to $6.7 million last year. We expect total capital expenditures for fiscal 2019 will not exceed $20 million.
Now, turning to our outlook for the third quarter of fiscal 2019. As Ed noted earlier, our total comparable store net sales, including e-commerce, are up 4.2% through August 26. Based on current and historical trends, we expect total net sales to range from approximately $151 million to approximately $156 million based on a comparable store net sales increase of 1% to 4% for the quarter.
We expect operating income to range from approximately $6.5 million to approximately $8.5 million and earnings per diluted share to range from $0.18 to $0.22. This outlook assumes no non-cash store asset impairment charges and effective income tax rate of approximately 27% and weighted average diluted shares of approximately $29.8 million. We expect inventories per square foot to remain consistent with our comp sales performance.
Operator we'll now go to our Q&A session.
Questions and Answers:
Operator
Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dave King with Roth Capital Partners. Please proceed with your question.
Dave King -- Roth Capital Partners -- Analyst
Thanks. Afternoon guys.
Edmond Thomas -- President and Chief Executive Officer
Hi.
Dave King -- Roth Capital Partners -- Analyst
I guess, first off, the operating margins based on a core basis, I think, were up 50 basis points or so on a slightly positive comp. Yet the guidance I think assumes sort of down margins on a stronger comp. Is that conservatism or just what are some of the puts and takes to that outlook?
Edmond Thomas -- President and Chief Executive Officer
You're referring to Q3?
Dave King -- Roth Capital Partners -- Analyst
Yeah, sorry. The guidance for Q3, it looks like you've got down margins if I use the 7.5% -- the midpoint of OP income?
Mike Henry -- Chief Financial Officer
No. I mean, last year's OP income was 4.6% and the range we're suggesting would get you anywhere from slightly below that to not quite 100 basis points better than that. So there might be just something in the individual line items that you need to tweak a bit.
Dave King -- Roth Capital Partners -- Analyst
Okay. I mean, that's fair. There was also I think, last year you had some offering costs related to the secondary offering. I was thinking on a core base. Yeah. So I was thinking on a core basis it looks like.
Mike Henry -- Chief Financial Officer
Yeah. I got it. Yeah. There would be in the GAAP numbers for last year. Yeah. I follow what you're saying. You know, again as we've talked about for I think a whole year now, if you're on the better end of our comp guidance, there would probably be a little over $0.5 million of extra payroll expense because of minimum wage increases. And again, as we've seen for three quarters in a row, with significant e-comm growth and e-Comm fulfillment, e-Comm marketing and shipping costs that go with e-comm that would roll into there. So on the SG&A line in particular, there's probably close to $1 million of added expense year-over-year from that. So those are the primary pieces of expense movement year on top of year that you might not kind of specifically have layered into your model.
Dave King -- Roth Capital Partners -- Analyst
Okay. That helps. And then switching gears. How is the traffic versus conversion, particularly in the -- maybe the June to July timeframe, and then how is that trended into August so far?
Mike Henry -- Chief Financial Officer
Our traffic in total for the quarter was down low-single digits. So for two quarters in a row, now it's been slightly down in Q1, it was down less than 1% in the second quarter, it was down not quite 2%. Conversion was actually up low single digits for the quarter and then on the average sale, it was down slightly, down less than 1%. As you transition into August, all those metrics are in the right direction, in a positive direction. So we've seen positive traffic each week so far in the month of August. All of our markets are positive in the month of August, and all departments are comping positive thus far with a slight exception of accessories being just barely below flat.
Dave King -- Roth Capital Partners -- Analyst
Okay. That's great to hear. One last one for me Ed. Looks like you took down the CapEx guidance maybe a little bit, just high level. How are you thinking about the potential for further capital return, whether that's further special dividends after, you know, some of those over the last three years. Regular dividend, just some high level thoughts would be helpful. Thank you.
Edmond Thomas -- President and Chief Executive Officer
Well, look at that Dave like we always do. We look at it pretty much quarterly with -- at the board, so we'll evaluate that. There's nothing planned right now, but we'll certainly evaluate as we get further into the year. And we'll make the -- we will make what we think is the right decision at the proper time.
Dave King -- Roth Capital Partners -- Analyst
Great. Fantastic. Thanks for taking the questions and good luck for the rest of the year.
Edmond Thomas -- President and Chief Executive Officer
Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Jeff Van Sinderen with B Riley FBR. Please proceed with your question.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Hi, everybody. And let me say congratulations on the strong resurgence and trends.
Edmond Thomas -- President and Chief Executive Officer
Thank you, Jeff.
Jeff Van Sinderen -- B Riley FBR -- Analyst
I guess the first thing I wanted to ask you about is just sort of the overall take that you have on the strong branded cycle that we've been in. Just wondering also about the RSQ and other private label, how that's been trending for you. And then maybe you can talk about thinking behind the RSQ store that you're opening in Irvine.
Edmond Thomas -- President and Chief Executive Officer
Okay, so first of all, the brand performance continues to be very strong for us. I wouldn't say there's any major changes in brand. There is a couple of brands that have emerged as being strong -- stronger that we didn't have last year, didn't have a major presence like Champion. That's probably the most significant one out there. And some of our top brands are our own Brands, RSQ being our best brand. It continues to perform very, very well. And quite frankly, I think, our results would have been a little bit better had we had more inventory in women's RSQ, going to back-to-school. So. we're very excited about the prospect of building that brand. And then as far as the stand-alone store, it's still in development stages in terms of what that merchandise mix will finally be. But, we have somebody dedicated to it and more to come on that as we get further in the year. It's still very early stage of development.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Okay, great. And then I think you launched the enhanced mobile app in Q2, just wondering response to that. I think, you mentioned a couple of things in your prepared comments on loyalty. Are you seeing that be a driver for back to school and how do you see that impacting your business, remainder of second half?
Edmond Thomas -- President and Chief Executive Officer
Okay. We haven't really launched the new mobile app, the enhanced one. We're still working on that. But what we did do is, we launched an enhanced feature, which is instant redeem of rewards. And that has been really, really well received by our loyalty customer base. So, we're excited about that and what we're going to continue to invest in anything that's omni-channel related or mobile through the balance of this year and probably well into next year, too.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Okay. And with the instant rewards, that means they don't have to -- they can actually use the rewards at the register for another purchase, an incremental purchase at the same time, or how does that work?
Mike Henry -- Chief Financial Officer
They can do it on that very transaction as they're standing there. The associate might tell them, oh, you have a dollar, do you want to use it right now? And they can use it right down on that very transaction.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Okay. Terrific. And then you mentioned the buy now, I think you said buy now, pay later program for holidays. I'm just wondering how that's going to work?
Edmond Thomas -- President and Chief Executive Officer
It's after pay that we're going to go with and that many retailers have adapt to that. So it's after pay. You know, we're working on trying to get that up for a holiday, but it's where we're really excited about the prospect of that.
Mike Henry -- Chief Financial Officer
It's kind of like the modern day layaway. Basically, a customer pays for 25% of the purchase up front and then they make an additional 25% payment every other week. And the metrics behind it indicate that it really helps average order value increase significantly. Something psychologically about that buy now, pay later seems to transcend into extra unit purchases with that particular tool.
So looking-forward to getting it implemented and see what it does for us.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Okay, great. And then I just have one final one, if I could squeeze it in. Just looking toward next year, if we were to assume I know it's early, but if we were to assume modestly positive comps, does it seem feasible for you to leverage? And do you think that the high-single digit operating margin target longer-term is still intact.
Mike Henry -- Chief Financial Officer
Yeah, I mean, we still believe that that's the goal -- it's what we've been talking about for the last three, four years since we've been here, is that we've consistently believe that we can get the business back into that level of performance. It does require us to continue to drive positive comps, both from stores as well as online.
You know, we will have another year of minimum wage increase here in California. Another dollar will go into effect on on January 1. So there are some additional cost pressures that'll come into play. You know, no one's asked about tariffs yet, but obviously those are out there. And whether they actually happen and when seems to change by the week. But, you know, we haven't really taken a hard look at next year's model yet.
Edmond Thomas -- President and Chief Executive Officer
But I think it's very achievable, Jeff, so.
Mike Henry -- Chief Financial Officer
Yeah.
Jeff Van Sinderen -- B Riley FBR -- Analyst
Okay, great. Thanks for taking my questions and continued success.
Mike Henry -- Chief Financial Officer
Thank you.
Operator
[Operator Instructions]
Edmond Thomas -- President and Chief Executive Officer
I guess if there are no questions, we'll just wrap it up.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Ed Thomas, CEO for closing remarks.
Edmond Thomas -- President and Chief Executive Officer
Thanks for joining us today. We look forward to discussing our third quarter results with you in early December. Have a good evening, everyone. Thank you.
Operator
[Operator Closing Remarks]
Duration: 22 minutes
Call participants:
Gar Jackson -- Investor Relations
Edmond Thomas -- President and Chief Executive Officer
Mike Henry -- Chief Financial Officer
Dave King -- Roth Capital Partners -- Analyst
Jeff Van Sinderen -- B Riley FBR -- Analyst
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