Tilly’s, Inc. (NYSE:TLYS) Q4 2023 Earnings Call Transcript
Tilly's, Inc. (NYSE:TLYS) Q4 2023 Earnings Call Transcript March 14, 2024
Tilly's, Inc. misses on earnings expectations. Reported EPS is $-0.68761 EPS, expectations were $-0.22. TLYS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Tilly's Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Gar Jackson. Please go ahead, sir.
Gar Jackson: Good afternoon, and welcome to the Tilly's fiscal 2023 fourth quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the Company's business and operating results. Then he and Hezy Shaked, Executive Chairman and Interim CEO and President, will 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, March 14, 2024, and actual results may differ materially from current expectations based on various 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 these forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal '23 fourth 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. This call may also contain certain references to certain non-GAAP measures. Reconciliations of those measures to their most recent directly comparable corresponding GAAP measure can be found in our earnings release on our website. Today's call will be limited to one hour, and I will include a Q&A session after our prepared remarks.
Now I'll turn the call over to Mike.
Michael Henry: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. It has been a tough couple of years since our record earnings in fiscal 2021 coming out of the pandemic. Our business has been challenged, while our young customer demographic has faced persistent inflationary pressures, record levels of credit card debt and a shift in consumer preferences for experiences over goods following the pandemic. We believe that these factors have had a significant impact on our business, and we are not alone in that within our industry. Yet there are clothing and lifestyle brand retailers who have performed relatively well over the last two years. We are challenging ourselves to improve despite the headwinds we are facing.
We are revisiting everything about our business, looking for and evaluating any opportunity for potential improvement. We have work to do to get our business back on track in terms of regaining ground on sales per square foot productivity in stores and generating stronger product margins. We certainly see opportunities for improvement, and we are actively pursuing those opportunities. First and foremost, we are focused on driving sales increases at healthy product margins. This starts with providing compelling merchandise. Our merchant teams have put in a lot of work in recent months to adjust our assortments lean into strong brand relationships and seek new relationships. We expect to be introducing several new brands throughout the year, including during the first quarter, producing new brand collaborations and continuing to leverage the strength of our own proprietary brands, particularly Rescue, which is our number one selling brand overall by far.
While we are off to a slow start to the first quarter, following a couple of atmospheric river storms that hit our home state of California, particularly hard, in the first 2 weeks of February, the year-over-year comp sales trend of our business has been improving moderately as the weeks have passed. There are pockets of products within each department that are working well for us. Our proprietary brands are performing meaningfully better overall than our third-party brands thus far in the first quarter, but we feel good about the content and quality of our spring assortment overall. We also believe better days are ahead as we transition into warmer weather, spring breaks and Easter. As a significant portion of our assortment is focused in warm weather categories such as shorts, swim and sandals to name just a few.
Beyond product, we are refocusing our marketing efforts to tell better product stories that are aligned with our primary merchandising priorities. We are working on a new brand campaign that we expect to launch in advance of the back-to-school season that is aimed at building connectivity with our customers in new and different ways. For those of you who follow us closely, you may have noticed some recent changes in our approach to our social media channels and product placements in certain media outlets where we have not been present before. This is just the start of our efforts to reinvigorate our approach to marketing and meet our customers where they are. We'll bring back certain in-store events that were successful for us in pre-pandemic years to help drive store traffic and create direct engagement with our customers.
We have other ideas in the planning phase that we are not yet prepared to discuss, but everything we are doing is aimed at opportunities to drive emotional connections between our customers and Tilly's. Turning to store real estate. We still intend on evaluating opportunities to grow our store count over time. We are purposefully taking a measured approach to new store openings in the short term, while we work toward improving our business performance, but we continue to believe that there are ample opportunities for strategic growth in our business over time. In fiscal 2024, we currently expect to open five new stores within existing markets, with two stores scheduled to open in the first quarter and one each during the remaining quarters.
For existing stores, we have nearly 100 lease decisions to make this year. We intend to maintain strict discipline in making decisions that we believe will generate improved profitability over time. If we are unable to negotiate what we believe to be acceptable lease costs, we will close stores as necessary. At this time, we are aware of five planned store closures that we expect will take place during fiscal 2024. Three of those will occur during the first quarter and more possible as we work through our lease decisions. We do not expect to close a large number of stores at this time, but we will be very disciplined and conscientious in our decision-making on store renewals and kick out clauses in light of the current environment and our specific performance in each location.
Beyond new stores, our primary capital expenditure priorities for fiscal 2024 include completing the upgrade of our warehouse management systems and investing in new markdown optimization and merchandise allocation tools to improve the efficiency of our inventory management, and ongoing IT infrastructure and cybersecurity investments to protect our business interest. Altogether, we currently expect our total capital expenditures for fiscal 2024 not to exceed $15 million but the spend we do have planned will be very purposely aimed at improving our performance over time. I will now turn to our fiscal 2023 fourth quarter operating results, which were shared in the press release earlier this afternoon. Overall, our results exceeded the updated outlook ranges that we provided in early January in connection with the Annual ICR conference.
As a reminder, for comparison purposes, this year's fourth quarter included an extra week, making it a 14-week quarter compared to last year's 13-week quarter. Specifics of our fiscal 2023 fourth quarter operating results compared to last year's fourth quarter were as follows: Total net sales were $173 million, a decrease of 4.1%. The extra week in this year's fourth quarter accounted for $5.7 million in total net sales. Total comparable net sales, including both physical stores and e-commerce, decreased by 8.8% for the comparable 14-week period. Total net sales from physical stores decreased by 7% and represented 72.6% of our total net sales compared to 74.9% of total net sales last year. On a comparable 14-week basis, net sales from physical stores decreased by 11.8%.
E-commerce net sales increased by 4.7%, largely due to the extra week and represented 27.4% of total net sales compared to 25.1% of total net sales last year. On a comparable 14-week basis, e-comm net sales increased by 0.3%. We ended the fiscal year with 248 total stores, a net decrease of one store compared to the end of fiscal 2022. Gross margin, including buying, distribution and occupancy expenses, was 27% of net sales compared to 29% of net sales last year. Product margins declined by 140 basis points compared to last year because of increased markdowns needed to manage inventory levels. Buying, distribution and occupancy costs deleveraged by 70 basis points collectively despite being $0.5 million below last year due to carrying these costs against lower net sales.
Total SG&A expenses were $55.2 million or 31.9% of net sales compared to $53.8 million or 29.8% of net sales last year. The increase in SG&A was primarily due to the extra week in this year's fourth quarter, which added an estimated $2.6 million to SG&A. Operating loss was $8.5 million or 4.9% of net sales compared to $1.4 million or 0.8% of net sales last year as a result of the combination of factors just noted. As a result of recording a noncash deferred tax asset valuation allowance charge of $15.4 million, income tax expense was $13.6 million despite our pretax loss position compared to income tax benefit of $0.2 million or 61.7% of pretax loss last year. On a non-GAAP basis, excluding the impact of the valuation allowance, income tax benefit was $1.8 million or 25.8% of pretax loss as would more naturally be expected.
Net loss, including the impact of the valuation allowance was $20.6 million or $0.69 per share compared to $0.1 million or breakeven on a per share basis last year. On a non-GAAP basis, excluding the impact of the valuation allowance, our net loss was better than we anticipated based on our revised outlook issued in connection with the Annual ICR Conference in early January at $5.2 million or $0.17 per share. Turning to our balance sheet. We ended the fiscal year with total cash and marketable securities of $95 million and no debt outstanding compared to $113 million and no debt last year. Total inventories at cost were up 2.6% per square foot at the end of fiscal 2023 ended February 3, 2024 compared to the end of fiscal 2022 ended January 28, 2023.
On a comparable date basis, total inventories at February 3, 2024, were down 9.6% per square foot versus February 4, 2023 due to timing of product deliveries. Total capital expenditures for fiscal 2023 were $14 million compared to $15.1 million last year. Turning to the first quarter of fiscal 2024. Total comparable net sales through March 12 decreased by 13.4% relative to the comparable period of last year, although with some trend improvement as the weeks have progressed, as I noted earlier, and with healthier product margins than last year. Based on current and historical trends, we currently estimate that our total net sales for the first quarter will be in the range of approximately $109 million to $119 million translating to a comparable store net sales decrease in the range of approximately 14% to 7%, respectively, compared to last year.
We expect our SG&A to be in the range of approximately $42 million to $43 million. Our pretax loss to be in the range of $17 million to $22 million. Our estimated loss per share is expected to be in the range of $0.42 to $0.54 for the first quarter with an estimated income tax rate of 27% and total shares outstanding of approximately $29.9 million. We currently expect to have 247 total stores at the end of the first quarter compared to 248 at the end of last year's first quarter. In closing, we've endured a lot in recent years. We recognize that we have work to do to improve our business, starting with driving sales and generating improved product margins, which we expect will take time in the current environment. That said, we have a highly dedicated hard-working team that is aiming to get us back on track.
We look forward to sharing our progress with you as we go through fiscal 2024 and beyond. Operator, we'll now go to our Q&A session.
See also 20 US Metros with the Highest Median List Prices and 20 Most Popular Religions in the World.
To continue reading the Q&A session, please click here.
