Tilly’s Hints At Improving Sales Picture After Tough Q4 And Weak Start To 2023

Tilly’s, Inc. saw total net sales decline 11.8 percent to $180.4 million for the fourth quarter of fiscal 2022 ended January 28, compared to $204.5 million in the prior-year comparable quarter. Total comp store net sales, including both physical stores and e-commerce, decreased by 13.7 percent for the period.

Net sales from physical stores were $135.0 million, a decrease of 11.3 percent, compared to $152.2 million in the prior-year Q4, with a comp-store net sales decrease of 14.1 percent. Net sales from physical stores represented 74.9 percent of total net sales in the quarter, compared to 74.4 percent of total net sales in the prior-year Q4. Net sales from e-commerce were $45.3 million, a decrease of 13.4 percent, compared to $52.3 million in the prior-year quarter. E-commerce net sales represented 25.1 percent of total net sales in Q4 compared to 25.6 percent of total net sales in the prior-year Q4 period.

TLYS ended the fourth quarter with 249 total stores compared to 241 total stores at the end of the fourth quarter in the prior-year period.

Gross profit, including buying, distribution, and occupancy costs, was $52.4 million, or 29.1 percent of net sales, compared to $70.4 million, or 34.4 percent of net sales, in the prior-year period. Product margins declined by 290 basis points primarily due to an increased markdown rate compared to the prior-year period, during which Tilly’s said they “experienced record full-price selling with an abnormally low markdown rate.” Buying, distribution and occupancy costs deleveraged by 240 basis points collectively, despite being $0.4 million lower than in the prior-year period, due to carrying these costs against a significantly lower level of net sales compared to the prior-year Q4.

SG&A expenses were $53.5 million, or 29.7 percent of net sales, compared to $53.1 million, or 25.9 percent of net sales, in the prior-year period. The increase in SG&A dollars was primarily attributable to the impact of wage inflation on store, corporate and e-commerce fulfillment payroll expenses as well as operating 8 net additional stores compared to the prior-year period. These increases were partially offset by a $1.0 million reduction in bonus expenses due to the lack of any bonus accrual this past year.

Operating loss was $1.1 million, or (0.6) percent of net sales, compared to operating income of $17.3 million, or 8.5 percent of net sales, in the prior-year period, due to the combined impact of the outlined factors.

Other income was $1.1 million compared to other expenses of $0.4 million in the prior-year period primarily due to earning higher rates of return on marketable securities investments and the absence of any costs associated with a former asset-backed credit facility which were included in the prior-year period’s results.

Income tax benefit was $0.3 million, compared to income tax expense of $4.9 million, or 28.7 percent of pre-tax income, in the prior-year quarter. This quarter’s income tax benefit was primarily attributable to certain allowable deductions and tax credits.

Net income was $0.3 million, or 1 cent per diluted share, compared to net income of $12.1 million, or 38 cents per diluted share, in the prior-year period.

“Our fourth quarter results exceeded our revised outlook ranges provided in early January,” commented Ed Thomas, company president and CEO. “Despite a disappointing year overall, the ongoing impacts of the current inflationary environment, and potential recession concerns ahead, we remain cautiously optimistic that we will be well positioned to improve our operating results in fiscal 2023 compared to fiscal 2022.”

For context, the company cautioned that operating results for the comparative periods in the prior year were driven by significant 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 fourth quarter and fifty-two weeks of fiscal 2021.

Full-year total net sales were $672.3 million, a decrease of 13.3 percent, compared to $775.7 million in the prior year. Total comparable net sales, including both physical stores and e-com, decreased by 14.6 percent. Net sales from physical stores were $531.1 million, a decrease of 12.9 percent for the year, compared to $609.7 million in the prior year, with a comp-store net sales decrease of 14.5 percent for the 52-week period. Net sales from stores represented 79.0 percent of total net sales compared to 78.6 percent of total net sales in the prior year.

Net sales from e-commerce were $141.1 million for the year, a decrease of 15.0 percent, compared to $165.9 million in the prior year. E-commerce net sales represented 21.0 percent of total net sales compared to 21.4 percent of total net sales in the prior year.

Gross profit including buying, distribution, and occupancy costs, was $202.8 million, or 30.2 percent of net sales, for the fiscal year, compared to $276.7 million, or 35.7 percent of net sales, in the prior year. Buying, distribution and occupancy costs deleveraged by 280 basis points collectively despite being $1.2 million lower than in the prior-year 52-week period due to “carrying these costs against a significantly lower level of net sales” compared to the prior year. Product margins declined by 270 basis points primarily due to an increased markdown rate compared to the prior year, during which Tilly’s said they experienced “record full-price selling with an abnormally low markdown rate.”

SG&A expenses were $191.3 million, or 28.5 percent of net sales, for the year, compared to $189.1 million, or 24.4 percent of net sales, in the prior year. The increase in SG&A dollars was said to be primarily attributable to the impact of wage inflation on store payroll and operating eight net additional stores compared to the prior year, as well as increased software as a service cost. These increases were partially offset by a $7.1 million reduction in bonus expenses due to the lack of any bonus accrual this past year.

Operating income was $11.5 million, or 1.7 percent of net sales, for the fiscal year, compared to 87.6 million, or 11.3 percent of net sales, in the prior year.

Other income was $2.0 million for the year, compared to other expenses of $(0.6) million in the prior year, primarily due to earning higher rates of return on marketable securities investments and the absence of any costs associated with a former asset-backed credit facility which were included in in the prior year’s results.

Income tax expense was $3.3 million, or 24.9 percent of pre-tax income, for the year, compared to $22.8 million, or 26.2 percent of pre-tax income, in the prior-year period. The decrease in the effective income tax rate was primarily attributable to a decrease in pre-tax income.

Net income was $10.1 million, or 33 cents per diluted share, for the fiscal year, compared to 64.2 million, or $2.06 per diluted share, in the prior year. Weighted average diluted shares were 30.3 million this past year compared to 31.1 million in the prior year.

As of January 28, Tilly’s had $113.3 million of cash and marketable securities and no debt outstanding, compared to $139.2 million and no debt outstanding as of January 29, 2022.

Tilly’s ended the fiscal year with inventories per square foot down 8.2 percent compared to the prior year-end.

Total year-to-date capital expenditures at the end of the fourth quarter were $15.1 million this past year compared to $13.4 million in the prior year.

Total comparable net sales through March 7, 2023, including both physical stores and e-commerce, decreased by 19.9 percent relative to the comparable period in the prior year, with a 21.0 percent decrease in Fiscal February and a 17.3 percent decrease thus far in Fiscal March.

The company believes its first quarter results have been adversely impacted by weather, particularly in California wherein approximately 40 percent of its stores reside and currently expects its comparable net sales trend to improve over the remainder of the quarter given easier prior-year comparisons.

Based on current and historical trends, the company currently estimates that its fiscal 2023 first-quarter net sales will be in the range of approximately $122 million to $133 million, translating to an estimated comparable net sales decrease of approximately 11 percent to 18.5 percent compared to the first quarter of fiscal 2022.

The company currently estimates its SG&A expenses for the first quarter of fiscal 2023 to be in the range of approximately $43 million to $44 million, pre-tax loss to be in the range of approximately $11.0 million to $16.7 million, and estimated income tax rate to be approximately 27 percent. The company currently expects its loss per share for the first quarter of Fiscal 2023 to be in the range of 27 cents to 41 cents based on estimated weighted average shares of approximately 29.9 million.

Tilly’s currently expects its total capital expenditures for Fiscal 2023 to be in the range of approximately $15 million to $20 million, inclusive of up to 10 new stores and upgrades to certain distribution and information technology systems.