Tilly’s Inc. reported earnings that came in at the low end of projections and same-store sales that missed guidance as online sales were disrupted by a system upgrade. Management remained bullish on continued improvement in 2018.

In the fourth quarter ended February 3:

  • Sales improved 2.6 percent to 164.3 million;
  • Comparable store sales, which includes e-commerce sales, were flat, below guidance, calling for a low single-digit percentage gain. Comparable store sales increased 0.1 percent in the fourth quarter last year.
  • Gross margins increased 70 basis points to 31.3 percent. A 90 basis point reduction in occupancy costs offset a 20 basis point decrease in product margins due to lower initial markups.
  • SG&A expenses increased to $40.0 million, or 24.3 percent of sales, from $38.7 million, or 24.1 percent, last year. This 20 basis point increase was primarily attributable to increased store payroll as a result of minimum wage increases.
  • Operating income advanced 9.6 percent to $11.4 million, or 7.0 percent of sales. The rate increased 50 basis point due to improved occupancy costs. Operating income was projected to arrive in the range of approximately $10.5 million to $13.0 million.
  • Income tax expense increased to $5.2 million from $4.2 million a year ago. The latest year included a charge of $0.2 million due to tax reform.
  • Net income lifted 6.3 percent to $6.7 million, or 23 cents a share, versus guidance calling for earnings between 22 cents to 26 cents.

On a conference call with analysts, Ed Thomas, president and CEO, said the comp miss was due to a 12 percent drop in online sales due to technical issues encountered with new order management and website platform systems. Online accounted for 14 percent of sales in the period.

Store comps grew 2.3 percent, driven by the chain’s fifth consecutive quarter of store traffic growth “despite what reportedly continues to be negative mall traffic environment.”

Thomas said the store traffic gains continue to benefit from in-store events often done in partnership with brands. He added, “We believe more direct consumer interactions improve our customer engagement and generate additional excitement about Tilly’s and we will continue this effort throughout 2018 with numerous events and contests.”

Among categories, men’s comps were up high-single digits and footwear also comped positive. While women’s, girls, boys and accessories were down, the branded portions of these assortments perform well.

“We lost ground with our private label assortment, particularly in women’s, girls and boys,” said Thomas. “With the transition into spring assortments, newness and color and styling are driving improved results across all apparel departments compared to the fourth quarter.”

Thomas said newness and exclusivity will continue to be key for differentiating its merchandising efforts in 2018. The retailer’s major brands include Volcom, Huf, Adidas, RVCA, Diamond Supply, Billabong, Vans, Brixton, Primitive, Salty Crew, Converse, Nike SG, Stance, Hurley, Riot Society and Santa Cruz. Owned brands include RSQ, Full Tilt, Blue Crown and Infamous.

Regarding e-commerce, Thomas said the new systems went live in early November and comps were positive for that month but problems in December resulted in incomplete orders and issues supporting omnichannel execution, among other items. Working with its third-party service providers, online sales are beginning to comp positive on a daily basis. He added, “We expect e-com sales to remain inconsistent for the near-term, as we complete the remaining fixes, but we believe we are on the right track to have e-com contributing to topline growth again within a reasonable period.”

He attributed the operating income improvement to consistent inventory and expense management.

For the year, sales increased 1.4 percent to $576.9 million, comps gained 1.0 percent and net income jumped 28.8 percent to $14.7 million, or 51 cents per share.

Thomas said Tilly’s still plans to open up to 15 stores this year, but the number of stores likely to close remains uncertain pending ongoing lease discussions. One store is expected to close later this month and possibly up to five more in the third quarter.

For the first quarter, comparable store sales are expected to range from flat to a low-single-digit percentage increase, operating results to range from a loss of approximately $0.5 million to income of approximately $1.0 million and per share results to range from a loss of 1 cent to income per diluted share of 3 cents. That compares to a comp increase of 0.6 percent, an operating loss of $200,000 and a 1 cent loss per share.

“In closing,” said Thomas, “fiscal 2017 represented Tilly’s second consecutive year of improved year-over-year operating income results. We are off to a good start in fiscal 2018 despite our short-term e-com issues. We aim to continue our operating momentum as we return to store growth mode this year.

Photo courtesy Tilly’s