Tilly’s, Inc. reported sales declined 13.7 percent in the third quarter ended October 29 with earnings falling further, but overall results exceeded company guidance.
“Our third quarter performance was better than we expected and we entered the fourth quarter with reduced inventory per square foot compared to last year,” commented Ed Thomas, President and Chief Executive Officer. “Although our November comparable net sales results were weaker than we expected, we saw an improved relative trend during the Black Friday weekend compared to earlier in the month. We are being cautious in our expectations for the fourth quarter, but believe we have the strategies in place to achieve improved performance in fiscal 2023.”
Operating Results Overview
It should be noted that the company’s operating results for the comparative periods last year were fueled by unprecedented 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 third quarter and first thirty-nine weeks of fiscal 2021.
Fiscal 2022 Third Quarter Operating Results Overview
The following comparisons refer to the company’s operating results for the third quarter of fiscal 2022 ended October 29, 2022 versus the third quarter of fiscal 2021 ended October 30, 2021.
Total net sales were $177.8 million, a decrease of $28.2 million or 13.7 percent, compared to $206.1 million last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 14.9 percent. Under its guidance, Tilly’s had expected sales in the range of $165 million to $170 million with a comparable net sales decrease of 18 percent to 21 percent.
Net sales from physical stores were $141.5 million, a decrease of $23.7 million or 14.4 percent, compared to $165.3 million last year with a comparable store net sales decrease of 15.8 percent. Net sales from physical stores represented 79.6 percent of total net sales compared to 80.2 percent of total net sales last year. The company ended the third quarter with 247 total stores compared to 243 total stores at the end of the third quarter last year.
Net sales from e-commerce were $36.3 million, a decrease of $4.5 million or 11.1 percent, compared to $40.8 million last year. E-commerce net sales represented 20.4 percent of total net sales compared to 19.8 percent of total net sales last year.
Gross profit, including buying, distribution, and occupancy costs, was $54.6 million, or 30.7 percent of net sales, compared to $76.7 million, or 37.2 percent of net sales, last year. Buying, distribution and occupancy costs were deleveraged by 360 basis points collectively due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 300 basis points primarily due to an increased markdown rate compared to last year, during which it experienced record full-price selling with an abnormally low markdown rate.
SG&A expenses were $48.3 million, or 27.1 percent of net sales, compared to $47.7 million, or 23.2 percent of net sales, last year. The increase in SG&A dollars was primarily attributable to the impact of wage inflation on store and corporate payroll expenses as well as operating 4 net additional stores compared to last year.
Operating income was $6.3 million, or 3.6 percent of net sales, compared to $29.0 million, or 14.1 percent of net sales, last year, due to the combined impact of the factors noted above. Tilly’s had expected operating income to be in the range of approximately $1.9 million to $4.6 million.
Income tax expense was $1.8 million, or 26.3 percent of pre-tax income, compared to $8.2 million, or 28.1 percent of pre-tax income, last year.
Net income was $5.1 million, or $0.17 per diluted share, compared to $20.8 million, or $0.66 per diluted share, last year. Weighted average diluted shares were 30.0 million this year compared to 31.4 million last year. Tilly’s had expected EPS in the range of $0.05 to $0.11.
Fiscal 2022 Year-to-Date Operating Results Overview
The following comparisons refer to the company’s operating results for the first thirty-nine weeks of fiscal 2022 ended October 29, 2022 versus the first thirty-nine weeks of fiscal 2021 ended October 30, 2021.
Total net sales were $491.9 million, a decrease of $79.3 million or 13.9 percent, compared to $571.2 million last year. Total comparable net sales, including both physical stores and e-commerce, decreased by 14.9 percent.
Net sales from physical stores were $396.1 million, a decrease of $61.4 million or 13.4 percent, compared to $457.6 million last year with a comparable store net sales decrease of 14.7 percent. Net sales from stores represented 80.5 percent of total net sales compared to 80.1 percent of total net sales last year.
Net sales from e-commerce were $95.8 million, a decrease of $17.8 million or 15.7 percent, compared to $113.6 million last year. E-commerce net sales represented 19.5 percent of total net sales compared to 19.9 percent of total net sales last year.
Gross profit including buying, distribution, and occupancy costs, was $150.4 million, or 30.6 percent of net sales, compared to $206.3 million, or 36.1 percent of net sales, last year. Buying, distribution and occupancy costs deleveraged by 300 basis points collectively despite being $0.9 million lower than last year due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 250 basis points primarily due to an increased markdown rate compared to last year, during which we experienced record full-price selling with an abnormally low markdown rate.
SG&A expenses were $137.8 million, or 28.0 percent of net sales, compared to $136.0 million, or 23.8 percent of net sales, last year. The increase in SG&A dollars was primarily attributable to the impact of wage inflation on store payroll and operating 4 net additional stores compared to last year, as well as increased software as a service cost.
Operating income was $12.6 million, or 2.6 percent of net sales, compared to $70.3 million, or 12.3 percent of net sales, last year.
Income tax expense was $3.7 million, or 27.2 percent of pre-tax income, compared to $17.9 million, or 25.5 percent of pre-tax income, last year.
Net income was $9.8 million, or $0.32 per diluted share, compared to $52.2 million, or $1.68 per diluted share, last year. Weighted average diluted shares were 30.4 million this year compared to 31.0 million last year.
Balance Sheet and Liquidity
As of October 29, 2022, the company had $105.8 million of cash and marketable securities and no debt outstanding compared to $155.6 million and no debt outstanding at the end of the third quarter last year. Since the end of last year’s third quarter, the company paid cash dividends to stockholders of $30.9 million in December 2021 and repurchased 1,258,330 shares of its common stock for a total of $10.9 million pursuant to its previously-announced stock repurchase program.
The company ended the third quarter with inventories per square foot down 6.9 percent compared to last year, an improvement from being up 4.1 percent relative to last year at the end of this year’s second quarter.
Total year-to-date capital expenditures at the end of the third quarter were $11.9 million this year compared to $10.9 million last year. For fiscal 2022 as a whole, the company expects its total capital expenditures to be approximately $19 million inclusive of 11 new store openings.
Fiscal 2022 Fourth Quarter Outlook
Total comparable net sales through November 29, 2022, including both physical stores and e-commerce, decreased by 18.5 percent relative to the comparable period last year. For Thanksgiving weekend, Thursday through Cyber Monday, total comparable net sales decreased by 13.4 percent compared to last year. Based on these results, current and historical trends, and anticipating that fourth-quarter sales performance will revert to a more traditional holiday cadence, including being the largest sales quarter of the year, the company currently estimates that its fiscal 2022 fourth-quarter net sales will be in the range of approximately $183 million to $188 million.
The company currently expects SG&A expenses to be in the range of approximately $54 million to $55 million, pre-tax income to be in the range of approximately $0.8 million to $2.6 million, and estimated income tax rate to be approximately 27 percent. The company currently expects its earnings per diluted share to be in the range of $0.02 to $0.06 based on the estimated weighted average diluted shares of approximately 29.9 million. This compares to $204.5 million in net sales and $0.38 in earnings per diluted share for the fourth quarter of last year.
The current business environment remains subject to many unpredictable risks and uncertainties including with respect to, among others, the current inflationary environment, continuing supply chain difficulties, labor challenges, the pandemic, geopolitical concerns, and how consumer behavior may change relative to any of these factors as well as last year’s historical anomalies of pent-up demand coming out of pandemic-related restrictions and federal stimulus payments. As a result, the company’s estimates concerning its projected business performance may change at any time and there can be no guarantee that the company’s current estimates will be accurate.
Fiscal 2023 Capital Expenditure Plans
The company currently expects its total capital expenditures for fiscal 2023 not to exceed $25 million, inclusive of up to 15 new stores and upgrades to certain distribution and information technology systems.
Photo courtesy Tilly’s