Tilly’s Inc. reported earnings more than doubled in the third quarter, helped by a reduction in costs and a 4.4-percent comp gain. Results were well above Wall Street’s targets.

“We are encouraged by the 4.4 percent comp increase we delivered in the third quarter on top of last year’s 3.9 percent increase,” stated Ed Thomas, president and chief executive officer. “A promising Black Friday weekend and Cyber Monday have us off to a decent start to the fourth quarter, and we believe our merchandise assortment is well positioned for the holiday season. We remain focused on improving profitability for the long term.”

Third Quarter Results Overview
The following comparisons refer to operating results for the third quarter of fiscal 2016 versus the third quarter of fiscal 2015 ended October 31, 2015.

Total net sales were $152.1 million, a 7.3 percent increase from $141.7 million last year. Comparable store sales, which include e-commerce sales, increased 4.4 percent. Comparable store sales increased 3.9 percent in the third quarter last year. Gross margin, or gross profit as a percentage of net sales, was flat at 31.5 percent compared to last year. A 110 basis point increase due to lower buying, distribution and occupancy costs was offset by a 110 basis point decline in product margins from increased markdowns.

Selling, general and administrative expenses (SG&A) were $37.3 million, a decrease of $2 million from $39.3 million last year. As a percentage of net sales, SG&A improved 320 basis points to 24.5 percent from 27.7 percent last year. The combination of more efficient marketing spend, lower non-cash store impairment charges, corporate payroll savings and several other smaller expense reductions resulted in 240 basis points of this improvement. The remaining 80 basis points of improvement was attributable to severance obligations of $1.1 million recorded in last year’s results.

Operating income was $10.7 million, or 7 percent of net sales, compared to $5.4 million, or 3.8 percent of net sales, last year. The 320 basis point increase in operating margin was primarily attributable to the reductions in SG&A noted above.

Effective tax rate was 40.4 percent compared to 48 percent last year. Last year’s tax rate was higher primarily due to increased discrete items related to restricted stock and stock option expirations.

Net income was $6.4 million, or 22 cents per diluted share, compared to $2.8 million, or 10 cents per diluted share, last year. Wall Street’s consensus estimate had been 10 cents.

First Nine Months Results Overview
The following comparisons refer to operating results for the first nine months of fiscal 2016 versus the first nine months of fiscal 2015 ended October 31, 2015.

Total net sales were $408.7 million, an increase of 4.3 percent from $391.9 million last year. Comparable-store sales, which include e-commerce sales, increased 0.7 percent. Comparable store sales increased 2.1 percent for the same time period last year. Gross margin, or gross profit as a percentage of net sales, was 29.2 percent compared to 29.9 percent last year. This 70 basis point decrease was attributable to a decline in product margins as a result of increased markdowns.

SG&A was $110.5 million, an increase of $1.8 million from $108.7 million last year. As a percentage of net sales, SG&A improved 70 basis points to 27 percent from 27.7 percent last year. The combination of more efficient marketing spend, lower stock-based compensation and corporate payroll savings resulted in 40 basis points of this improvement. The remaining 30 basis points of improvement was attributable to severance obligations of $1.1 million recorded in last year’s results.

Operating income was $8.9 million, an increase of $0.3 million from $8.6 million last year. Operating margin was flat at 2.2 percent of net sales compared to last year. Income tax expense was $4.1 million, or 44.5 percent of pre-tax income, compared to $4 million, or 46.2 percent of pre-tax income, last year. Net income was $5.1 million, or 18 cents per diluted share, compared to $4.7 million, or 16 cents per diluted share, last year.

Balance Sheet and Liquidity
As of October 29, 2016, the company had $105 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $76 million of cash and marketable securities and no debt outstanding as of October 31, 2015.

Fourth Quarter 2016 Outlook
Based on current trends, the company expects fourth-quarter comparable-store sales to be in the range of flat to up 2 percent, operating income to be in the range of $7.5 million to $9.5 million and earnings per diluted share to be in the range of 15 cents to 20 cents compared to 10 cents for the fourth quarter of fiscal 2015. This assumes an anticipated effective tax rate of approximately 40 percent and weighted average diluted shares of approximately 28.7 million.

Photo courtesy Tilly’s