Tilly’s Q2 Comps Inch Up 0.6 Percent

Tilly’s Inc. reported earnings were down slightly but handily topped guidance after sales recovered in June and July after a sluggish May.

The company had warned that it had a slow start to the second quarter attributable to unseasonable weather across much of the country, particularly in California where 95 of the company’s 228 total stores reside. Quarter-to-date comparable store net sales have decreased 6.6 percent through Memorial Day weekend.

“After a slow start to the second quarter during May, we posted positive comps both in stores and online during each of June and July to finish the quarter with better net sales, product margins, and earnings per share than expected,” commented Ed Thomas, president and chief executive officer. “This positive momentum has continued throughout the back-to-school season, giving us optimism about our opportunities for the third quarter and second half of fiscal 2019.”

Second Quarter Results Overview

The following comparisons refer to operating results for the second quarter of fiscal 2019 versus the second quarter of fiscal 2018 ended August 4, 2018:

• Total net sales were $161.7 million, an increase of $4.3 million or 2.8 percent, compared to $157.4 million last year. Guidance had called for sales to range from approximately $154 million to approximately $159 million. The company ended the second quarter of fiscal 2019 with 229 total stores, including two RSQ-branded pop-up stores, compared to 226 total stores, including three RSQ-branded pop-up stores, last year.
• Comparable store net sales, which includes e-commerce net sales, increased 0.6 percent compared to last year’s second quarter increase of 4.4 percent. Guidance had called for a decline in the range of 1 percent to 4 percent. E-commerce net sales increased 15.7 percent and represented approximately 14.1 percent of total net sales this year, compared to an increase of 8.1 percent and a 12.5 percent share of total net sales last year. Comparable store net sales in physical stores decreased 1.5 percent and represented approximately 85.9 percent of total net sales, compared to an increase of 3.8 percent and an 87.5 percent share of total net sales last year. Comparable store net sales in physical stores decreased by a high single-digit percentage in May, but increased by a low single-digit percentage in each of June and July.
• Gross profit was $51.7 million, an increase of $1.6 million or 3.2 percent, compared to $50.1 million last year. Gross margin, or gross profit as a percentage of net sales, increased to 32.0 percent from 31.8 percent last year. Product margins were flat as a percentage of net sales. Buying, distribution and occupancy costs improved by 10 basis points in total. Improved leverage of buying and occupancy costs as a percentage of net sales more than offset higher e-commerce shipping costs associated with e-commerce net sales growth.
• Selling, general and administrative expenses (“SG&A”) were $39.6 million, or 24.5 percent of net sales, compared to $37.6 million, or 23.9 percent of net sales, last year. The $2.0 million increase in SG&A was primarily attributable to a $1.5 million credit in last year’s SG&A resulting from the favorable resolution of a previously disclosed legal matter. Additionally, higher e-commerce marketing and fulfillment expenses of approximately $1.0 million associated with e-commerce net sales growth and higher store payroll expenses of approximately $0.9 million due to minimum wage and annual merit increases were partially offset by a $1.2 million reduction in bonus expenses and $0.5 million reduction in non-cash charges.
• Operating income was $12.1 million, or 7.5 percent of net sales, compared to $12.5 million, or 7.9 percent of net sales, last year. This slight decline in operating income was primarily attributable to last year’s $1.5 million legal matter credit noted above. Operating income was expected to range from approximately $6.5 million to approximately $8.5 million.
• Income tax expense was $3.4 million, or 26.8 percent of pre-tax income, compared to $3.3 million, or 25.3 percent of pre-tax income, last year.
• Net income was $9.3 million, or $0.31 per diluted share, compared to $9.7 million, or $0.33 per diluted share, last year. Last year’s net income includes $1.1 million after tax, or $0.04 per diluted share, attributable to the favorable resolution of the legal matter noted above. EPS was projected to range from 17 cents to 23 cents

First Half Results Overview

The following comparisons refer to operating results for the first half of fiscal 2019 versus the first half of fiscal 2018 ended August 4, 2018:

• Total net sales were $292.0 million, an increase of $11.0 million or 3.9 percent, from $281.0 million last year.
  Comparable store net sales, which includes e-commerce net sales, increased 1.4 percent compared to last year’s increase of 2.4 percent. E-commerce net sales increased 21.7 percent and represented approximately 14.5 percent of total net sales compared to an increase of 0.9 percent and a 12.4 percent share of total net sales last year. Comparable store net sales in physical stores decreased 1.5 percent and represented approximately 85.5 percent of total net sales compared to an increase of 2.7 percent and a 87.6 percent share of last year’s total net sales.
• Gross profit was $87.4 million, an increase of $2.3 million or 2.7 percent, compared to $85.1 million last year. Gross margin was 29.9 percent compared to 30.3 percent last year. This 40 basis point decrease in gross margin was primarily attributable to a 30 basis point decline in product margins due to higher total markdowns. Buying, distribution and occupancy costs deleveraged 10 basis points as a percentage of net sales. Higher e-commerce shipping costs associated with e-commerce net sales growth more than offset improved leverage of buying and occupancy costs as a percentage of net sales.
• SG&A was $75.1 million, or 25.7 percent of net sales, compared to $71.3 million, or 25.4 percent of net sales, last year. The $3.9 million increase in SG&A was primarily attributable to higher store payroll expenses of approximately $1.9 million due to minimum wage and annual merit increases, higher e-commerce marketing and fulfillment expenses of approximately $1.9 million associated with e-commerce net sales growth, and a $1.5 million credit in last year’s SG&A attributable to the favorable resolution of the legal matter noted above. These expense increases were partially offset by a $1.3 million reduction in bonus expenses and a $0.7 million reduction in non-cash charges.
• Operating income was $12.2 million, or 4.2 percent of net sales, compared to $13.8 million, or 4.9 percent of net sales, last year. The $1.6 million decline in operating income was attributable to last year’s $1.5 million legal matter credit noted above.
• Income tax expense was $3.7 million, or 27.1 percent of pre-tax income, compared to $3.8 million, or 25.7 percent of pre-tax income, last year.
• Net income was $10.0 million, or $0.33 per diluted share, compared to $10.9 million, or $0.37 per share, last year. Last year’s net income includes $1.1 million after tax, or $0.04 per diluted share, attributable to the favorable resolution of a legal matter.

Balance Sheet and Liquidity

As of August 3, 2019, the company had $124.8 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $124.2 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of August 4, 2018.

Fiscal 2019 Third Quarter Outlook

Total comparable store net sales have increased 4.2 percent through August 26, 2019. Based on current and historical trends, the company expects its third quarter total net sales to range from approximately $151 million to approximately $156 million based on a comparable store net sales increase of 1 percent to 4 percent for the quarter as a whole. The company expects its third quarter operating income to range from approximately $6.5 million to approximately $8.5 million, and earnings per diluted share to range from $0.18 to $0.22. 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 29.8 million.

Regarding the legal settlement coupons the company issued in early September 2018, approximately 2.1 percent have been redeemed to date, resulting in no material impact on its business. All such coupons will expire on September 4, 2019.