Tilly’s, Inc. Co-Founder and Interim President and CEO Hezy Shaked said the retailer and his team are challenging themselves to improve business performance by carefully reconsidering everything they do.
“Our business currently faces many headwinds from the macro environment, Shaked said in a company press release outlining fiscal 2023 financials. “We see opportunities for improvement, but we expect it may take some time to see the benefits from our efforts in this environment.”
Total net sales were $173.0 million for the 14-week fourth quarter of fiscal 2023 ended February 3, a decrease of 4.1 percent, compared to $180.4 million in the 13-week quarter ended January 28, 2023. Total comparable net sales, including both physical stores and e-commerce, decreased by 8.8 percent. The extra week in the year’s fourth quarter accounted for $5.7 million in total net sales.
Net sales from physical stores were $125.6 million, a decrease of 7.0 percent, in Q4, compared to $135.0 million in the prior-year quarter, with a comparable store net sales decrease of 11.8 percent.
- Net sales from physical stores represented 72.6 percent of total net sales in the 2023 Q4 period, compared to 74.9 percent of total net sales in the 2022 Q4 period.
- The company ended the fourth quarter with 248 total stores compared to 249 total stores at the end of the fourth quarter last year.
Net sales from e-commerce were $47.4 million, an increase of 4.7 percent, compared to $45.3 million in the prior-year Q4 period.
- E-commerce net sales represented 27.4 percent of total net sales in Q4, compared to 25.1 percent of total net sales in the prior year fourth quarter.
“Our business has been challenged, while our young customer demographic has faced persistent inflationary pressures, record levels of credit card debt and a shift in consumer preferences for experiences over goods following the pandemic, We believe that these factors have had a significant impact on our business, and we are not alone in that within our industry,” offered company EVP and CFO Michael Henry on a conference call with analysts.
“Yet there are clothing and lifestyle brand retailers who have performed relatively well over the last two years,” he noted. “We are challenging ourselves to improve despite the headwinds we are facing. We are revisiting everything about our business, looking for and evaluating any opportunity for potential improvement. We have work to do to get our business back on track in terms of regaining ground on sales per square foot productivity in stores and generating stronger product margins. We certainly see opportunities for improvement, and we are actively pursuing those opportunities.”
First and foremost, Henry said Tilly’s is focused on driving sales increases at healthy product margins.
“This starts with providing compelling merchandise,” he said. “Our merchant teams have put in a lot of work in recent months to adjust our assortments, lean into strong brand relationships, and seek new relationships. We expect to be introducing several new brands throughout the year, including during the first quarter, producing new brand collaborations and continuing to leverage the strength of our own proprietary brands, particularly Rescue, which is our number one selling brand overall by far.”
Gross profit, including buying, distribution, and occupancy costs, was $46.7 million, or 27.0 percent of net sales, compared to $52.4 million, or 29.0 percent of net sales, in the prior year quarter.
- Product margins declined by 140 basis points primarily due to increased markdowns.
- Buying, distribution and occupancy costs deleveraged by 70 basis points collectively, despite being $0.5 million lower than last year, primarily due to carrying these costs against a lower level of net sales this past year.
SG&A expenses were $55.2 million, or 31.9 percent of net sales, compared to $53.8 million, or 29.8 percent of net sales, in the prior-year quarter. The increase in SG&A were primarily due to the extra week in the fourth quarter, which added an estimated $2.6 million to SG&A expenses.
Operating loss was $8.5 million, or 4.9 percent of net sales, in the fourth quarter, compared to an operating loss of $1.4 million, or 0.8 percent of net sales, in the prior-year fourth quarter.
Other income was $1.6 million in Q4, compared to $1.1 million in the 2022 fourth quarter, primarily attributable to earning significantly higher rates of return on marketable securities compared to the prior year.
Income tax expense, which includes a non-cash deferred tax asset valuation allowance of $15.4 million, was $13.6 million or 195.9 percent of pre-tax loss, compared to an income tax benefit of $(0.2) million, or 61.7 percent of pre-tax loss last year. On a non-GAAP basis, excluding the impact of the valuation allowance, income tax benefit was $(1.8) million, or 25.8 percent of pre-tax loss. This quarter’s non-GAAP effective income tax rate was primarily attributable to a decrease in pre-tax income and discrete income tax items associated with stock-based compensation. Last year’s income tax benefit was primarily attributable to certain allowable deductions and tax credits.
Net loss, including the non-cash valuation allowance charge noted above, was $20.6 million, or a loss of 69 cents loss per share, compared to a loss of $0.1 million, or $0.00 cents loss per share, in the prior-year period.
- On a non-GAAP basis, excluding the impact of the valuation allowance, the year’s Q4 net loss was $5.2 million, or a loss of 17 cents per share.
Weighted average shares were 29.9 million in 2023 compared to 29.8 million shares in 2022.
Balance Sheet
Tilly’s ended the fiscal year with total cash and marketable securities of $95 million and no debt outstanding compared to $113 million and no debt last year.
Total inventories at cost were up 2.6 percent per square foot at the end of fiscal 2023 ended February 3, 2024 compared to the end of fiscal 2022 ended January 28, 2023. On a comparable date basis, total inventories at February 3, 2024, were down 9.6 percent per square foot versus February 4, 2023 due to timing of product deliveries.
Total capital expenditures for fiscal 2023 were $14 million compared to $15.1 million last year. Turning to the first quarter of fiscal 2024. Total comparable net sales through March 12 decreased by 13.4 percent relative to the comparable period of last year, although with some trend improvement as the weeks have progressed, as I noted earlier, and with healthier product margins than last year.
Fiscal 2024 First Quarter Outlook
Total comparable quarter-to-date net sales through March 12, 2024, decreased by 13.4 percent relative to the comparable period last year.
“While we are off to a slow start to the first quarter, following a couple of atmospheric river storms that hit our home state of California, particularly hard, in the first 2 weeks of February, the year-over-year comp sales trend of our business has been improving moderately as the weeks have passed,” Henry shared.
Based on current quarter-to-date comparable net sales results and current and historical trends, the company currently estimates that its fiscal 2024 first quarter net sales will be in the range of approximately $109 million to $119 million, translating to an estimated comparable net sales decrease in the range of approximately 14 percent to 7 percent, respectively, compared to last year.
“There are pockets of products within each department that are working well for us,” Henry suggested. “Our proprietary brands are performing meaningfully better overall than our third-party brands thus far in the first quarter, but we feel good about the content and quality of our spring assortment overall. We also believe better days are ahead as we transition into warmer weather, spring breaks and Easter. As a significant portion of our assortment is focused in warm weather categories such as shorts, swim and sandals to name just a few. Beyond product, we are refocusing our marketing efforts to tell better product stories that are aligned with our primary merchandising priorities.”
The company currently estimates its SG&A expenses for the first quarter of fiscal 2024 to be approximately $42 million to $43 million, pre-tax loss to be in the range of approximately $17 million to $22 million, and estimated income tax rate to be approximately 27 percent.
TLYS currently expects its loss per share for the first quarter of fiscal 2024 to be in the range of 42 cents to 54 cents based on estimated weighted average shares of approximately 29.9 million.
The company currently expects to have 247 stores open at the end of the first quarter of fiscal 2024 compared to 248 at the end of last year’s first quarter.
Fiscal 2024 New Store and Capital Expenditure Plans
The company currently expects its total capital expenditures for fiscal 2024 not to exceed $15 million, primarily for the construction of five new stores and continued upgrades to certain distribution and information technology systems.
“We still intend on evaluating opportunities to grow our store count over time,” Henry said. “We are purposefully taking a measured approach to new store openings in the short term, while we work toward improving our business performance, but we continue to believe that there are ample opportunities for strategic growth in our business over time. In fiscal 2024, we currently expect to open five new stores within existing markets, with two stores scheduled to open in the first quarter and one each during the remaining quarters. For existing stores, we have nearly 100 lease decisions to make this year.
“We intend to maintain strict discipline in making decisions that we believe will generate improved profitability over time,” he continued. “If we are unable to negotiate what we believe to be acceptable lease costs, we will close stores as necessary. At this time, we are aware of five planned store closures that we expect will take place during fiscal 2024. Three of those will occur during the first quarter and more possible as we work through our lease decisions. We do not expect to close a large number of stores at this time, but we will be very disciplined and conscientious in our decision-making on store renewals and kick out clauses in light of the current environment and our specific performance in each location.”
Beyond new stores, the CFO said that primary capital expenditure priorities for fiscal 2024 include completing the upgrade of warehouse management systems and investing in new markdown optimization and merchandise allocation tools to improve the efficiency of inventory management, and ongoing IT infrastructure and cybersecurity investments to protect the business interest.
“Altogether, we currently expect our total capital expenditures for fiscal 2024 not to exceed $15 million but the spend we do have planned will be very purposely aimed at improving our performance over time,” he said..
Fiscal 2024 New Store and Capital Expenditure Plans
The company expects its total capital expenditures for fiscal 2024 not to exceed $15 million, primarily for the construction of five new stores and continued upgrades to certain distribution and information technology systems.