Tilly’s Inc. reported a small rebound in earnings in the second quarter that beat its internal plan, while same-store sales gained 0.8 percent.

“Our second-quarter comp sales and operating income exceeded our outlook ranges, and we ended the quarter with inventory down 7 percent on a per square foot basis,” stated Ed Thomas, president and CEO. “We are focused as a management team on continuing these directional improvements. Our back-to-school results have been mixed, but we believe our merchandise assortment is well positioned for the season.”

Second Quarter Results Overview
The following comparisons refer to operating results for the second quarter of fiscal 2016 versus the second quarter of fiscal 2015 ended August 1, 2015:

  • Total net sales were $136.4 million, an increase of 5 percent over last year.
  • Comparable store sales, which include e-commerce sales, increased 0.9 percent.
  • Gross profit was $38.8 million, a 6.1 percent increase from $36.6 million last year. Gross margin, or gross profit as a percentage of net sales, improved 40 basis points to 28.5 percent compared to 28.1 percent last year. This 40 basis point increase in gross margin was attributable to a 70 basis point improvement in buying, distribution and occupancy costs, partially offset by a 30 basis point decline in product margins from increased markdowns. Occupancy costs were lower than expected due to a lease assignment and certain other lease negotiations.
  • Selling, general and administrative expenses (SG&A) were $36.6 million, up $1.1 million from $35.5 million last year. This increase was primarily due to increased store payroll dollars associated with 9 net new stores and minimum wage increases, which offset expense reductions in other areas. As a percentage of net sales, total SG&A improved 50 basis points to 26.8 percent from 27.3 percent last year. This rate improvement was primarily driven by the combination of more efficient marketing spend and reductions in corporate office payroll, stock compensation, and various other smaller expenses as a percentage of sales.
  • Operating income was $2.2 million, or 1.6 percent of net sales, compared to $1.1 million, or 0.8 percent of net sales, last year. The 80 basis point increase in operating results was primarily attributable to higher gross profit and reduced SG&A as a percentage of net sales, as noted above.
  • Net income was $1.4 million, or 5 cents per diluted share, compared to $0.6 million, or 2 cents per diluted share, last year. Effective tax rate was 38.3 percent compared to 49.7 percent last year, primarily due to the tax impact of discrete items related to restricted stock and stock option expirations.

First Half Results Overview
The following comparisons refer to operating results for the first half of fiscal 2016 versus the first half of fiscal 2015 ended August 1, 2015:

  • Total net sales were $256.6 million, an increase of 2.6 percent over last year.
  • Comparable store sales, which include e-commerce sales, decreased 1.4 percent.
  • Gross profit was $71.4 million, a 1.7 percent decrease from $72.6 million last year. Gross margin, or gross profit as a percentage of net sales, was 27.8 percent compared to 29.0 percent last year. This 120 basis point decrease in gross margin was attributable to two factors: a 60 basis point decline in product margins as a result of increased markdowns, and a 60 basis point increase in occupancy costs due to the negative sales comp and adding 9 net new stores year over year.
  • Selling, general and administrative expenses were $73.2 million, up $3.7 million from $69.4 million last year. Of this increase, $2.4 million was attributable to the combination of a legal provision and non-cash store asset impairment charges. Excluding these items, SG&A increased $1.4 million, primarily due to increased store payroll dollars associated with 9 net new stores and minimum wage increases, which offset expense reductions in other areas.
  • Operating loss was $1.7 million, or 0.7 percent of net sales, compared to operating income of $3.2 million, or 1.3 percent of net sales, last year. The 200 basis point decrease in our operating results was primarily attributable to lower gross profit and increased SG&A, as noted above.
  • Income tax benefit was $0.3 million, or 16.3 percent of pre-tax loss, compared to income tax expense of $1.4 million, or 43.3 percent of pre-tax income, last year. This tax benefit was attributable to a $0.4 million discrete income tax impact related to restricted stock and stock option expirations during fiscal 2016.
  • Net loss was $1.3 million, or 5 cents per share, compared to net income of $1.8 million, or 6 cents per diluted share, last year.

Balance Sheet and Liquidity
As of July 30, 2016, the company had $96 million of cash and marketable securities, and no debt outstanding under its revolving credit facility, compared to $77 million of cash and marketable securities and no debt, respectively, as of August 1, 2015.

Third Quarter 2016 Outlook
The company expects third-quarter comparable store sales to be in the range of flat to -4 percent, operating income to be in the range from $3.5 million to $6.5 million, and earnings per share results to be in the range from 7 to 13 cents. This assumes an anticipated effective tax rate of approximately 40 percent and weighted average diluted shares of 28.5 million.