<span style="color: #999999;">After a sluggish start, Tilly’s sales recovered in the latter months of the second quarter and have accelerated with the arrival of back-to-school selling.

The action-sports themed retailer had warned of 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. In May, comparable store net sales had decreased 6.6 percent through Memorial Day weekend.

Same-store sales, including e-commerce sales, in the second quarter, wound up increasing 0.6 percent, exceeding guidance calling for a decline in the range of 1 percent to 4 percent. Comps in the year-ago second quarter increased 4.4 percent.

“Following a tough start to the second quarter in May, we posted positive comps both in stores and online during each of June and July to finish the quarter with better than expected comps, product margins and earnings per share,” said Ed Thomas, president and CEO, on a conference call with analysts.

The quarter represented Tilly’s 13th consecutive quarter with flat to positive comps. Footwear, boys, accessories and men’s all posted positive comps for the quarter. Women’s and girls were negative.

E-commerce net sales increased 15.7 percent and represented approximately 14.1 percent of total sales this year, compared to an increase of 8.1 percent and a 12.5 percent share last year. Comps in physical stores decreased 1.5 percent compared to an increase of 3.8 percent last year. By month, comps 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.

Total sales were $161.7 million, an increase 2.8 percent. Guidance had called for sales to range from $154 million to $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, including three RSQ-branded pop-up stores, last year.

Net income slumped 4.1 percent to $9.3 million, or 31 cents per share, but easily topped Tilly’s guidance calling for earnings in the range of 17 to 23 cents. Last year’s income included a benefit of $1.1 million after-tax, or 4 cents per share, attributable to a favorable resolution of a legal matter.

Gross margins increased to 32.0 percent from 31.8 percent last year. Product margins were flat. Buying, distribution and occupancy costs improved 10 basis points as improved leverage of buying and occupancy costs more than offset higher e-commerce shipping costs associated with e-commerce growth.

SG&A expense increased 5.3 percent to $39.6 million, or to 24.5 percent of sales from 23.9 percent. The year-ago period benefited from a $1.5 million credit from the favorable resolution of the legal matter. The latest quarter also included higher e-commerce marketing and fulfillment expenses of approximately $1.0 million associated with e-commerce growth and higher store payroll expenses of $900,000 due to minimum wage and annual merit that were partially offset by a $1.2 million reduction in bonus expenses and $500,000 reduction in non-cash charges.

Operating income declined 3.2 percent to $12.1 million. The decline was primarily attributable to last year’s $1.5 million legal matter credit.

<span style="color: #999999;">Regarding expansion, Tilly’s expects to open four new full-size Tilly’s stores in the third quarter and seven more during the fourth to bring new store openings for the year to 13. The focus continues to be filling in markets, particularly within Texas and Chicago. The first permanent RSQ branded store will open at the Irvine Spectrum in California in May 2020.

On technology, an enhanced loyalty program, including an instant redeem feature, was launched and has been well received. A “buy now, pay later” program is set to launch before the holiday season.

Looking ahead, monthly comps through August 26 have increased 4.2 percent with both stores and online comping positive. Said Thomas, “Our positive momentum has continued and we are most encouraged that our women’s business has turned positive and has been one of our better performing departments in recent weeks.”

He added, “These results give us optimism for the third quarter and the back half of fiscal 2019, despite going up against some tougher comp comparisons.”

For the third quarter, Tilly’s expects net sales to range from approximately $151 million to approximately $156 million based on a comp increase of 1 percent to 4 percent. Operating income is expected to range from $6.5 million to $8.5 million, and EPS from 18 to 22 cents. In the 2018 third quarter, sales were $146.8 million, operating earnings reached $6.7 million and EPS was 18 cents.

In the Q&A session, Thomas said the strong branded cycle has continued for Tilly’s.

“The brand performance continues to be very strong for us,” said Thomas. “I wouldn’t say there are any major changes in the brand. There is a couple of brands that have emerged as being strong — stronger that we didn’t have last year, didn’t have a major presence like Champion. That’s probably the most significant one out there.

He added that some of Tilly’s top brands were its own brands, led by the RSQ denim label. Said Thomas, “It continues to perform very, very well. And quite frankly, I think, our results would have been a little bit better had we had more inventory in women’s RSQ, going to back-to-school. So. we’re very excited about the prospect of building that brand.”

Tilly’s national brands include Vans, Volcom, The North Face, Jansport, Champion, Primitive, Billabong, Nike SB, RVCA, Fila, O’Neill, Hershel, Adidas, Riot Society, Nixon, Ethika, Ray-Ban, Stance, Huf, Hydro Flask, Santa Cruz, Brixton, and Salty Crew. About a quarter of its mix is proprietary brands, including RSQ, Full Tilt and Sky and Sparrow.

Asked about the potential for RSQ stand-alone stores, Thomas said, “It’s still in development stages in terms of what that merchandise mix will finally be. But, we have somebody dedicated to it and more to come on that as we get further in the year. It’s still a very early stage of development.”

Photo courtesy Tilly’s