Tilly’s Inc. was bolstered by a strong third quarter ended November 2 that saw the retailer beat Wall Street’s revenue and earnings expectations.

“Tillys continued its positive momentum with its 14th consecutive quarter of flat to positive comparable store net sales during the third quarter, including positive comps from both stores and e-commerce, all merchandising departments, and each month of the quarter,” commented Ed Thomas, President and Chief Executive Officer. “Based on our results during Thanksgiving weekend through Cyber Monday, we believe we are well positioned to continue our momentum during the Holiday season.”

Third Quarter Results Overview

The following comparisons refer to operating results for the third quarter of fiscal 2019 versus the third quarter of fiscal 2018 ended November 3, 2018:

  • Total net sales were $154.8 million, an increase of $8 million or 5.4 percent, compared to $146.8 million last year. The company ended the quarter with 232 total stores, including one RSQ-branded pop-up store, compared to 227 total stores, including four RSQ-branded pop-up stores, last year.
  • Comparable store net sales, which includes e-commerce net sales, increased 3.1 percent compared to last year’s third quarter increase of 4.3 percent. Comparable store net sales in physical stores increased 2.4 percent and represented approximately 85.3 percent of total net sales, compared to an increase of 1.3 percent and an 85.5 percent share of total net sales last year. E-commerce net sales increased 7.4 percent and represented approximately 14.7 percent of total net sales this year, compared to an increase of 26.7 percent and a 14.5 percent share of total net sales last year.
  • Gross profit was $47.2 million, an increase of $3.5 million or 8.1 percent, compared to $43.7 million last year. Gross margin, or gross profit as a percentage of net sales, increased to 30.5 percent from 29.7 percent last year. Product margins increased 80 basis points as a percentage of net sales. Buying, distribution and occupancy costs deleveraged by less than 10 basis points, primarily due to severance and other transition expenses of approximately $0.7 million related to our change in merchandising leadership during the third quarter, largely offset by improved leverage of distribution costs.
  • Selling, general and administrative expenses (“SG&A”) were $39.5 million, or 25.5 percent of net sales, compared to $36.9 million, or 25.1 percent of net sales, last year. The $2.5 million increase in SG&A was primarily due to higher marketing and fulfillment expenses of approximately $1 million largely as a result of e-commerce net sales growth, an asset write-off charge of $0.5 million relating to mobile app development, higher store payroll expenses of approximately $0.5 million resulting from minimum wage and store count growth, and higher temporary labor expenses of approximately $0.5 million. Last year’s SG&A also includes approximately $0.7 million of expenses associated with our secondary offering completed in early September 2018.
  • Operating income was $7.7 million, or 5 percent of net sales, compared to $6.7 million, or 4.6 percent of net sales, last year. The $1 million increase in operating income was primarily driven by net sales growth more than offsetting the expense increases noted above. On a non-GAAP basis, excluding the severance and related transition expenses noted above from this year and the secondary offering costs noted above from last year, non-GAAP operating income was $8.4 million, or 5.4 percent of net sales, compared to $7.5 million, or 5.1 percent of net sales, last year.
  • Income tax expense was $2.2 million, or 25.9 percent of pre-tax income, compared to $2 million, or 26.9 percent of pre-tax income, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the secondary offering costs noted above from last year, non-GAAP income tax expense was $2.4 million, or 25.9 percent of non-GAAP pre-tax income, compared to $2 million, or 24.8 percent of non-GAAP pre-tax income, last year.
  • Net income was $6.4 million, or $0.21 per diluted share, compared to $5.4 million, or $0.18 per diluted share, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the secondary offering costs noted above from last year, non-GAAP net income was $6.9 million, or $0.23 per diluted share, compared to $6 million, or $0.20 per diluted share, last year.

Year-to-Date Results Overview

The following comparisons refer to operating results for the thirty-nine weeks of fiscal 2019 versus the thirty-nine weeks of fiscal 2018 ended November 3, 2018:

  • Total net sales were $446.8 million, an increase of $19 million or 4.4 percent, compared to $427.9 million last year.
  • Comparable store net sales, which includes e-commerce net sales, increased 2 percent compared to last year’s increase of 3.1 percent. E-commerce net sales increased 16.4 percent and represented approximately 14.6 percent of total net sales compared to an increase of 9.2 percent and a 13.1 percent share of total net sales last year. Comparable store net sales in physical stores decreased 0.2 percent and represented approximately 85.4 percent of total net sales compared to an increase of 2.2 percent and a 86.9 percent share of last year’s total net sales.
  • Gross profit was $134.6 million, an increase of $5.8 million or 4.5 percent, compared to $128.7 million last year. Gross margin was 30.1 percent in both years. Product margins improved by 10 basis points as a percentage of net sales. Buying, distribution and occupancy costs as a whole deleveraged by 10 basis points, primarily due to increased e-commerce shipping costs.
  • SG&A was $114.6 million, or 25.7 percent of net sales, compared to $108.2 million, or 25.3 percent of net sales, last year. The $6.4 million increase in SG&A was primarily due to higher marketing and fulfillment expenses of approximately $2.8 million largely associated with e-commerce net sales growth, higher store payroll expenses of approximately $2.3 million resulting from minimum wage and store count growth, a $1.5 million credit in last year’s SG&A attributable to the favorable resolution of a legal matter, and increased temporary labor expenses of approximately $1.2 million in the current year. These increases were partially offset by a $1.2 million reduction in bonus expenses. Last year’s SG&A also includes secondary offering expenses of approximately $0.7 million.
  • Operating income was $20 million, or 4.5 percent of net sales, compared to $20.5 million, or 4.8 percent of net sales, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the legal credit and secondary offering costs each noted above from last year, non-GAAP operating income was $20.6 million, or 4.6 percent of net sales, compared to $19.8 million, or 4.6 percent of net sales, last year.
  • Income tax expense was $5.9 million, or 26.6 percent of pre-tax income, compared to $5.7 million, or 26.1 percent of pre-tax income, last year. On a non-GAAP basis, excluding the severance and related transition costs noted above from this year and the legal credit and secondary offering costs each noted above from last year, non-GAAP income tax expense was $6.1 million, or 26.6 percent of non-GAAP pre-tax income, compared to $5.4 million, or 25.3 percent of non-GAAP pre-tax income, last year.
  • Net income was $16.3 million, or $0.55 per diluted share, in both years. On a non-GAAP basis, excluding the after-tax impact of the severance and related transition costs noted above from this year and the net benefit of the legal matter and secondary offering costs each noted above from last year, non-GAAP net income was $16.8 million, or $0.57 per diluted share, compared to $15.9 million, or $0.53 per diluted share, last year.

Balance Sheet and Liquidity

As of November 2, 2019, the company had $130.1 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $120.5 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of November 3, 2018.

Fiscal 2019 Fourth Quarter Outlook

Despite a slow start to the fourth quarter due to the later Thanksgiving this year compared to last year, our results during Thanksgiving weekend through Cyber Monday give us optimism about our opportunity to deliver positive comps for the fourth quarter as a whole. Based on current and historical trends, particularly with respect to years with a later Thanksgiving and shorter time frame to Christmas, the company expects its fourth quarter total net sales to range from approximately $179 million to approximately $184 million based on an anticipated comparable store net sales increase of 2 percent to 5 percent for the quarter as a whole. The company expects its fourth quarter operating income to range from approximately $11 million to approximately $12.5 million, and earnings per diluted share to range from $0.29 to $0.32. This outlook assumes no asset impairment charges, an anticipated effective tax rate of approximately 27 percent, and weighted average shares of approximately 29.9 million.