Benefitting from its sixth consecutive quarter of positive comp sales, fourth consecutive quarter of store traffic growth and continued strict inventory and expense management, Tilly’s Inc. reported third-quarter earnings that handily topped Wall Street’s targets.

In the quarter ended October 28, net profits climbed 36.5 percent to $8.8 million, or 30 cents per share. Wall Street was expecting earnings of 21 cents a share.

Total sales inched up 0.5 percent to $152.8 million despite ending the quarter with five fewer stores than a year ago (220 total stores vs. 225 last year). When it reported second-quarter results. Tilly’s said it expected earnings in the range of 19 to  24 cents.

Revenues reached $152.8 million, an increase of 0.5 percent.

Comparable store sales, which includes e-commerce sales, increased 1.5 percent. The guidance had called for sales in the range of flat to up low single-digits. Comps increased 4.4 percent in the third quarter last year.

“We believe our broad and diverse merchandise assortment of over 400 brands over the course of the year continues to differentiate Tilly’s from many other retailers,” said Ed Thomas, president and CEO, on a conference call with analysts.

During the third quarter, branded men’s and boy’s assortment drove it third quarter comps with high single-digit and mid-single-digit percentage increases respectively. Accessories and footwear were all flat to down 1 percent. Girls were down down mid-single-digits due to weakness in fashion tops and dresses.

E-commerce sales were just about flat due to certain transitionary issues associated with the launch of its new Demandware website platform which was completed in early November.

Gross margin improved to 32.8 percent from 31.5 percent last year. The gain reflected a 100 basis-point reduction in buying, distribution and occupancy costs, and a 30 basis-point improvement in product margins as a result of reduced markdowns.

SG&A expenses were reduced to 23.5 percent of sales from 24.5 percent primarily due to reduced marketing spend and lower corporate payroll costs.

Looking to the fourth quarter, comp sales to-date including Black Friday weekend and Cyber Monday are up low single-digits. In early November, a new accessory fixture package was rolled out to all stores to enhance the presentation of its accessories assortment and early results have been encouraging. Said Thomas, “We are cautiously optimistic that this bodes well for a solid fourth quarter.”

Regarding technology, Thomas noted that its new integrated Aptos point of sale order management and customer relationship management systems, as well as its new Demandware website platform are all now in place. He added, “As with any new systems, there are bugs to work out but we have had no material negative impacts on our business from these implementations. We’re excited about the capabilities of these new systems given to improve customer engagement and drive increased sales opportunities going forward. Our next technology deployments will be the launch of an enhanced mobile app and a ship-to-store program in the first half of fiscal 2018.”

On the marketing front, the retailer continues its recent efforts to drive store traffic   Said Thomas “We believe more direct consumer interactions, improved customer engagement generate additional excitement about Tilly’s. Early in the third quarter we launched an all-store Augmented Reality Scavenger Hunt in partnership with a Social Media star which was a big hit with our customers. We continue to work on new in-store collaborations but I’m still not able to share details just yet.”

On expansion, Tilly’s noted that given the the operating margin trend, it plans to “get back into a moderate store growth mode” with 10 to 15 store openings next year. The stores are expected to be open in existing markets One of the new stores in Alderwood, WA will be the first to have a newer smaller store format developed last year. The format is designed to present our full assortment in as little as 4,500 square feet; Alderwood will be approximately 5,100 square feet.

Tilly’s also continues to work on driving down store occupancy on existing stores as leases come up for renegotiation. An additional 120 lease decisions are expected to be made over the course of 2018 and 2019.

Based on current and historical trends, the company expects its fourth quarter comparable store sales to increase by a low single-digit percentage, operating income to be in the range of approximately $10.5 million to $13.0 million, and income per diluted share to be in the range of 22 to 26 cents. This compares to operating income of $10.4 million and income per diluted share of 22 cents for the fourth quarter of fiscal 2016..

“In closing, I remain proud of our teams efforts and dedication in driving improved results over the past year and a half during which was arguably has been one of the most challenging and complicated retail environment ever,” said Thomas. “We are off to a decent start to the holiday season and we believe we can continue our operating momentum through the fourth quarter and into fiscal 2018.”

Photo courtesy Tilly’s