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Tilly's, Inc. Announces Fiscal 2019 Third Quarter Results

Comp Store Net Sales Increase 3.1%; Earnings per Share of $0.21 vs. $0.18 Last Year

Introduces Fourth Quarter Outlook

Tilly’s, Inc. (NYSE: TLYS, the "Company") today announced financial results for the third quarter and year-to-date period ended November 2, 2019.

"Tillys continued its positive momentum with its 14th consecutive quarter of flat to positive comparable store net sales during the third quarter, including positive comps from both stores and e-commerce, all merchandising departments, and each month of the quarter," commented Ed Thomas, President and Chief Executive Officer. "Based on our results during Thanksgiving weekend through Cyber Monday, we believe we are well positioned to continue our momentum during the Holiday season."

Third Quarter Results Overview

The following comparisons refer to operating results for the third quarter of fiscal 2019 versus the third quarter of fiscal 2018 ended November 3, 2018:

  • Total net sales were $154.8 million, an increase of $8.0 million or 5.4%, compared to $146.8 million last year. The Company ended the quarter with 232 total stores, including one RSQ-branded pop-up store, compared to 227 total stores, including four RSQ-branded pop-up stores, last year.
  • Comparable store net sales, which includes e-commerce net sales, increased 3.1% compared to last year's third quarter increase of 4.3%. Comparable store net sales in physical stores increased 2.4% and represented approximately 85.3% of total net sales, compared to an increase of 1.3% and an 85.5% share of total net sales last year. E-commerce net sales increased 7.4% and represented approximately 14.7% of total net sales this year, compared to an increase of 26.7% and a 14.5% share of total net sales last year.
  • Gross profit was $47.2 million, an increase of $3.5 million or 8.1%, compared to $43.7 million last year. Gross margin, or gross profit as a percentage of net sales, increased to 30.5% from 29.7% last year. Product margins increased 80 basis points as a percentage of net sales. Buying, distribution and occupancy costs deleveraged by less than 10 basis points, primarily due to severance and other transition expenses of approximately $0.7 million related to our change in merchandising leadership during the third quarter, largely offset by improved leverage of distribution costs.
  • Selling, general and administrative expenses ("SG&A") were $39.5 million, or 25.5% of net sales, compared to $36.9 million, or 25.1% of net sales, last year. The $2.5 million increase in SG&A was primarily due to higher marketing and fulfillment expenses of approximately $1.0 million largely as a result of e-commerce net sales growth, an asset write-off charge of $0.5 million relating to mobile app development, higher store payroll expenses of approximately $0.5 million resulting from minimum wage and store count growth, and higher temporary labor expenses of approximately $0.5 million. Last year's SG&A also includes approximately $0.7 million of expenses associated with our secondary offering completed in early September 2018.
  • Operating income was $7.7 million, or 5.0% of net sales, compared to $6.7 million, or 4.6% of net sales, last year. The $1.0 million increase in operating income was primarily driven by net sales growth more than offsetting the expense increases noted above. On a non-GAAP basis, excluding the severance and related transition expenses noted above from this year and the secondary offering costs noted above from last year, non-GAAP operating income was $8.4 million, or 5.4% of net sales, compared to $7.5 million, or 5.1% of net sales, last year.
  • Income tax expense was $2.2 million, or 25.9% of pre-tax income, compared to $2.0 million, or 26.9% of pre-tax income, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the secondary offering costs noted above from last year, non-GAAP income tax expense was $2.4 million, or 25.9% of non-GAAP pre-tax income, compared to $2.0 million, or 24.8% of non-GAAP pre-tax income, last year.
  • Net income was $6.4 million, or $0.21 per diluted share, compared to $5.4 million, or $0.18 per diluted share, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the secondary offering costs noted above from last year, non-GAAP net income was $6.9 million, or $0.23 per diluted share, compared to $6.0 million, or $0.20 per diluted share, last year.

Year-to-Date Results Overview

The following comparisons refer to operating results for the thirty-nine weeks of fiscal 2019 versus the thirty-nine weeks of fiscal 2018 ended November 3, 2018:

  • Total net sales were $446.8 million, an increase of $19.0 million or 4.4%, compared to $427.9 million last year.
  • Comparable store net sales, which includes e-commerce net sales, increased 2.0% compared to last year's increase of 3.1%. E-commerce net sales increased 16.4% and represented approximately 14.6% of total net sales compared to an increase of 9.2% and a 13.1% share of total net sales last year. Comparable store net sales in physical stores decreased 0.2% and represented approximately 85.4% of total net sales compared to an increase of 2.2% and a 86.9% share of last year's total net sales.
  • Gross profit was $134.6 million, an increase of $5.8 million or 4.5%, compared to $128.7 million last year. Gross margin was 30.1% in both years. Product margins improved by 10 basis points as a percentage of net sales. Buying, distribution and occupancy costs as a whole deleveraged by 10 basis points, primarily due to increased e-commerce shipping costs.
  • SG&A was $114.6 million, or 25.7% of net sales, compared to $108.2 million, or 25.3% of net sales, last year. The $6.4 million increase in SG&A was primarily due to higher marketing and fulfillment expenses of approximately $2.8 million largely associated with e-commerce net sales growth, higher store payroll expenses of approximately $2.3 million resulting from minimum wage and store count growth, a $1.5 million credit in last year's SG&A attributable to the favorable resolution of a legal matter, and increased temporary labor expenses of approximately $1.2 million in the current year. These increases were partially offset by a $1.2 million reduction in bonus expenses. Last year's SG&A also includes secondary offering expenses of approximately $0.7 million.
  • Operating income was $20.0 million, or 4.5% of net sales, compared to $20.5 million, or 4.8% of net sales, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the legal credit and secondary offering costs each noted above from last year, non-GAAP operating income was $20.6 million, or 4.6% of net sales, compared to $19.8 million, or 4.6% of net sales, last year.
  • Income tax expense was $5.9 million, or 26.6% of pre-tax income, compared to $5.7 million, or 26.1% of pre-tax income, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the legal credit and secondary offering costs each noted above from last year, non-GAAP income tax expense was $6.1 million, or 26.6% of non-GAAP pre-tax income, compared to $5.4 million, or 25.3% of non-GAAP pre-tax income, last year.
  • Net income was $16.3 million, or $0.55 per diluted share, in both years. On a non-GAAP basis, excluding the after-tax impact of the severance and related transition costs noted above from this year and the net benefit of the legal matter and secondary offering costs each noted above from last year, non-GAAP net income was $16.8 million, or $0.57 per diluted share, compared to $15.9 million, or $0.53 per diluted share, last year.

Balance Sheet and Liquidity

As of November 2, 2019, the Company had $130.1 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $120.5 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of November 3, 2018.

Non-GAAP Financial Measures

In addition to reporting financial measures in accordance with GAAP as provided above, 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 diluted income per 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. Specifically, the non-GAAP financial measures included in the tables provided herein exclude the impact of the merchandising transition costs from this year's third quarter, the secondary offering expenses from last year's third quarter, and the legal matter credit from last year's year-to-date 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.

Fiscal 2019 Fourth Quarter Outlook

Despite a slow start to the fourth quarter due to the later Thanksgiving this year compared to last year, our results during Thanksgiving weekend through Cyber Monday give us optimism about our opportunity to deliver positive comps for the fourth quarter as a whole. Based on current and historical trends, particularly with respect to years with a later Thanksgiving and shorter time frame to Christmas, the Company expects its fourth quarter total net sales to range from approximately $179 million to approximately $184 million based on an anticipated comparable store net sales increase of 2% to 5% for the quarter as a whole. The Company expects its fourth quarter operating income to range from approximately $11.0 million to approximately $12.5 million, and earnings per diluted share to range from $0.29 to $0.32. This outlook assumes no asset impairment charges, an anticipated effective tax rate of approximately 27%, and weighted average shares of approximately 29.9 million.

Conference Call Information

A conference call to discuss these financial results is scheduled for today, December 4, 2019, at 4:30 p.m. ET (1:30 p.m. PT). Investors and analysts interested in participating in the call are invited to dial (877) 407-4018 (domestic) or (201) 689-8471 (international) at 4:25 p.m. ET (1:25 p.m. PT). The conference call will also be available to interested parties through a live webcast at www.tillys.com. Please visit the website and select the "Investor Relations" link at least 15 minutes prior to the start of the call to register and download any necessary software.

A telephone replay of the call will be available until December 18, 2019, by dialing (844) 512-2921 (domestic) or (412) 317-6671 (international) and entering the conference identification number: 13696226. Please note participants must enter the conference identification number in order to access the replay.

About Tillys

Tillys is a leading specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and currently operates 239 total stores, including one RSQ pop-up store, 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 sales, future operating income, future net income, future earnings per share, future gross, operating or product margins, anticipated tax rate, future inventory levels, and market share and our business and strategy, including but not limited to expected store openings and closings, expansion of brands and exclusive relationships, development and growth of our e-commerce platform and business, promotional strategy, and any other statements about our future expectations, plans, intentions, beliefs or prospects expressed by management are forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs, but they involve a number of risks and uncertainties that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including, but not limited to, our ability to respond to changing customer preferences and trends, attract customer traffic at our stores and online, execute our growth and long-term strategies, expand into new markets, grow our e-commerce business, effectively manage our inventory and costs, effectively compete with other retailers, enhance awareness of our brand and brand image, general consumer spending patterns and levels, the effect of weather, and other factors that are detailed in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC"), including those detailed in the section titled "Risk Factors" and in our other filings with the SEC, which are available from the SEC’s website at www.sec.gov and from our website at www.tillys.com under the heading "Investor Relations". Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. This release should be read in conjunction with our financial statements and notes thereto contained in our Form 10-K.

Tilly’s, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(unaudited)

 

 

November 2,
2019

 

February 2,
2019

 

November 3,
2018

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

 

67,596

 

 

$

 

68,160

 

 

$

 

24,751

 

Marketable securities

 

62,476

 

 

 

75,919

 

 

 

95,766

 

Receivables

 

9,060

 

 

 

6,082

 

 

 

7,633

 

Merchandise inventories

 

70,337

 

 

 

55,809

 

 

 

71,488

 

Prepaid expenses and other current assets

 

6,499

 

 

 

11,171

 

 

 

10,707

 

Total current assets

 

215,968

 

 

 

217,141

 

 

 

210,345

 

Operating lease assets

 

255,776

 

 

 

 

 

Property and equipment, net

 

70,568

 

 

 

73,842

 

 

 

78,679

 

Other assets

 

2,521

 

 

 

2,185

 

 

 

3,667

 

Total assets

$

 

544,833

 

 

$

 

293,168

 

 

$

 

292,691

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

 

37,461

 

 

$

 

24,207

 

 

$

 

34,352

 

Accrued expenses

 

19,482

 

 

 

18,756

 

 

 

19,895

 

Deferred revenue

 

8,521

 

 

 

10,373

 

 

 

7,172

 

Accrued compensation and benefits

 

7,487

 

 

 

8,930

 

 

 

8,690

 

Dividends payable

 

 

 

29,453

 

 

 

Current portion of operating lease liabilities

 

54,512

 

 

 

 

 

Current portion of deferred rent

 

 

 

5,540

 

 

 

5,466

 

Total current liabilities

 

127,463

 

 

 

97,259

 

 

 

75,575

 

Noncurrent operating lease liabilities

 

234,885

 

 

 

 

 

Noncurrent deferred rent

 

 

 

30,825

 

 

 

31,624

 

Other

 

942

 

 

 

1,757

 

 

 

1,997

 

Total liabilities

 

363,290

 

 

 

129,841

 

 

 

109,196

 

Stockholders’ equity:

 

 

 

 

 

Common stock (Class A)

 

22

 

 

 

21

 

 

 

21

 

Common stock (Class B)

 

8

 

 

 

8

 

 

 

8

 

Preferred stock

 

 

 

 

 

Additional paid-in capital

 

151,711

 

 

 

149,737

 

 

 

149,141

 

Retained earnings

 

29,684

 

 

 

13,335

 

 

 

34,111

 

Accumulated other comprehensive income

 

118

 

 

 

226

 

 

 

214

 

Total stockholders’ equity

 

181,543

 

 

 

163,327

 

 

 

183,495

 

Total liabilities and stockholders’ equity

$

 

544,833

 

 

$

 

293,168

 

 

$

 

292,691

 

 

Tilly’s, Inc.

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

November 2,
2019

 

November 3,
2018

 

November 2,
2019

 

November 3,
2018

Net sales

$

 

154,780

 

 

$

 

146,826

 

 

$

 

446,821

 

 

$

 

427,866

 

Cost of goods sold (includes buying, distribution, and occupancy costs)

 

107,609

 

 

 

103,170

 

 

 

312,247

 

 

 

299,127

 

Gross profit

 

47,171

 

 

 

43,656

 

 

 

134,574

 

 

 

128,739

 

Selling, general and administrative expenses

 

39,467

 

 

 

36,919

 

 

 

114,614

 

 

 

108,193

 

Operating income

 

7,704

 

 

 

6,737

 

 

 

19,960

 

 

 

20,546

 

Other income, net

 

911

 

 

 

585

 

 

 

2,312

 

 

 

1,457

 

Income before income taxes

 

8,615

 

 

 

7,322

 

 

 

22,272

 

 

 

22,003

 

Income tax expense

 

2,227

 

 

 

1,967

 

 

 

5,923

 

 

 

5,737

 

Net income

$

 

6,388

 

 

$

 

5,355

 

 

$

 

16,349

 

 

$

 

16,266

 

Basic income per share of Class A and Class B common stock

$

 

0.22

 

 

$

 

0.18

 

 

$

 

0.55

 

 

$

 

0.56

 

Diluted income per share of Class A and Class B common stock

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.55

 

 

$

 

0.55

 

Weighted average basic shares outstanding

 

29,529

 

 

 

29,373

 

 

 

29,501

 

 

 

29,221

 

Weighted average diluted shares outstanding

 

29,759

 

 

 

30,075

 

 

 

29,745

 

 

 

29,746

 

 

Tilly’s, Inc.

Supplemental Financial Information

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

(In thousands, except per share data)

(unaudited)

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

November 2,
2019

 

November 3,
2018

 

November 2,
2019

 

November 3,
2018

Gross profit

$

 

47,171

 

 

$

 

43,656

 

 

$

 

134,574

 

 

$

 

128,739

 

Severance and transition costs

 

654

 

 

 

 

 

654

 

 

 

Non-GAAP gross profit

$

 

47,825

 

 

$

 

43,656

 

 

$

 

135,228

 

 

$

 

128,739

 

Selling, general and administrative, as reported

$

 

39,467

 

 

$

 

36,919

 

 

$

 

114,614

 

 

$

 

108,193

 

Legal settlement

 

 

 

 

 

 

 

1,458

 

Secondary offering costs

 

 

 

(714

)

 

 

 

 

(714

)

Non-GAAP selling, general and administrative

$

 

39,467

 

 

$

 

36,205

 

 

$

 

114,614

 

 

$

 

108,937

 

Operating income, as reported

$

 

7,704

 

 

$

 

6,737

 

 

$

 

19,960

 

 

$

 

20,546

 

Severance and transition costs

 

654

 

 

 

 

 

654

 

 

 

Legal settlement

 

 

 

 

 

 

 

(1,458

)

Secondary offering costs

 

 

 

714

 

 

 

 

 

714

 

Non-GAAP operating income

$

 

8,358

 

 

$

 

7,451

 

 

$

 

20,614

 

 

$

 

19,802

 

Income tax expense, as reported

$

 

2,227

 

 

$

 

1,967

 

 

$

 

5,923

 

 

$

 

5,737

 

Income tax effect of severance and transition costs (1)

 

171

 

 

 

 

 

171

 

 

 

Income tax effect of legal settlement (1)

 

 

 

 

 

 

 

(386

)

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

$

 

2,398

 

 

$

 

1,991

 

 

$

 

6,094

 

 

$

 

5,375

 

Net income, as reported

$

 

6,388

 

 

$

 

5,355

 

 

$

 

16,349

 

 

$

 

16,266

 

Severance and transition costs

 

654

 

 

 

 

 

654

 

 

 

Legal settlement

 

 

 

 

 

 

 

(1,458

)

Secondary offering costs

 

 

 

714

 

 

 

 

 

714

 

Less: Income tax effects (1)

 

(171

)

 

 

(24

)

 

 

(171

)

 

 

362

 

Non-GAAP net income

$

 

6,871

 

 

$

 

6,045

 

 

$

 

16,832

 

 

$

 

15,884

 

Diluted income per share, as reported

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.55

 

 

$

 

0.55

 

Severance and transition costs, net of taxes (1)

 

0.02

 

 

 

 

 

0.02

 

 

 

Legal settlement, net of taxes (1)

 

 

 

 

 

 

 

(0.04

)

Secondary offering costs, net of taxes (1)

 

 

 

0.02

 

 

 

 

 

0.02

 

Non-GAAP diluted income per share

$

 

0.23

 

 

$

 

0.20

 

 

$

 

0.57

 

 

$

 

0.53

 

Weighted average basic shares outstanding

 

29,529

 

 

 

29,373

 

 

 

29,501

 

 

 

29,221

 

Weighted average diluted shares outstanding

 

29,759

 

 

 

30,075

 

 

 

29,745

 

 

 

29,746

 

(1) For the thirteen and thirty-nine weeks ended November 2, 2019, the effective tax rate applied to the severance and transition costs was 26.2%. For the thirteen and thirty-nine weeks ended November 3, 2018, the effective tax rate applied to the $0.7 million of secondary offering costs was 26.5%. Additionally, last year's income tax expense includes approximately $0.2 million due to the non-deductibility of a portion of the secondary offering costs.

 

Tilly’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

Thirty-Nine Weeks Ended

 

November 2,
2019

 

November 3,
2018

Cash flows from operating activities

 

 

 

Net income

$

 

16,349

 

 

$

 

16,266

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation and amortization

 

15,330

 

 

 

16,966

 

Stock-based compensation expense

 

1,648

 

 

 

1,662

 

Impairment of assets

 

 

 

786

 

Loss on disposal of assets

 

584

 

 

 

11

 

Gain on sales and maturities of marketable securities

 

(1,391

)

 

 

(983

)

Deferred income taxes

 

(470

)

 

 

(419

)

Changes in operating assets and liabilities:

 

 

 

Receivables

 

1,716

 

 

 

(3,281

)

Merchandise inventories

 

(14,528

)

 

 

(18,462

)

Prepaid expenses and other assets

 

(1,045

)

 

 

(1,290

)

Accounts payable

 

12,901

 

 

 

12,859

 

Accrued expenses

 

(1,740

)

 

 

(6,403

)

Accrued compensation and benefits

 

(1,443

)

 

 

2,571

 

Operating lease liabilities and deferred rent

 

(1,555

)

 

 

530

 

Deferred revenue

 

(1,852

)

 

 

(1,534

)

Net cash provided by operating activities

 

24,504

 

 

 

19,279

 

Cash flows from investing activities

 

 

 

Purchase of property and equipment

 

(10,636

)

 

 

(10,394

)

Purchases of marketable securities

 

(96,810

)

 

 

(116,442

)

Proceeds from marketable securities

 

111,504

 

 

 

104,678

 

Net cash provided by (used in) investing activities

 

4,058

 

 

 

(22,158

)

Cash flows from financing activities

 

 

 

Dividends paid

 

(29,453

)

 

 

(29,067

)

Proceeds from exercise of stock options

 

412

 

 

 

3,606

 

Taxes paid in lieu of shares issued for stock-based compensation

 

(85

)

 

 

(111

)

Net cash used in financing activities

 

(29,126

)

 

 

(25,572

)

Change in cash and cash equivalents

 

(564

)

 

 

(28,451

)

Cash and cash equivalents, beginning of period

 

68,160

 

 

 

53,202

 

Cash and cash equivalents, end of period

$

 

67,596

 

 

$

 

24,751

 

 

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)

2018 Q4

227

 

3

 

1

 

229

 

1,703

2019 Q1

229

 

1

 

1

 

229

 

1,708

2019 Q2

229

 

1

 

1

 

229

 

1,710

2019 Q3

229

 

4

 

1

 

232

 

1,727

 

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