By Thomas J. Ryan

<span style="color: #a3a3a3;">Tilly’s Inc., as previously reported, saw its first negative quarterly comp in over three and a half years. With a new chief merchant in place, the action sports-themed chain on its fourth-quarter conference call laid out its revised merchandise priorities for 2020.

Tricia Smith was appointed the company’s EVP and chief merchandising officer, effective September 30. Smith previously served as EVP, general merchandise manager of women’s, young contemporary, designer and specialized apparel at Nordstrom since 2016.

On its fourth-quarter conference call on March 12, Ed Thomas, president and CEO, said, “our new chief merchandising officer, Tricia Smith has identified several opportunities that we believe will improve our business over time, notwithstanding current concerns regarding the potential near-term effects of the coronavirus situation.”

Steps have included bringing in specific new brands and selectively buying deeper in existing brands.

Thomas pointed to five merchandising priorities for 2020:

  • Digital-first mentality: Planning assortments that are specifically targeted to drive online business then editing those assortments down for stores. Said Thomas, “With our customer demographic, we believe it is critical to always have the best of our assortment online and to adjust our buys into the styles and items that drive e-com sales. We expect that greater newness more frequently should help increase regular price selling online and e-com profitability over time.”
  • Increasing investments in denim: Not only in the amount carried but also in the available size ranges. Said Thomas, “We believe that carrying additional denim inventory will provide us with a much more meaningful year-round denim presentation to attract more customers.”
  • Further developing the proprietary RSQ brand: With little direct marketing, RSQ was the number two overall brand for fiscal 2019 with $60 million in annual net sales, making it Tilly’s strongest denim brand. Said Thomas, “By focusing resources on this proprietary brand expanding our denim presentation and with the creation of the RSQ concept store now scheduled to open at the end of June in the Irvine Spectrum, we believe that RSQ has meaningful growth opportunities ahead.”
  • Further capitalize on Boys and Girls: Boys and Girls are seen as key differentiators versus competitors. Also without significant marketing efforts, Boys and Girls combined to account for nearly $70 million in total net sales between apparel and footwear in fiscal 2019. Said Thomas, “We have recently started creating kid-specific marketing materials to generate greater awareness of this part of our business. We believe it can grow further with better communication and marketing behind it, particularly in new markets.”
  • Expanding women’s with improved assortments: The West of Melrose collection, Tilly’s new young contemporary proprietary brand, is the beginning of an effort to expand the age range of its women’s business beyond early high school years. Said Thomas, “Given that we carry both young adult and kids clothing, we often see young families shopping in our stores and believe we have an opportunity to offer assortments that can retain our young women customers longer than we have in the past.”

Added Thomas, “Although some of these merchandising strategies are already underway, we expect the impact of many of them to begin in earnest with the back-to-school season. In the meantime, Tricia has very quickly procured several new brands for Tilly’s, and we are excited about their prospects to drive additional business over time.”

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On January 13, Tilly’s lowered its fourth-quarter guidance based on holiday sales. The company expected comparable stores to decrease by 2 percent to 3 percent with EPS in the range of 18 cents to 20 cents. Previously, comps were expected to climb 2 percent to 5 percent for the quarter with EPS in the range of 29 cents to 32 cents.

Said Thomas, “Given that several other retailers have since reported similar slowdowns in their businesses during the same period, we believe this drop was primarily due to a shift in consumer behavior in connection with the shorter window between Thanksgiving and Christmas for this past holiday season.”

In the fourth quarter, total sales were $172.5 million, an increase of 1.1 percent.

Comparable store sales, which includes e-commerce net sales, decreased 2.0 percent compared to last year’s increase of 6.4 percent. Comparable store sales in physical stores decreased 2.2 percent. E-commerce sales decreased 1.2 percent and represented approximately 19.3 percent of net sales.

By department, girls and women’s comped positive, while footwear, accessories, boys and men’s comped negatively. Said Thomas, “We experienced a deceleration in sales from a couple of our top third-party brands.”

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Gross margins were 30.2 percent of sales, down from 30.6 percent the year before. Product margins decreased 20 basis points due to increased markdowns. Occupancy costs deleveraged 70 basis points, primarily due to opening 11 net new stores compared to last year and the negative comparable store net sales result. Distribution costs improved 50 basis points primarily due to lower e-commerce shipping charges compared to last year.

SG&A expenses rose to 25.3 percent of sales from 24.2 percent. The net $2.4 million increase in SG&A was primarily due to higher store payroll expenses of approximately $1.5 million resulting from minimum wage increases and store count growth, higher worker’s compensation claims reserves of $800,000 and higher marketing expenses of approximately $400,000 primarily relating to e-commerce. These expense increases were partially offset by lower corporate bonus provisions of $1.2 million compared to last year. Last year’s SG&A also included $900,000 in expense reductions related to negotiated resolutions of certain vendor disputes.

Operating income declined 9.2 percent to $8.5 million. Net income was $6.3 million, or 21 cents per share, a drop of 11.5 percent.

For the full-year, sales were $619.3 million, an increase of 3.5 percent. Comparable store sales, which include e-commerce net sales, increased 0.8 percent compared to last year’s increase of 4.0 percent. E-commerce net sales increased 9.7 percent and represented approximately 15.9 percent of net sales. Comparable sales in physical stores dipped 0.7 percent.

Operating income in the year slumped 9.5 percent to $28.5 million. Net income declined 9.2 percent to $22.6 million, or 76 cents per share.

Looking ahead, through March 10, total comps, including e-commerce, increased by a low-single-digit percentage with comps in stores slightly negative and e-commerce sales up high-single-digits on a percentage basis.

Tilly’s, however, said it will be no longer providing guidance due to the uncertainty around the coronavirus outbreak.

Thomas said Tilly’s is closely monitoring events and working with third-party brands and proprietary suppliers to gather information, determine alternative action plans and adapt to any foreseeable business impacts.

“Currently, we have been informed that some of the new product receipts will be delayed in the March-through-June period,” said Thomas. “We cannot predict in greater detail what the potential impacts of coronavirus may be on our business as any potential changes in the number of cases and severity of the situation and its potential impacts on consumer behavior, store traffic, production capabilities, timing of deliveries, our people, weather, and the market, generally are unknowable.”

He added, “Further, we may be required to take extraordinary measures to ensure the safety of our employees and business partners. Our sales and operating results could be materially negatively impacted at the time as the coronavirus situation evolves. As a result, we are unable to provide specific earnings guidance for fiscal 2020 at this time. We will continue to carefully monitor this coronavirus situation and continue to execute our business plans to the best of our ability.”

Photo courtesy Tilly’s