Tilly’s Inc. (NYSE:TLYS) Ed Thomas joined the ranks of CEOs Thursday asked to defend their spending on e-commerce initiatives by Wall Street analysts concerned that shipping costs and massive investments in fulfillment centers will lower the industry’s return on investment.
Tilly’s reported Thursday that its sales came in flat at $120.2 million in the fiscal first quarter ended May 2 compared with a year earlier, despite the addition of 11 stores. The company attributed the decrease to a 4.1-percent decline in same-store sales driven by lower traffic partially offset by stronger conversion. The decline would have been worse if not for strong growth in online sales.
But the higher mix of online sales shaved gross margin by 30 basis points during the quarter due to higher spending on shipping, prompting analysts to question whether investors should lower their return on investment expectations for the larger retail industry.
“Look, free shipping is part of everybody’s formula to a certain extent, it is not new to our company, it’s been done in the past, and we are selective when we do it,” Thomas said. “So we are very sensitive in terms of how we manage that business and making sure it’s profitable, and at the same time giving our customers multiple choices in which to shop our merchandise mix and our brands.”
Tilly’s recently implemented a ship-from-store program and expects to begin offering in-store pickup of online orders in the current quarter. Thomas, who took the helm at Tilly’s in October after guiding retailer Wet Seal through a Chapter 11 bankruptcy, said such initiatives provide the best way to counter declining traffic.
“I know from prior experience and from other retailers that that will definitely drive traffic to our stores,” Thomas said.
He added that declining traffic at Tilly’s mall stores is being driven by changes in how teens spend their time more than it is fashion trends, income or other factors.
“The customer does a lot of homework online before they go shopping in the mall, and so I think whatever marketing we do online is really important,” he said.
The days of teens frittering away hours cruising the mall are numbered.
“They’re not completely gone,” he said, “but I don’t think they spend as much time in the mall as they used to.”
Tilly’s reported that spending on shipping for e-commerce accounted for just 30 of the 290-basis-point decline in gross margin during the quarter compared to -170 basis points from lower comps and new-store openings and a -90 basis decline in product margins due to increased markdowns.
SG&A rose to 30.4 percent of net sales from 28.2, due primarily to legal provisions and non-cash store impairment charges. The company was able to absorb higher minimum wagers without increasing its average payroll per store.
The retailer was able to reduce its inventory per-square-foot 7 percent thanks in part to a micro-merchandising initiative Thomas initiated at underperforming stores shortly after taking the helm.
“We have been reacting faster to move through slow sellers and allow for better flow of new product,” Thomas said.
Tilly’s exited the quarter with $88 million in cash and marketable securities and no debt outstanding under its revolving credit facility.
Photo courtesy Tilly’s and Goldcoast Skateboards