Tilly’s, Inc. reported earnings and sales missed company guidance in the second quarter. Sales were down 17 percent against record year-ago revenues.

“We believe our second quarter operating results were negatively affected by the impact on our customers of the highest inflationary environment in 40 years, which we expect will also adversely impact our third quarter results,” commented Ed Thomas, president and chief executive officer. “At its peak, the back-to-school season produced an improved comparative trend in late July and early August. However, this trend has since declined and we believe the remainder of the third quarter will be challenging as we anniversary last year’s early holiday shopping patterns, though this may give us an opportunity to have a better performance trend in the fourth quarter if the holiday season follows more traditional patterns.”

Operating Results Overview
For greater context relating to the following comparisons, it should be noted that the company’s operating results for the comparative periods last year were fueled by unprecedented pent-up consumer demand and the impact of stimulus payments resulting from the pandemic, producing company-record results for net sales, gross margin, operating income and earnings per share for the second quarter and first half of fiscal 2021.

Fiscal 2022 Second Quarter Operating Results Overview
The following comparisons refer to the company’s operating results for the second quarter of fiscal 2022 ended July 30, 2022 versus the second quarter of fiscal 2021 ended July 31, 2021.

  • Total net sales were $168.3 million, a decrease of $33.6 million or 16.7 percent, compared to $202.0 million last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 16.4 percent. Net sales from physical stores were $137.1 million, a decrease of $27.5 million or 16.7 percent, compared to $164.6 million last year with a comparable store net sales decrease of 16.5 percent. Net sales from physical stores represented 81.5 percent of total net sales both this year and last year. The company ended the second quarter with 242 total stores compared to 244 total stores at the end of the second quarter last year. Net sales from e-commerce were $31.2 million, a decrease of $6.1 million or 16.4 percent, compared to $37.3 million last year. E-commerce net sales represented 18.5 percent of total net sales both this year and last year.
  • Gross profit, including buying, distribution and occupancy expenses, was $52.0 million, or 30.9 percent of net sales, compared to $74.7 million, or 37.0 percent of net sales, last year. Buying, distribution and occupancy costs were deleveraged by 330 basis points collectively despite being reduced by $0.9 million due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 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 $46.8 million, or 27.8 percent of net sales, compared to $48.3 million, or 23.9 percent of net sales, last year. 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 $0.7 million 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 compared to last year, but this was more than offset by wage rate increases.
  • Operating income was $5.2 million, or 3.1 percent of net sales, compared to $26.4 million, or 13.1 percent of net sales, last year.
  • Income tax expense was $1.5 million, or 28.4 percent of pre-tax income, compared to $5.9 million, or 22.5 percent of pre-tax income, last year. The increase in the effective income tax rate was primarily due to discrete tax impacts related to stock-based compensation.
  • Net income was $3.8 million, or $0.13 per diluted share, compared to $20.4 million, or $0.66 per diluted share, last year. Weighted average diluted shares were 30.2 million this year compared to 31.1 million last year.

Sales of $168.3 million were below guidance in the range of $170 million to $175 million. EPS of 13 cents was below company guidance in the range of 14 cents to 20 cents.

Fiscal 2022 First Half Operating Results Overview
The following comparisons refer to the company’s operating results for the first half of fiscal 2022 ended July 30, 2022 versus the first half of fiscal 2021 ended July 31, 2021.

  • Total net sales were $314.1 million, a decrease of $51.0 million or 14.0 percent, compared to $365.1 million last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 14.9 percent. Net sales from physical stores were $254.6 million, a decrease of $37.7 million or 12.9 percent, compared to $292.3 million last year with a comparable store net sales decrease of 14.1 percent. Net sales from stores represented 81.1 percent of total net sales compared to 80.1 percent of total net sales last year. Net sales from e-commerce were $59.5 million, a decrease of $13.3 million or 18.3 percent, compared to $72.8 million last year. E-commerce net sales represented 18.9 percent of total net sales compared to 19.9 percent of total net sales last year.
  • Gross profit including buying, distribution, and occupancy expenses, was $95.8 million, or 30.5 percent of net sales, compared to $129.6 million, or 35.5 percent of net sales, last year. Buying, distribution and occupancy costs were deleveraged by 270 basis points collectively despite being reduced by $1.9 million due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 230 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 $89.5 million, or 28.5 percent of net sales, compared to $88.3 million, or 24.2 percent of net sales, last year. Of the $1.3 million increase in SG&A dollars, $2.5 million was attributable to higher store payroll and related benefits. Additionally, $1.6 million was attributable to a credit from the reversal of a disputed California sales tax assessment in last year’s first quarter. Other expense increases included $0.6 million from technology services and $0.5 million from higher insurance premiums. Partially offsetting these increases was the absence of any corporate bonus accrual this year compared to $4.3 million included in last year’s SG&A.
  • Operating income was $6.3 million, or 2.0 percent of net sales, compared to $41.3 million, or 11.3 percent of net sales, last year.
  • Income tax expense was $1.8 million, or 28.2 percent of pre-tax income, compared to $9.7 million, or 23.7 percent of pre-tax income, last year. The increase in the effective income tax rate was primarily due to discrete tax impacts related to stock-based compensation.
  • Net income was $4.6 million, or $0.15 per diluted share, compared to $31.4 million, or $1.02 per diluted share, last year. Weighted average diluted shares were 30.6 million this year compared to 30.8 million last year.

Balance Sheet and Liquidity
As of July 30, 2022, the company had $116.4 million of cash and marketable securities and no debt outstanding. This compared to $148.5 million at the end of the second quarter last year, and no debt outstanding. Since the end of last year’s second quarter, the company paid aggregate cash dividends to stockholders of $30.9 million in December 2021 and repurchased 987,427 shares of its common stock for a total of $9.0 million pursuant to its previously announced stock repurchase program. The company is authorized to repurchase up to an additional 1,012,573 shares by mid-March 2023 at its discretion based on market characteristics.

The company 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, as the company continues to contend with inconsistent product flows as a result of ongoing supply chain challenges. Unit inventories were down 1.1 percent per square foot relative to last year.

Total capital expenditures for the first half were $6.9 million compared to $8.5 million last year, the decrease is primarily due to earlier new store openings last year. For fiscal 2022 as a whole, the company expects its total capital expenditures to be in the range of $22 million to $24 million, inclusive of 11 new store openings.

Fiscal 2022 Third Quarter Outlook
Total comparable net sales through August 30, 2022, including both physical stores and e-commerce, decreased by 10.6 percent relative to the comparable period last year. Based on this result, current and historical trends, and anticipating a significant decline in the post-back-to-school period of the quarter, the company currently estimates that its fiscal 2022 third-quarter net sales will be in the range of approximately $165 million to $170 million with a comparable net sales decrease of 18 percent to 21 percent, SG&A expenses to be in the range of approximately $46 million to $47 million, operating income to be in the range of approximately $1.9 million to $4.6 million, and earnings per diluted share to be in the range of $0.05 to $0.11.

The company expects its estimated income tax rate to be approximately 27 percent and estimated weighted average diluted shares to be approximately 30.2 million. This compares to a company quarterly record of $206.1 million in net sales and records earnings per diluted share of $0.66 for the third quarter of last year. The company expects to have 247 total stores open at the end of the third quarter, a net increase of 4 from 243 total stores at the end of last year’s third quarter.

The current business environment remains subject to unpredictable risks and uncertainties, including the current inflationary environment, continuing supply chain difficulties, labor challenges, the pandemic, geopolitical concerns, and how consumer behavior may change relative to any of these factors as well as last year’s historic anomalies of pent-up demand coming out of pandemic-related restrictions and federal stimulus payments. As a result, the company’s estimates concerning its projected business performance may change at any time and there can be no guarantee that the company’s current estimates will be accurate.

Photo courtesy Tilly’s