Tilly’s, Inc. predicted a significant decline in third-quarter results as sales in the second quarter dropped off in the latter part of the period, attributed to inflationary pressures.
The action sports-themed chain also reported earnings and sales in the second quarter were short of company guidance.
“As our customers continue to face the highest inflationary environment of the past 40 years, our second quarter results fell just short of our estimated outlook ranges for both net sales and earnings per share,” said Ed Thomas, president and CEO, on a call with analysts.
In the second quarter ended July 30, earnings dropped 81.4 percent to $3.8 million, or 13 cents a share, from $20.4 million, or 66 cents, a year ago and below Tilly’s guidance in the range of 14 cents to 20 cents.
Tilly’s faced challenging comparisons against company-record results in the year-ago quarter, supported by pent-up consumer demand and the impact of stimulus payments resulting from the pandemic.
Sales in the quarter were down 16.7 percent to $168.3 million, below guidance in the range of $170 million to $175 million.
Comparable-store sales, including both physical stores and e-commerce, fell 16.4 percent. Comps eased 0.6 percent relative to the pre-pandemic second quarter of 2019 in what Tilly’s officials also saw as a sign of inflation’s impact.
Net sales from physical stores declined 16.7 percent to $137.1 million, with a comp decrease of 16.5 percent. E-commerce sales were down 16.4 percent to $31.2 million. E-commerce sales represented 18.5 percent of sales both this year and last year.
By month, comps began negative in May and declined further throughout June before moderating to less negative comps in the final two weeks of the quarter once the early stages of the back-to-school season began.
All geographic markets comped double-digit negative for the quarter.
Merchandise departments comped double-digit negative except for footwear, which decreased by a high-single-digit percentage. Swim was weak across departments and geographies. Customer traffic and conversion declined by high single-digit percentages compared to last year.
“We believe seeing both traffic and conversion declined to this extent, at the same time as indicative of the impact of inflation on our customers particularly as we lap last year’s record-setting results that were fueled by stimulus payments and other pandemic-related factors,” said Thomas.
He said supply chain issues have been “getting somewhat better” but continue to cause disruptions to typical product flows, most significantly in footwear and branded women’s and children’s apparel. Thomas said, “We believe we have managed through these challenges fairly well under the circumstances.”
Gross Margins Slump 610 Basis Points
Gross margins eroded to 30.9 percent from 37.0 percent a year ago. Buying, distribution, and occupancy costs were deleveraged by 330 basis points collectively despite being reduced by $900,000 due to carrying these costs against a significantly lower level of net sales this year. Product margins declined 280 basis points primarily due to an increased and more normalized markdown rate compared to last year when full-price selling was at record levels.
SG&A expenses were reduced by 3.1 percent to $46.8 million and increased as a percent of sales to 27.8 percent from 23.9 percent a year ago. The $1.5 million reduction in SG&A dollars was primarily attributable to the absence of any corporate bonus accrual this year compared to $2.8 million included in last year’s SG&A and a $700,000 reduction in e-com marketing expenses. Partially offsetting these expense reductions were less significant increases in each store’s payroll and related benefits, technology services, e-commerce fulfillment, and insurance expenses. Store payroll hours were managed to a lower average number of hours per store, although this was more than offset by wage rate increases.
Operating income plunged 80.3 percent to $5.2 million, or 3.1 percent of sales, from $26.4 million, or 13.1 percent, last year.
Inventory Flow Still Facing Disruptions
Tilly’s ended the second quarter with inventories at cost, up 4.1 percent per square foot, a significant improvement from being up 12.7 percent at the end of the first quarter. Tilly’s said it continues to contend with inconsistent product flows due to ongoing supply chain challenges. Unit inventories were down 1.1 percent per square foot relative to last year.
Mike Henry, EVP and CFO, said, “As we continue to contend with inconsistent product flows resulting from ongoing supply chain challenges, our goal remains to continue rightsizing our inventories relative to sales performance and anticipated sales trends, while continuing to maintain product margins that are reasonably consistent with our pre-pandemic performance as we’ve been doing thus far this year.”
Henry said Tilly’s had tapped cancellation rights if deliveries are “meaningfully late,” but the chain also wants to ensure its holiday offering is optimal. He added, “it’s a constant balancing act. We’ve discussed it multiple times a week, every single week, just because things change that rapidly, but again we both feel like the team has just turned yeoman’s work at just trying to keep us as under control as we can under extremely difficult circumstances.”
Outlook
Looking ahead, comparable sales through August 30, including both physical stores and e-commerce, decreased 10.6 percent versus the comparable period of last year. Thomas said the less negative comp trend that began in the latter half of July carried through the first half of August before returning to negative double-digits in the latter half of August. Compared to the pre-pandemic third quarter of 2019, comps increased 7.5 percent.
The CEO stated, “While these August comp results represent an improvement compared to our second quarter comp performance, we are expecting the latter half of the third quarter to decrease significantly, compared to last year once the traditional back-to-school shopping period concludes, particularly given the impacts of inflation this year and the early holiday shopping that took late last year. We feel good about our merchandise assortment for the holiday season, and if the holiday season follows more traditional patterns, we believe we have an opportunity to have a better performance trend in the fourth quarter.”
Sales in the third quarter are expected in the range of $165 million to $170 million, down from $206.1 million a year ago. Comparable store sales are expected to decrease in the range of 18 percent to 21 percent. Operating income is projected in the range of approximately $1.9 million to $4.6 million (versus $29.0 million a year ago), and EPS to be in the range of 5 cents to 11 cents versus 66 cents a share.
Photo courtesy Tilly’s
