Tilly’s Inc. reported earnings fell 67.2 percent in the third quarter on a 9.4 percent revenue decline. Sales came in well above Wall Street’s targets.

“The third quarter finished strong following a weak start in August resulting from delays in back-to-school timing this year, and this positive momentum carried into the early stages of the fourth quarter,” commented Ed Thomas, President and CEO. “With all of our stores closed on Thanksgiving and with reduced operating hours and significant restrictions on customer traffic on Black Friday this year as a result of the pandemic, we saw much lower sales compared to last year for those two days. However, sales in physical stores have been positive each day since Black Friday. Our e-com sales have remained strong during both the third and fourth quarters.”

Third Quarter Results Overview
The following comparisons refer to operating results for the third quarter of fiscal 2020 versus the third quarter of fiscal 2019 ended November 2, 2019:

  • Total net sales were $140.3 million, a decrease of $14.5 million or 9.4 percent, compared to $154.8 million last year. Sales topped Wall Street’s consensus target of $129.88 million.
  • Sales results were negatively influenced by delayed back-to-school timing this year, restrictions on store customer traffic and operating hours, and the government-mandated closure of 33 California stores for a portion of the third quarter. Compared to the respective fiscal months of last year, August net sales decreased by 35 percent, followed by a 22 percent increase in September net sales and a 10 percent increase in October net sales.
  • Net sales from physical stores were $104.6 million, a decrease of $27.5 million or 20.8 percent, compared to $132.1 million last year. Store traffic decreased by 34 percent compared to last year’s third quarter, partially offset by a low double-digit percentage increase in conversion rate and a high single-digit percentage increase in average transaction value. Net sales from stores represented 74.5 percent of total net sales compared to 85.3 percent of total net sales last year. The company ended the third quarter of fiscal 2020 with 238 total stores, including one RSQ-branded pop-up store and one RSQ Skate store, all of which were open to the public, but subject to government restrictions on operating hours and customer traffic as a result of COVID-19. This compares to 232 total stores, including one RSQ-branded pop-up store, all of which were open to the public without restrictions, last year.
  • Net sales from e-commerce were $35.7 million, an increase of $13.0 million or 57.3 percent compared to approximately $22.7 million last year. E-commerce net sales represented 25.5 percent of total net sales compared to 14.7 percent last year.
  • Gross profit was $40.7 million, or 29.0 percent of net sales, compared to $47.2 million, or 30.5 percent of net sales last year. Product margins improved 70 basis points as a percentage of net sales primarily due to improved full-price selling on e-commerce and reduced markdowns overall compared to last year. Buying, distribution and occupancy costs deleveraged by 220 basis points collectively against lower total sales. Distribution costs deleveraged 120 basis points as a percentage of net sales primarily due to an increase in e-commerce shipping costs of $1.5 million resulting from a greater volume of e-commerce orders. Occupancy costs deleveraged 110 basis points as a percentage of net sales despite being reduced by $1.0 million. Buying costs leveraged 10 basis points as a percentage of net sales.
  • Selling, general and administrative expenses (“SG&A”) were $37.1 million, or 26.5 percent of net sales, compared to $39.5 million, or 25.5 percent of net sales, last year. The $2.3 million decrease in SG&A was primarily due to reduced store payroll and related benefits expenses of $3.9 million resulting from the various periods of store closures during the quarter, reduced staffing levels upon reopening of stores and a $1.2 million payroll tax credit from the Coronavirus Aid, Relief and Economic Stimulus Act (the “CARES Act”). Most other expenses were also reduced compared to last year. These expense decreases were partially offset by higher e-commerce marketing and fulfillment expenses of approximately $2.3 million associated with significant growth in e-commerce orders compared to last year, and a disputed $1.7 million sales tax assessment received from the State of California relating to past years.
  • Operating income was $3.5 million, or 2.5 percent of net sales, compared to operating income of $7.7 million, or 5.0 percent of net sales, last year. The decrease in operating income was primarily attributable to the impacts of COVID-19 on its business as noted above.
  • Income tax expense was $1.4 million, or 39.8 percent of pre-tax income, compared to $2.2 million, or 25.9 percent of pre-tax income, last year. The increase in the effective income tax rate for fiscal 2020 is primarily due to the anticipated income tax benefit from the CARES Act, which provides for net operating losses in fiscal 2020 to be carried back to earlier tax years with higher tax rates than the current year.
  • Net income was $2.1 million, or $0.07 per diluted share, compared to $6.4 million, or $0.21 per diluted share, last year. Results exceeded Wall Street’s consensus estimate calling for a loss of 1 cent a share.

Year-to-Date Results Overview
The following comparisons refer to operating results for the first thirty-nine weeks of fiscal 2020 versus the first thirty-nine weeks of fiscal 2019 ended November 2, 2019:

  • Total net sales were $353.4 million, a decrease of $93.4 million or 20.9 percent, compared to $446.8 million last year as a result of the various periods of store closures resulting from COVID-19.
  • Net sales from physical stores were $235.3 million, a decrease of $146.3 million or 38.3 percent, compared to $381.6 million last year. In terms of total available store operating days in fiscal 2020, physical stores were open for 50 percent of the first quarter, 65 percent of the second quarter, and 94 percent of the third quarter. Net sales from stores represented 66.6 percent of total net sales compared to 85.4 percent of total net sales last year.
  • Net sales from e-commerce were $118.1 million, an increase of $52.9 million or 81.1 percent compared to approximately $65.2 million last year. E-commerce net sales represented 33.4 percent of total net sales compared to 14.6 percent last year.
  • Gross profit was $83.9 million, or 23.7 percent of net sales, compared to $134.6 million, or 30.1 percent of net sales last year. Product margins were flat to last year. Occupancy costs deleveraged 400 basis points as a percentage of net sales, despite being reduced by $1.8 million and having six additional stores compared to last year, against lower total net sales. Distribution costs deleveraged 220 basis points as a percentage of net sales primarily due to an increase in e-commerce shipping charges of $5.4 million resulting from a greater volume of e-commerce orders. Buying costs deleveraged 20 basis points as a percentage of net sales.
  • SG&A expenses were $101.1 million, or 28.6 percent of net sales, compared to $114.6 million, or 25.7 percent of net sales, last year. The $13.5 million decrease in SG&A was primarily due to reduced store payroll and related benefits expenses of $16.3 million resulting from the various periods of pandemic-related store closures this year and reduced staffing levels upon reopening of stores. Most other expenses were also reduced compared to last year. These expense reductions were partially offset by higher e-commerce marketing and fulfillment expenses of approximately $7.4 million associated with significant growth in e-commerce orders compared to last year.
  • Operating loss was $(17.2) million, or (4.9) percent of net sales, compared to operating income of $20.0 million, or 4.5 percent of net sales, last year. The decrease in operating results was primarily attributable to the impacts of COVID-19  on its business as noted above.
  • Income tax benefit was $6.4 million, or 39.2 percent of pre-tax loss, compared to income tax expense of $5.9 million, or 26.6 percent of pre-tax income, last year. The increase in the effective income tax rate for fiscal 2020 is primarily due to the anticipated income tax benefit from the CARES Act, as previously noted.
  • Net loss was $(10.0) million, or $(0.34) per share, compared to net income of $16.3 million, or $0.55 per diluted share, last year.

Balance Sheet and Liquidity
As of October 31, 2020, the company had $125.3 million of cash and marketable securities, including $12.4 million of withheld store lease payments and no debt outstanding, compared to $130.1 million and no withheld store lease payments and no debt outstanding as of the same date last year. The company ended the third quarter of fiscal 2020 with merchandise inventories per square foot down 7.4 percent compared to last year.

As previously announced, on November 9, 2020, the company entered into a new credit agreement with Wells Fargo Bank N.A., which includes a $65.0 million credit facility (the “ABL Facility”) and which replaced the company’s existing credit agreement. The ABL Facility bears interest on borrowings at LIBOR plus 200 to 225 basis points, depending on usage and remaining availability, and includes an unused credit fee of 37.5 to 50 basis points, also depending on remaining availability. Total allowable borrowings under the ABL Facility are determined monthly as the lesser of $65.0 million and a percentage of eligible merchandise inventories and accounts receivable. The ABL Facility is secured by substantially all company assets. Pursuant to the terms of the ABL Facility, the company is prohibited from declaring or paying any cash dividends to its stockholders or repurchasing its own common stock, in each case until November 9, 2021. As of December 2, 2020, the company had no borrowings outstanding under the ABL Facility.

Fiscal 2020 Fourth Quarter Business Update
At this time, the company cannot predict with any certainty what future customer traffic or comparable store net sales results will be in light of continuing uncertainties surrounding COVID-19 including, but not limited to, its impacts on consumer behavior and the company’s ability to continue to operate some or all of its stores or its e-commerce business at any point in time, particularly in light of the recent increases in the number of cases across the U.S. As a result, the company cannot provide specific sales or earnings guidance; however, the company is providing the following updates regarding its fiscal 2020 fourth-quarter business:

  • The company’s total comparable net sales for the fourth quarter of fiscal 2020 through December 1, 2020, were $56.0 million, a slight decrease of $0.3 million or 0.6 percent, compared to $56.3 million for last year’s fourth quarter through December 3, 2019, which is the comparable fiscal date last year. Due to the impacts of COVID-19, including higher unemployment and anticipated reductions in consumer spending compared to last year, the company expects its fiscal 2020 fourth-quarter net sales will be lower overall compared to the company’s reported net sales of $172.5 million for the fourth quarter of fiscal 2019.
  • Comparable net sales from physical stores, including all periods of store closures, for the fourth quarter of fiscal 2020 through December 1, 2020, were $36.7 million, a decrease of $6.1 million or 14.2 percent compared to $42.8 million for the comparable period last year. Store traffic has decreased by 29 percent compared to the corresponding period of last year, partially offset by a high single-digit percentage increase in conversion rate and a low double-digit percentage increase in average transaction value.
  • Net sales from e-commerce were $19.3 million for the fourth quarter of fiscal 2020 through December 1, 2020, an increase of $5.7 million or 42.4 percent, compared to $13.5 million for the comparable period last year.
  • As of December 2, 2020, the company had $138.6 million of cash and marketable securities, including an aggregate of $4.4 million of withheld store lease payments and no debt outstanding, compared to $143.7 million with no withheld store lease payments and no debt outstanding as of December 4, 2019, which is the comparable fiscal date last year. Based on all currently available information, the company believes the combination of its cash, marketable securities, and credit facility availability will be sufficient to support its operations for at least the next twelve months.

The results of operations noted above thus far in the fourth quarter of fiscal 2020 are not necessarily indicative of results to be expected for the fourth quarter as a whole, especially in light of the uncertainties surrounding the impacts of COVID-19, including, but not limited to, its ability to continue operating some or all of its stores or e-commerce, significant restrictions on store customer traffic and operating hours, anticipated reductions in consumer spending, and higher unemployment compared to last year’s fourth quarter.

Photo courtesy Tilly’s