Share of Tilly’s were trading up around 13 percent in mid-day trading Thursday after the action-sports themed retailer posted the company’s best comp since the third quarter of 2016 while exceeding profit guidance.

In the quarter:

  • Revenue climbed 13.4 percent to $157.4 million, just ahead of guidance from the company calling for sales between $153 million to $157 million. Wall Street’s consensus target had been $155.3 million.
  • Comparable store net sales, which includes e-commerce sales, increased 4.4 percent. Guidance had called for growth of 1 to 4 percent.
  • On a non-GAAP basis, operating income slightly more than doubled to $11 million, compared to $4.9 million. Tilly’s had guided earnings to arrive in the range of $9.5 million to $11.0 million.
  • On a non-GAAP, adjusted basis, net income more than doubled to $8.6 million, or 29 cents per share, from net income of $3.1 million, or 11 cents, a year ago. Tilly’s had guided for earnings between 24 and 28 cents a share. Wall Street expected 26 cents per share.

Non-GAAP earnings exclude the impact of a a lawsuit settlement in both periods.

The double-digit top-line growth reflects approximately $12.3 million of comparable sales realized in the second quarter this year rather than in the third quarter as a result of the calendar shift impact of last year’s 53rd week in the retail calendar. The remaining sales increase of $6.3 million was primarily attributable to increased comparable store net sales and sales from five net new stores.

Comps in physical stores increased 3.8 percent, while e-commerce sales increased 8.1 percent. Overall comps increased 2.1 percent in the second quarter last year.

On a conference call with analysts, Ed Thomas, president and CEO, noted that e-commerce showed its strongest performance since the third quarter of 2016. Said Thomas, “The technical issues with our order management and website systems that we faced during the holiday season and into the beginning of this year are now largely behind us.” E-com represented 12 percent of total sales for the quarter.

Tilly’s is now re-launching the company’s Pick Up in Store program, although it’s still in test mode before a chain-wide release.

In terms of merchandising, all departments comped positive during the second quarter with the exception of boys, which was down less than 1 percent. Footwear, girls and women’s were particularly strong. Tops performed well across all apparel departments, including women’s, which posted its first positive comp since Q2 of last year.

Tilly’s officials indicated that denim and soft bottoms have been strong sellers and helped boost the women’s business by supporting outfitting. The in-house RSQ brand has been a stand-out, but most brands are seeing growth.

“Some are always stronger than others, and obviously the strongest brand you never have enough,” said Thomas. “But we’re in pretty good shape, and I think the merchandising team has done a really good job of chasing where it can be chased and staying on top of those categories that are maybe outperforming what we originally expected.”

Prominently featured brands on Tilly’s website include Champion, Jansport, Huf, Adidas, RVCA, Hershel, Diamond Supply, Billabong, Vans and Brixton.

Thomas said Tilly’s continues to drive store traffic with in-store events, contests and co-branded promotions.

“For example, in the second quarter, we launched a tour sponsorship for Echosmith, an exciting young pop band from the local SoCal area. We also introduced a new augmented reality collaboration with Echosmith and social media star Shonduras,” said Thomas. “In addition, we held a number of other in-store events designed to get our customers excited about having another reason to visit our stores. We believe that these efforts continue to have a meaningful impact on driving improved store traffic and customer engagement.”

Profitability was helped by an improvement in gross margins by 230 basis points to 31.8 percent. The margin gains primarily reflected the leveraging lower total occupancy costs on higher total sales. Product margins were flat.

SG&A expenses was slashed to 23.9 percent of sales from 30.4 percent. Last year’s SG&A included an estimated legal provision of $6.2 million which accounts for 450 basis points of the 650 basis point total improvement in SG&A. This year’s SG&A also included credit of $1.5 million due to receiving final approval of the settlement terms for the same legal matter, accounting for 90 basis points of the total 650 basis point improvement in total SG&A.

The remaining 110 basis points of SG&A improvement was primarily due to leveraging increased store and corporate payroll costs on higher total sales.

With both periods including legal costs, net income in the quarter came to $9.7 million, or 33 cents per share, compared to a net loss of $0.6 million or 2 cents, last year. Of the 35 cents improvement in EPS, 17 cents was attributable to the year-over-year impacts of the legal matter, 10 cents due to the retail calendar shift and  8 cents due to stronger operating results.

Reported operating income was $12.5 million compared to an operating loss of $1.2 million. Of this, $13.7 million improvement in year-over-year operating income, $7.6 million, was attributable to the legal matter, $4.2 million to the calendar shift and $1.9 million to increased comparable store results.

Tilly’s said the company expects to open 12 stores this year, the highest number of openings since 2015. Four stores were opened in the second quarter in Austin and McAllen in Texas as well in Salt Lake City and Seattle. Five stores are expected to close in the second half.

Said Thomas, “We also continue to work hard on our existing lease portfolio to improve our overall occupancy structure. It is a significant challenge working through these negotiations, and not all choices ultimately result in occupancy reductions, but we remain strategic in our decision-making process and have achieved some positive results so far this year.”

The lawsuit related to alleged violations of the Telephone Consumer Protection Act of 1991. As part of the lawsuit settlement, Tilly’s will be issuing non-transferable discount coupons to approximately 612,000 existing Tilly’s customers in early September 2018 which will allow for a one-time 50 percent discount on a single, future purchase transaction of up to $1,000. Any unused coupons will expire upon the one-year anniversary of coupon issuance.

Photo courtesy Tilly’s