Tillys Inc. reported adjusted net income rose 11 percent in the fourth quarter. Revenues grew 14.5 percent while comps dipped 0.9 percent.

I am proud of what we accomplished in fiscal 2012. In line with our long-term goals we achieved double-digit growth in net sales and, on an adjusted basis, leveraged our SG&A expenses, increased our operating margin and grew net income by 19 percent during the year. Despite the variability in sales trends we experienced in the second half of 2012, we maintained our strong pricing discipline and exited the year with inventory that was clean, current and well positioned for the spring season. Our business continued to generate significant cash flow and we capitalized on a strong pipeline of real estate opportunities to open a net 28 new stores during the year, further expanding the Tillys concept into 20 new markets and augmenting a key driver of future growth, commented Daniel Griesemer, President and Chief Executive Officer. As we begin fiscal 2013, we are confident in the fundamentals of our business and in our ability to deliver on the opportunities we see to expand the Tillys brand for sustainable, long-term, quality growth.

For the fourth quarter ended February 2, 2013:

Total net sales for the fourth quarter were $140.8 million, an increase of 14.5 percent compared to the fourth quarter of 2011.

Comparable store sales for the thirteen-week period, which include e-commerce sales, decreased 0.9 percent. E-commerce sales for the thirteen-week period were $19.3 million, an increase of 20 percent compared to the fourth quarter of 2011.

Gross profit increased 13.2 percent to $46.8 million. Gross margin was 33.3 percent, compared to 33.6 percent in the fourth quarter of 2011.
Operating income on a GAAP basis was $14.8 million compared to $14.1 million in the fourth quarter of 2011. Operating margin was 10.5 percent, compared to 11.4 percent in the fourth quarter of 2011.

On a GAAP basis, net income was $9.8 million, or $0.35 per diluted share, based on a weighted average diluted share count of 28.0 million shares. This compares to net income of $13.9 million, or $0.67 per diluted share, based on 20.5 million weighted average diluted shares in the fourth quarter of 2011.

Adjusted net income for the quarter increased 10.8 percent to $8.9 million, or $0.32 per diluted share, compared to adjusted net income of $8.0 million, or $0.39 per diluted share in the fourth quarter of 2011. These results adjust GAAP net income to assume an expected long-term effective tax rate of 40 percent for both this year and last year periods, and add back a charge for on-going non-cash compensation expense for stock options of $0.7 million, before tax, to the fourth quarter of 2011, which equals the charge for on-going non-cash compensation expense in the fourth quarter of 2012.

For the fiscal year ended February 2, 2013:

Total net sales for the fiscal year were $467.3 million, an increase of 16.6 percent compared to the prior year.

Comparable store sales for the fifty-two week period, which include e-commerce sales, increased 2.2 percent. E-commerce sales for the fifty-two week period were $53.0 million, an increase of 21 percent compared to the prior year.

Gross profit increased 16.3 percent to $150.2 million. Gross margin was 32.1 percent, compared to 32.2 percent in the prior year.
Operating income on a GAAP basis was $31.4 million including a one-time, non-cash charge to SG&A expense of $7.6 million, before tax, to recognize life to date compensation expense for stock options, which was triggered by the completion of the Companys initial public offering in the second quarter of 2012.

On a GAAP basis, net income was $23.9 million, or $0.92 per diluted share, based on a weighted average diluted share count of 26.1 million shares. GAAP net income includes the one-time non-cash compensation charge for stock options of $7.6 million to SG&A as well as a one-time net tax provision benefit of $3.0 million, both triggered at the initial public offering effective date in the second quarter of 2012. This compares to prior year net income of $34.3 million, or $1.68 per diluted share, based on 20.5 million weighted average diluted shares in the prior year.

Adjusted net income increased 18.7 percent to $23.3 million, or $0.90 per diluted share, compared to adjusted net income of $19.7 million, or $0.96 per diluted share, in the prior year period. These results adjust GAAP net income for the one-time, non-cash compensation charge to SG&A incurred in the second quarter of 2012, assume an expected long-term effective tax rate of 40 percent for both this year and last year periods, and add back a charge for on-going non-cash compensation expense for stock options of $2.0 million, before tax, for the second, third and fourth quarters of 2011, which equals the charge for on-going non-cash compensation expense in the second, third and fourth quarters of 2012.

Tillys follows the retail 4-5-4 reporting calendar, which included an extra week in the fourth quarter of fiscal 2012 (the 53rd week). In the 53rd week, the Company had pre-tax income of approximately $0.6 million. The 53rd week is not included in the comparable store sales percentage.

Balance Sheet and Liquidity

As of February 2, 2013, the Company had $57.2 million of cash and marketable securities compared to $25.1 million as of January 28, 2012. The Company ended the quarter with no borrowings and no debt outstanding on its revolving credit facility.

First Quarter 2013 Outlook

Although traffic and sales were soft in the first few weeks of the quarter, trends have shown solid improvement in March. Given this variability we believe it prudent to remain cautious and therefore expect comparable store sales to decline in the low- to mid-single digit range compared to a 4.3 percent comparable store sales increase in the first quarter of 2012. Using the anticipated effective tax rate of 40 percent, net income for the first quarter is expected to be in the range of $1.1 million to $2.0 million, or $0.04 to $0.07 per diluted share, and assumes a weighted average diluted share count of 28.2 million shares, compared to 20.5 million weighted average diluted shares in the first quarter of last year.

First quarter 2012 adjusted net income was $3.2 million, which includes ongoing stock-based compensation expense and a 40 percent effective tax rate to make that quarter, operating as an S-corporation, comparable to operating in 2013 as a C-corporation. (See reconciliation of non-GAAP results to GAAP results at the end of this release.)

Fiscal Year 2013 Outlook

Given continued economic uncertainty, the Company is projecting comparable store sales growth in the low-single digit range for fiscal 2013, on a 52-week vs. 52-week basis. Using an anticipated full year effective tax rate of 40 percent, net income for fiscal year 2013 is expected to be in the range of $21.5 million to $23.0 million, or $0.75 to $0.81 per diluted share, and assumes a weighted average diluted share count of 28.4 million shares, compared to 26.1 million weighted average diluted shares for the full year 2012.

Full year 2012 adjusted net income was $22.9 million, which includes four quarters of ongoing stock –based compensation expense totaling $2.7 million and a 40 percent effective tax rate for the entire year, and excludes a one-time charge to recognize life-to-date stock-based compensation that was recorded in the second quarter of 2012 and a one-time tax benefit resulting from the conversion of deferred tax assets to the higher C-corporation value of those assets.