Boosted by its strongest in-store traffic seen in several years, Tilly’s Inc. achieved its fifth consecutive quarter of improved year-over-year operating results. Earnings benefited from comp sales growth, gross margin increase and SG&A reductions.

“We believe our merchandising, marketing and operating initiatives are gaining traction in driving these improved results despite a very difficult brick-and-mortar retail environment,” said Ed Thomas, Tilly’s CEO and president, on a conference call with analysts. “Strength in our men’s business in particular, along with positive comps in the women’s, footwear and boys, led to our positive comp for the quarter. Our early back-to-school results are encouraging and we believe that we are well-positioned to continue the operating momentum we have been building over recent quarters.”

In the quarter ended July 29, the action-sports themed retailer lost $596,000, or 11 cents a share, after a loss provision of approximately $6.2 million to settle a putative class action lawsuit alleging violations of the Telephone Consumer Protection Act of 1991. The retailer has denied all of the claims alleged in the case.

On a non-GAPP basis excluding the legal provision, net income was $3.1 million, or 11 cents per share, up 121 percent from $1.4 million, or 5 cents, a year ago. The company had guided earnings to come in the range of 3 cents to 7 cents.

Total net sales inched up 1.8 percent to $138.8 million. Comparable store sales, which includes e-commerce sales, increased 2.1 percent on top of a 0.9 percent gain in the year-ago quarter. Tilly’s had expected its second quarter comparable store sales to be in the range of flat to up low single-digits. E-com sales increased 3.9 percent and represented 12.1 percent of total sales versus 11.9 percent a year ago.

Gross margins improved 100 basis points to 29.5 percent. Product margins improved 60 basis points, which was considerably better than expected due to reduced markdowns. Leveraging buying, distribution and occupancy cost added 40 basis points on its positive sales comp.

On a GAAP basis, SG&A expenses grew to 30.4 percent of sales from 26.8 percent due to the legal charge. Excluding the charge, total SG&A expenses decreased to 25.9 percent of net sales. Primary expense reductions were for marketing and non-cash store asset impairment charges that more than offset increased expenses from ongoing system implementations and the minimum wage impacts on store payroll.

Excluding the legal charge, operating earnings would have been $4.9 million against $2.2 million. That topped guidance calling for operating income in the range of $1.2 million to $3.5 million.

On the call, Thomas said efforts to improve the effectiveness of marketing is helping reach consumers. He added, “In doing so, we continue to prioritize direct consumer interactions over broad-brushed marketing campaigns which we believe improves customer engagement and the in-store experience.”

As an example, he noted how the launch of an augmented reality program at its Ontario, CA store “continues to generate a lot of enthusiasm, interest and traffic.” Tilly’s also recently launched an all-store augmented reality scavenger hunt in partnership with social media star, Shonduras.

Thomas added, “Looking forward, we are working toward the introduction of some interesting enhancements to our in-store experience that we believe will be compelling and exciting for our customers, but we are not ready to release details yet. We believe that these kinds of marketing efforts improve customer engagement and generate excitement about Tilly’s, leading to improved store traffic.”

Regarding real estate, the focus remains on reducing occupancy costs. Thomas described it as a “slow process with moderate results thus far,” but indicated nearly 120 leases are coming up for renewal now through 2019 to present greater opportunities. Tilly’s closed the quarter with 221 stores compared to 225 a year ago. Two stores will open prior to holiday selling.

On technology, Tilly’s remains on track to launch several systems designed to improve its omnichannel and customer engagement capabilities. A new point-of-sale, order management and customer relationship management systems is being piloted. An upgraded website platform and mobile app is expected to launch before the 2017 holiday season as well as a new ship-to-store program. Stated Thomas, “We’re excited about the potential of these new capabilities we have to improve customer engagement and drive store traffic and increase sales opportunities.”

For the third quarter, Tilly’s expects its comparable store sales to be in the range of flat to up low single-digits on a percentage basis, operating income to be in the range of approximately $9 million to $11.5 million, and income per diluted share to be in the range of 19 cents to 24 cents. This compares to operating income of $10.7 million and income per share of 22 cents in the same period a year ago.

Concluded Thomas, “In closing, despite the seemingly constant stream of negative news in the brick-and-mortar retail industry, we continue to deliver improved results. I am proud of our team’s efforts. We aim to continue the momentum we have been building through the back-to-school and holiday seasons.”

Photo courtesy Tilly’s