Tilly’s Scores Best Quarterly Comp Since 2011

Tilly’s Inc. reported fourth-quarter earnings jumped 29.9 percent on 3.8 percent revenue gain.

“Tillys finished fiscal 2018 with its strongest single-quarter comp sales result since the third quarter of fiscal 2011, and its best consecutive three-quarter run of comp sales results since becoming a public company in 2012,” commented Ed Thomas, President and Chief Executive Officer. “We aim to continue our operating momentum during fiscal 2019.”

Fourth Quarter Results Overview

The following comparisons refer to operating results for the fourth quarter of fiscal 2018 (13 weeks) versus the fourth quarter of fiscal 2017 (14 weeks) ended February 3, 2018:

Total net sales were $170.6 million, an increase of 3.8 percent from $164.3 million last year, despite last year’s fourth quarter containing an extra week of net sales worth approximately $7.1 million to the quarter. The company ended fiscal 2018 with 229 total stores, including four RSQ-branded pop-up stores, compared to 219 full-size stores last year.

Comparable store net sales, which includes e-commerce net sales, increased 6.4 percent compared to flat comparable store net sales during last year’s fourth quarter. E-commerce net sales increased 49.6 percent and represented approximately 20 percent of total net sales this year, compared to a decrease of 12 percent and a 14 percent share of total net sales last year. Comparable store net sales in physical stores decreased 0.9 percent and represented approximately 80 percent of total net sales, compared to an increase of 2.3 percent and an 86 percent share of total net sales last year.

Gross profit was $52.2 million, an increase of 1.4 percent from $51.4 million last year. Gross margin, or gross profit as a percentage of net sales, decreased to 30.6 percent from 31.3 percent last year. This 70 basis point decrease in gross margin was due to a 120 basis point increase in distribution costs primarily as a result of higher e-commerce shipping costs associated with strong e-commerce net sales growth. This cost increase was partially offset by a 20 basis point decrease in occupancy costs and a 20 basis point improvement in product margins. While occupancy costs were approximately $0.5 million higher in total dollars due to having 10 net new stores compared to last year, they were lower as a percentage of net sales due to the company’s net sales increase. Product margins improved primarily due to lower total markdowns as a percentage of net sales, partially offset by lower initial markups attributable to a product mix shift toward branded merchandise.

Selling, general and administrative expenses (“SG&A”) were $41.2 million, or 24.2 percent of net sales, compared to $40.0 million, or 24.3 percent of net sales, last year. The $1.2 million increase in SG&A was primarily attributable to higher corporate bonus provisions of approximately $1.1 million associated with improved operating results for fiscal 2018 as a whole. This year’s SG&A included approximately $0.9 million in expense reductions related to negotiated resolutions of certain vendor disputes. On a non-GAAP basis, excluding these negotiated expense reductions, non-GAAP SG&A was $42.1 million, or 24.7 percent of net sales, compared to $40.0 million, or 24.3 percent of net sales, last year.

Operating income was $10.9 million, or 6.4 percent of net sales, compared to $11.4 million, or 7.0 percent of net sales, last year. The decrease in our operating results was attributable to last year’s fourth quarter containing an extra week of net sales worth approximately $7.1 million, which helped create greater leverage of our relatively fixed expense base last year. On a non-GAAP basis, excluding the negotiated expense reductions noted above, non-GAAP operating income was $10.1 million, or 5.9 percent of net sales, compared to $11.4 million, or 7.0 percent of net sales, last year.

Income tax expense was $3.1 million, or 26.4 percent of pre-tax income, compared to $5.2 million, or 43.5 percent of pre-tax income, last year. The reduction in this year’s income tax rate was attributable to the new corporate tax rates that went into effect for 2018. On a non-GAAP basis, excluding the negotiated expense reductions noted above, non-GAAP income tax expense was $2.9 million, or 26.4 percent of non-GAAP pre-tax income, compared to $5.2 million, or 43.5 percent of non-GAAP tax income, last year.

Net income was $8.7 million, or $0.29 per diluted share, compared to $6.7 million, or $0.23 per diluted share, last year. On a non-GAAP basis, excluding the negotiated expense reductions noted above, non-GAAP net income was $8.0 million, or $0.27 per diluted share, compared to $6.7 million, or $0.23 per diluted share, last year.

On January 14 when it reported better-than-expected holiday sales, Tilly’s said it expected earnings in the range of 24 to 26 cents per share, within the upper half of its original earnings outlook range of 22 cents to 26 cents.

Fiscal 2018 Full Year Results Overview

The following comparisons refer to operating results for fiscal 2018 (52 weeks) versus fiscal 2017 (53 weeks) ended February 3, 2018:

Total net sales were $598.5 million, an increase of 3.7 percent from $576.9 million last year, despite fiscal 2017 containing an extra week of net sales worth approximately $5.8 million to the year.

Comparable store net sales increased 4.0 percent in fiscal 2018, following a 1.0 percent increase in fiscal 2017. Comparable store net sales in physical stores increased 1.4 percent and represented approximately 85 percent of total net sales, compared to an increase of 1.6 percent and a 87 percent share of total net sales last year. E-commerce net sales increased 21.7 percent and represented approximately 15 percent of total net sales, compared to a decrease of 2.5 percent and a 13 percent share of total net sales last year.

Gross profit was $180.9 million, an increase of 3.2 percent from $175.4 million last year. Gross margin was 30.2 percent, compared to 30.4 percent last year. This 20 basis point decrease in gross margin was primarily attributable to a 50 basis point increase in distribution costs and a 30 basis point decrease in product margins, partially offset by a 70 basis point decrease in occupancy costs. Distribution costs increased primarily as a result of higher e-commerce shipping costs associated with e-commerce net sales growth. Product margins declined primarily due to lower initial markups associated with a product mix shift towards branded merchandise. Total occupancy expenses were approximately $0.4 million lower than last year, despite having 10 net new stores, primarily due to reductions in lease costs.

SG&A was $149.4 million, or 25.0 percent of net sales, compared to $151.4 million, or 26.2 percent of net sales, last year. Last year’s SG&A included $6.8 million in legal matter provisions. This year’s SG&A included a $1.5 million reduction to such provisions as a result of the final settlement of a legal matter in early August 2018, and $0.7 million in costs associated with our secondary offering completed in early September 2018. The net year-over-year impact of these legal matter provisions, partially offset by our secondary offering costs, accounted for the improvement in SG&A as a percentage of net sales. On a non-GAAP basis, excluding the impact of the legal provisions from both years, and the secondary offering costs and the negotiated expense reductions noted above, non-GAAP SG&A was $151.0 million, or 25.2 percent of net sales, compared to $144.6 million, or 25.1 percent of net sales, last year. Primary dollar increases in SG&A were attributable to store payroll of $1.9 million primarily due to minimum wage increases and higher comparable store net sales, online marketing costs of $1.7 million associated with e-commerce net sales growth, corporate bonus provisions of $1.7 million due to improved operating results, and e-commerce fulfillment costs of $0.9 million due to e-commerce net sales growth.

Operating income was $31.5 million, or 5.3 percent of net sales, compared to $24.0 million, or 4.2 percent of net sales, last year. This 110 basis point improvement in operating income was primarily due to the reduction in legal provisions compared to last year described above. On a non-GAAP basis, excluding the impact of the legal provisions from both years, and the secondary offering costs and the negotiated expense reductions noted above, non-GAAP operating income was $29.9 million, or 5.0 percent of net sales, compared to $30.8 million, or 5.3 percent of net sales, last year. This decrease in our non-GAAP operating results was primarily attributable to the extra week of net sales in fiscal 2017 worth approximately $5.8 million, which helped leverage our relatively fixed expense base last year.

Income tax expense was $8.9 million, or 26.2 percent of pre-tax income, compared to $10.5 million, or 41.7 percent of pre-tax income, last year. The reduction in this year’s income tax rate was attributable to the new corporate tax rates that went into effect in 2018. On a non-GAAP basis, excluding the impact of legal provisions from both years, and the secondary offering costs and the negotiated expense reductions noted above, non-GAAP income tax expense was $8.3 million, or 25.8 percent of non-GAAP pre-tax income, compared to $13.1 million, or 41.0 percent of non-GAAP pre-tax income, last year.

Net income was $24.9 million, or $0.84 per diluted share, compared to $14.7 million, or $0.51 per diluted share, last year. Of the $0.33 improvement in year-over-year earnings per diluted share, approximately $0.18 was attributable to the aggregate impact of legal matters, the secondary offering costs and the negotiated expense reductions noted above, and approximately $0.15 was attributable to improved operating results. On a non-GAAP basis, excluding the impact of legal provisions from both years, and the secondary offering costs and the negotiated expense reductions noted above, non-GAAP net income was $23.9 million, or $0.80 per diluted share, compared to $18.9 million, or $0.65 per diluted shared, last year.

Balance Sheet and Liquidity

As of February 2, 2019, the company had $144.1 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $136.0 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of February 3, 2018. For the third consecutive year, the company paid a special cash dividend to its stockholders in February. This year’s special cash dividend was approximately $29.5 million in the aggregate, or $1 per share.

Fiscal 2019 First Quarter Outlook

Based on current and historical trends, particularly with respect to years in which Easter occurred later in the year, as in fiscal 2019, the company expects total net sales for the first quarter of fiscal 2019 to range from approximately $128 million to $130 million based on an assumption of a low single-digit percentage increase in comparable store net sales. The company’s quarter-to-date comparable store net sales, including e-commerce, have decreased by a low single-digit percentage, primarily due to a later Easter versus the comparable prior year period and unseasonably cold and wet weather throughout much of the country, particularly in California where 95 of the company’s stores reside. However, the company continues to believe it can produce positive comparable store net sales for the quarter. Based on an anticipated continuation of the product mix shift towards branded merchandise, and the e-commerce net sales momentum with attendant costs that we experienced in the fourth quarter of fiscal 2018, we expect pre-tax operating results to range from a loss of approximately $(0.4) million to income of approximately $1.2 million, and earnings per share to range from a loss of $(0.01) to income of $0.03. This compares to a comparable store net sales increase of 0.1 percent, pre-tax income of $1.7 million, and earnings per diluted share of $0.04 for the first quarter of fiscal 2018. This outlook assumes no non-cash store asset impairment charges, an anticipated effective tax rate of approximately 27 percent, and weighted average shares of approximately 30 million.

Regarding the legal settlement coupons we issued in early September 2018, less than 1.5 percent of the total coupons issued have been redeemed to date. Since issuance, redemption transactions have represented less than 0.2 percent of total transactions and less than 0.5 percent of total net sales, resulting in no material impact on our comp sales or operating results. While there can be no guarantee that redemption activity will remain immaterial to our total company operating results prior to coupon expiration on September 4 of this year, we are not expecting any meaningful impacts to our business during the final 6 months of the redemption period.