Tilly’s Inc. on Wednesday reported net income for the second quarter ended August 4 of $9.7 million, or 33 cents per diluted share, compared to a net loss of $0.6 million, or 2 cents per share, the same quarter a year ago.

Of the 35-cent improvement in year-over-year earnings per share, approximately $0.17 was attributable to an aggregate legal matter impacts noted below, approximately 10 cents was attributable to the retail calendar shift impact noted below, and the remaining 8 cents was due to improved operating results.

On a non-GAAP basis, excluding the impacts of the legal matter from both years, net income was $8.6 million, or 29 cents per diluted share, compared to net income of $3.1 million, or 11 per diluted share, last year. Wall Street expected 26 cents per share.

Total net sales of $157.4 million marked 13.4 percent increase from last year and beat estimates by $2.1 million. As a result of the calendar shift impact of last year’s 53rd week in the retail calendar, which caused a portion of the back-to-school season to shift into the second quarter, approximately $12.3 million of comparable net sales were realized in the second quarter this year rather than in the third quarter.

The remaining net sales increase of approximately $6.3 million was primarily attributable to increased comparable store net sales and net sales from five net new stores.

Comparable store net sales, which includes e-commerce net sales, increased 4.4 percent in total. Comparable store net sales in physical stores increased 3.8 percent. E-commerce net sales increased 8.1 percent. Comparable store net sales increased 2.1 percent in the second quarter last year.

“Tilly’s delivered its strongest comparable store net sales result since the third quarter of fiscal 2016, and we believe we have our e-com business back on track,” commented Ed Thomas, president and chief executive officer. “The back-to-school season is off to a strong start, and we feel optimistic about the back half of fiscal 2018.”

Second Quarter Results Overview

The following comparisons refer to operating results for the second quarter of fiscal 2018 versus the second quarter of fiscal 2017 ended July 29, 2017:

  • Total net sales of $157.4 million, an increase of $18.6 million, or 13.4 percent, from $138.8 million last year. As a result of the calendar shift impact of last year’s 53rd week in the retail calendar, which caused a portion of the back-to-school season to shift into the second quarter, approximately $12.3 million of comparable net sales were realized in the second quarter this year rather than in the third quarter. The remaining net sales increase of approximately $6.3 million was primarily attributable to increased comparable store net sales and net sales from five net new stores.
  • Comparable store net sales, which includes e-commerce net sales, increased 4.4 percent in total. Comparable store net sales in physical stores increased 3.8 percent. E-commerce net sales increased 8.1 percent. Comparable store net sales increased 2.1 percent in the second quarter last year.
  • Gross profit was $50.1 million, an increase of 22.4 percent from $40.9 million last year, primarily due to the calendar shift noted above and increased comparable store net sales. Gross margin, or gross profit as a percentage of net sales, increased to 31.8 percent from 29.5 percent last year. This 230 basis point improvement in gross margin was primarily attributable to leveraging lower total occupancy costs on higher total net sales. Product margins were approximately flat.
  • Selling, general and administrative expenses (“SG&A”) were $37.6 million, or 23.9 percent of net sales, compared to $42.2 million, or 30.4 percent of net sales, last year. Last year’s SG&A included an estimated $6.2 million provision related to a legal matter. This year’s SG&A includes a $1.5 million reduction to this same provision as a result of the final settlement of the related legal matter in early August 2018. Taken together, these legal matter impacts accounted for 540 basis points of the total 650 basis point improvement in SG&A. The remaining 110 basis point improvement in SG&A was primarily due to leveraging store and corporate payroll costs against higher total net sales. On a non-GAAP basis, excluding the noted legal matter impacts from both years, SG&A increased to $39.1 million, or 24.8 percent of net sales, compared to $36 million, or 25.9 percent of net sales, last year. Primary dollar increases in SG&A were attributable to certain marketing and other selling expenses associated with a portion of the back-to-school season shifting from the third quarter to the second quarter, store payroll increases due to higher net sales and minimum wage increases, and corporate bonus provision increases due to improved year-over-year operations.
  • Operating income was $12.5 million, or 7.9 percent of net sales, compared to an operating loss of $(1.2) million, or (0.9) percent of net sales, last year. Of this $13.7 million improvement in year-over-year operating income, approximately $7.6 million was attributable to the aggregate year-over-year impact of the legal matter noted above, approximately $4.2 million was attributable to the retail calendar shift impact noted earlier, and approximately $1.9 million was attributable to increased comparable store net sales results. On a non-GAAP basis, excluding the legal matter impacts from both years, operating income was $11 million, or 7 percent of net sales, compared to $4.9 million, or 3.5 percent of net sales, last year.
  • Income tax expense was $3.3 million, or 25.3 percent of pre-tax income, compared to income tax benefit of $(0.4) million, or 42.8 percent of pre-tax loss last year. Income tax expense/(benefit) includes certain discrete items associated with employee stock-based award activity in both periods.
  • Net income was $9.7 million, or 33 cents per diluted share, compared to a net loss of $(0.6) million, or (2) cents per share, last year. Of the 35 cent improvement in year-over-year earnings per share, approximately $0.17 was attributable to the aggregate legal matter impacts noted above, approximately $0.10 was attributable to the retail calendar shift impact noted earlier, and the remaining $08 was due to improved operating results. On a non-GAAP basis, excluding the impacts of the legal matter from both years, net income was $8.6 million, or $0.29 per diluted share, compared to net income of $3.1 million, or $0.11 per diluted share, last year.

First Half Results Overview

The following comparisons refer to operating results for the first half of fiscal 2018 versus the first half of fiscal 2017 ended July 29, 2017:

  • Total net sales were $281 million, an increase of $21.3 million, or 8.2 percent, from $259.8 million last year. As a result of the calendar shift impact of last year’s 53rd week in the retail calendar, a net increase of approximately $15.2 million of comparable net sales were realized in the first half. The remaining net sales increase of $6.1 million was primarily attributable to increased comparable store net sales and net sales from five net new stores.
  • Comparable store net sales, which includes e-commerce net sales, increased 2.4 percent in total. Comparable store net sales in physical stores increased 2.7 percent. E-commerce net sales increased 0.9 percent. Comparable store net sales increased 1.4 percent in the first half last year.
  • Gross profit was $85.1 million, an increase of 15.2 percent from $73.8 million last year, primarily due to the calendar shift noted above and increased comparable store net sales. Gross margin increased to 30.3 percent from 28.4 percent last year. This 190 basis point improvement in gross margin was primarily attributable to leveraging lower total occupancy costs on higher total net sales. Product margins were flat.
  • SG&A was $71.3 million, or 25.4 percent of net sales, compared to $75.4 million, or 29 percent of net sales, last year. Last year’s SG&A included an estimated $6.2 million provision related to a legal matter. This year’s SG&A includes a $1.5 million reduction to this same provision as a result of the final settlement of the related legal matter in early August 2018. Taken together, these legal matter impacts accounted for 290 basis points of the total 360 basis point improvement in SG&A. The remaining 70 basis point improvement in SG&A was primarily due to leveraging store and corporate payroll costs against higher total net sales. On a non-GAAP basis, excluding the legal matter impacts from both years, SG&A increased to $72.7 million, or 25.8 percent of net sales, compared to $69.2 million, or 26.7 percent of net sales, last year. Primary dollar increases in SG&A were attributable to store payroll increases due to higher net sales and minimum wage increases, certain marketing and other selling expenses associated with a portion of the back-to-school season shifting from the third quarter to the second quarter and corporate bonus provision increases due to improved year-over-year operations.
  • Operating income was $13.8 million, or 4.9 percent of net sales, compared to an operating loss of $(1.6) million, or (0.6) percent of net sales, last year. Of this $15.4 million improvement in year-over-year operating income, approximately $7.6 million was attributable to the aggregate year-over-year impact of the legal matter noted above, approximately $5.2 million was attributable to the retail calendar shift impact noted earlier, and approximately $2.6 million was attributable to increased comparable store net sales results. On a non-GAAP basis, excluding the legal matter impacts from both years, operating income was $12.4 million, or 4.4 percent of net sales, compared to $4.6 million, or 1.8 percent of net sales, last year.
  • Income tax expense was $3.8 million, or 25.7 percent of pre-tax income, compared to income tax benefit of $(0.4) million, or 33.2 percent of pre-tax loss, last year. Income tax expense/(benefit) includes certain discrete items associated with employee stock-based award activity in both periods.
  • Net income was $10.9 million, or $0.37 per diluted share, compared to a net loss of $(0.8) million, or $(03) per share, last year. Of the $0.40 improvement in year-over-year earnings per share, approximately $0.17 was attributable to the aggregate legal matter impacts noted above, approximately $0.13 was attributable to the retail calendar shift impact noted earlier, and the remaining $0.10 was due to improved operating results. On a non-GAAP basis, excluding the impact of the legal matter from both years, net income was $9.8 million, or $0.33 per diluted share, compared to $3 million, or $0.10 per diluted share, last year.

Balance Sheet and Liquidity

As of August 4, 2018, the company had $124.2 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $109.6 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of July 29, 2017. The company paid special cash dividends to its stockholders of approximately $29.1 million and $20.1 million in the aggregate during February of 2018 and 2017, respectively.

Fiscal 2018 Third Quarter Outlook

As a result of the calendar shift impact of last year’s 53rd week in the retail calendar, the company expects its third quarter total net sales to range from approximately $145 million to $151 million based on an assumed three to six percent increase in comparable store net sales. We expect this calendar shift to result in a net decrease of approximately $13.9 million in last year’s comparable sales base and approximately $0.11 of diluted earnings per share for third quarter comparability. This is due to a portion of the back-to-school season shifting into the second quarter this year versus being in the third quarter last year. The company expects third quarter operating income to range from approximately $8 million to $9.5 million, and earnings per diluted share to range from $0.20 to $0.24. This outlook assumes an anticipated effective tax rate of approximately 27 percent and weighted average shares of approximately 30 million.

Pursuant to the settlement terms of the previously noted legal matter, the company will be issuing non-transferable discount coupons to approximately 612,000 existing Tilly’s customers in early September 2018, which will allow for a one-time 50 percent discount on a single, future purchase transaction of up to $1,000. Any unused coupons will expire upon the one year anniversary of coupon issuance. We cannot reasonably estimate the number of coupons that will be utilized, the timing of any coupon usage, the average transaction value utilizing these coupons, or the potential impact of their usage on our reported comparable store net sales, product margins and earnings per share over the course of the next twelve months, but the potential impact could be material and adverse.

In particular, the company generally expect that the usage of these coupons will have a positive impact on comparable store net sales and a negative impact on product margins, although the company cannot reasonably estimate the magnitude of such impacts. The potential impact on the company’s operating income will depend on a variety of factors that cannot be reasonably estimated at this time, including but not limited to the factors described above. As a result of the uncertainty related to the potential impact of these coupons, the company’ third quarter outlook does not contemplate any projected impacts from the future usage of these coupons.