Tilly’s Inc. reported a 36.5 percent gain in earrings in the third quarter on a 1.5 percent gain in same-store sales and improved operating margin, topping Wall Street’s targets.

“In the third quarter, we delivered a 32 percent improvement in year-over-year operating income, largely driven by our sixth consecutive quarter of comp store sales growth, our fourth consecutive quarter of store traffic growth, and our continued strict inventory and expense management,” said Ed Thomas, president and chief executive officer. “Having turned the operating margin trend of our business around over the past year and a half, we now believe it is the appropriate time to plan for moderate growth by targeting to open approximately 10 to 15 new stores during fiscal 2018.”

Third Quarter Results Overview

The following comparisons refer to operating results for the third quarter of fiscal 2017 versus the third quarter of fiscal 2016 ended October 29, 2016:

  • Total net sales were $152.8 million, an increase of 0.5 percent from $152.1 million last year, despite ending the quarter with five fewer stores than a year ago (220 total stores vs. 225 last year).
  • Comparable store sales, which includes e-commerce sales, increased 1.5 percent. Comparable store sales increased 4.4 percent in the third quarter last year.
  • Gross profit was $50.1 million, an increase of 4.4 percent from $48.0 million last year. Gross margin, or gross profit as a percentage of net sales, increased to 32.8 percent from 31.5 percent last year. This 130 basis-point increase in gross margin was attributable to 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.
  • Selling, general and administrative expenses (“SG&A”) were $36.0 million, or 23.5 percent of net sales, compared to $37.3 million, or 24.5 percent of net sales, last year. This 100 basis-point decrease was primarily attributable to reduced marketing spend and lower corporate payroll costs.
  • Operating income was $14.1 million, or 9.2 percent of net sales, a 32.3 percent increase compared to $10.7 million, or 7.0 percent of net sales, last year. This 220 basis-point increase in our operating margin was attributable to the combination of comparable store sales growth, improved gross margins, and reduced SG&A, each as explained above.
  • Income tax expense was $5.7 million, or 39.6 percent of pre-tax income, compared to $4.4 million, or 40.4 percent of pre-tax income, last year.
  • Net income was $8.8 million, or $0.30 per diluted share, a 36.5 percent increase compared to $6.4 million, or 22 per diluted share, last year.

When it reported second-quarter results, the action sports retailer said it third quarter comparable store sales to be in the range of flat to up low single-digits on a percentage basis, operating income to be in the range of approximately $9.0 million to $11.5 million, and income per diluted share to be in the range of 19 cents to  24 cents. Wall Street was expecting earnings of 21 cents a share on sales of $151.4 million.

First Nine Months Results Overview

The following comparisons refer to operating results for the first nine months of fiscal 2017 versus the first nine months of fiscal 2016 ended October 29, 2016:

  • Total net sales were $412.6 million, an increase of 0.9 percent from $408.7 million last year.
  • Comparable store sales, which includes e-commerce sales, increased 1.5 percent. Comparable store sales increased 0.7 percent in the first nine months of last year.
  • Gross profit was $123.9 million, a 3.8 percent increase from $119.4 million last year. Gross margin was 30.0 percent compared to 29.2 percent last year. This 80 basis-point increase in gross margin was primarily attributable to a 70 basis-point reduction in total buying, distribution and occupancy costs and a 10 basis-point improvement in product margins.
  • SG&A was $111.4 million, or 27.0 percent of net sales, compared to $110.5 million, or 27.0 percent of net sales, last year. SG&A includes legal provisions of $6.8 million this year compared to $1.7 million last year. After consideration of legal provisions, SG&A decreased by $4.2 million. Primary expense reductions were from marketing, non-cash store impairment charges, corporate payroll costs, and several other smaller expenses.
  • Operating income was $12.5 million, or 3.0 percent of net sales, a 40.4 percent increase compared to $8.9 million, or 2.2 percent of net sales, last year.
  • Income tax expense was $5.4 million, or 40.1 percent of pre-tax income, compared to $4.1 million, or 44.5 percent of pre-tax income, last year.
  • Net income was $8.0 million, or $0.28 per diluted share, a 56.7 percent increase compared to $5.1 million, or $0.18 per diluted share, last year.

Balance Sheet and Liquidity

As of October 28, 2017, the company had $121.9 million of cash and marketable securities and no debt outstanding under its revolving credit facility. This compares to $105.3 million of cash and marketable securities and no debt outstanding under its revolving credit facility as of October 29, 2016. In February 2017, the company paid a first-ever special cash dividend to its stockholders of approximately $20.1 million in the aggregate.

Fiscal 2017 Fourth Quarter Outlook

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 $0.22 to $0.26. This compares to operating income of $10.4 million and income per diluted share of 22 cents for the fourth quarter of fiscal 2016. This assumes an anticipated effective tax rate of approximately 40 percent and weighted average shares of approximately 29.2 million.