Tilly’s Inc. reported margins improved sharply in the fiscal first quarter ended May 2 but said a sharp drop in traffic at its heritage stores since Easter prompted it to issue unusually broad comp store guidance for the fiscal second quarter.

The Irvine, CA-based retailer, which specializes in selling California-inspired apparel, footwear and accessories brands, refers to its stores in California , Arizona and Nevada as its heritage stores.

TLYS reported net sales of $120.2 million, up 8.1 percent compared to the fiscal first quarter of 2014. The retailer, which carries many global action sports brands,  was able to more than offset the impact of weakening traffic at its heritage stores by opening news stores and through higher conversion rates and average transaction values compared with a year earlier. Executives said all product categories posted comps growth.

Online sales driving comps growth

While comparable store sales increased 2.0 percent  compared to the same 13-week period in 2014, much of the growth appeared to come online, where TLYS continues to build momentum a year after opening a new fulfillment center. TLYS ended the period with 213 stores, an increase of 19 compared with a year earlier.

“Our first-quarter performance demonstrates that we progressed in our efforts to increase sales and profitability despite further weakness in traffic, especially in the post-Easter period,” said Daniel Griesemer, President and Chief Executive Officer.

Griesemer credited the growth to investment in dominant, on-trend products and categories, including more products and brands that are new, unique, or exclusive to Tilly's. Strong performers included Nike SB skate shoes and Ray-Ban, new brands like Catch Surf and exclusive products from LRG, Neff, Element, Rook and Electric. New or exclusive collaborations with Converse, Hurley, O'Neill, and Billabong also contributed.

Firmer pricing boosts margins
Gross margin climbed 180 basis points to 30.0 percent with half of the improvement coming from higher merchandise margins, which improved thanks to better regular price selling and lower markdowns. Another 60 basis points came from lower buying, distribution and occupancy costs achieved through comp store growth. The remaining 30 points of improvement was attributed to a favorable adjustment to rental expenses incurred in prior years. 

“We expanded our gross profit and ended the quarter with inventory well positioned for the summer and back-to-school seasons,” said Griesemer.

A 100 basis point increase in selling, general and administrative expenses, which reached 28.2 percent of net sales, resulted in operating margins of 1.8 percent, up 80 basis points from a year earlier.  The higher SG&A ratio reflected the impact California's new minimum wage on store payrolls.

Net income was $1.3 million, or 5 cents per diluted share, compared with $600,000, or 2 cents per diluted share, in the year earlier quarter.

Opportunistic buys fuel inventory growth
TLYS attributed a $10.1 million, or 19.8 percent, increase in merchandise inventory at quarter's end to certain low risk key merchandise initiatives and opportunistic buys for summer and the back-to-school season as well as increased inventory to support the planned growth in its e-commerce business. On a square footage basis, inventory rose 10 percent. Executives plan for a similar year-over-year increase in inventory per square foot at the end of the second quarter as it continues to fund key merchandise initiatives and planned e-commerce growth.

The retailer ended the period with $79.2 million in cash and marketable securities and no borrowings or debt outstanding on its revolving credit facility.

Weakening traffic blurs outlook

Citing much weaker traffic and softness in sales in its key heritage markets since Easter, TLYS issued guidance for the fiscal second quarter that calls for comparable store sales to range from a decline of 2 percent to an increase of 2 percent. The company expects  net income per diluted share to be in the range of 1-to-5 cents, compared with 5 cent in the year earlier quarter. 

Although parts of California are entering a fourth year of drought, Griesemer attributed the weakness to weather that was cooler and wetter than normal in many heritage markets. He said he sees no evidence of any fundamental or structural change in those markets.

“The stores in our heritage markets continue to be very high volume, and a strong driver of profit for the company,” he said. “You will not see us turning to a significant promotional position on this. We are very comfortable with where our inventory is and where it will be, and the initiatives we have in place to drive profitable growth. “