Profits at Tilly’s Inc. jumped 41.3 percent in the fourth quarter ended January 30 as sales rose 3.2 percent. Results exceeded Wall Street’s targets.
“Finishing such a challenging year with a positive fourth-quarter comp, a significantly stronger e-com business, and improved earnings per share compared to last year’s fourth quarter, along with a strong, debt-free balance sheet was a remarkable accomplishment,” commented Ed Thomas, President and Chief Executive Officer.
Fiscal 2020 Fourth Quarter Results Overview
The following comparisons refer to operating results for the fourth quarter of fiscal 2020 versus the fourth quarter of fiscal 2019 ended February 1, 2020:
- Total net sales were $177.9 million, an increase of $5.4 million or 3.2 percent, compared to $172.5 million last year. Wall Street’s consensus estimate was $176.23 million.
- Total comparable net sales, including both physical stores and e-commerce, increased by 2.5 percent compared to last year.
- Net sales from physical stores were $122.5 million, a decrease of $16.7 million or 12.0 percent, compared to $139.2 million last year. Comparable net sales from physical stores decreased by 12.3 percent. Store traffic decreased by 25 percent compared to last year’s fourth quarter, partially offset by increases in conversion rate and average transaction value. Net sales from stores represented 68.9 percent of total net sales compared to 80.7 percent of total net sales last year. The company ended the fourth quarter of fiscal 2020 with 238 total stores, substantially all of which were open to the public but subject to government restrictions on customer traffic and with reduced operating hours as a result of COVID-19. This compares to 240 total stores, all of which were open to the public without restrictions, last year.
- Net sales from e-commerce were $55.4 million, an increase of $22.1 million or 66.5 percent compared to approximately $33.3 million last year. E-commerce net sales represented 31.1 percent of total net sales compared to 19.3 percent of total net sales last year.
- Gross profit was $58.3 million, an increase of $6.1 million compared to $52.1 million last year. Gross margin, or gross profit as a percentage of net sales, was 32.7 percent, an improvement of 250 basis points compared to 30.2 percent last year. Product margins improved by 210 basis points as a percentage of net sales primarily due to reduced total markdowns. Total buying, distribution and occupancy costs improved by 40 basis points as a percentage of net sales. Occupancy costs improved by 170 basis points as a percentage of net sales and by $2.3 million in the aggregate, primarily due to favorable lease negotiations and a decrease in depreciation compared to last year. Distribution costs deleveraged by 140 basis points as a percentage of net sales and increased by $2.8 million, primarily due to an increase in e-commerce shipping charges of $3.1 million associated with the significant increase in e-commerce orders. Buying costs improved by 10 basis points.
- Selling, general and administrative expenses (“SG&A”) were $44.1 million, an increase of $0.5 million compared to $43.6 million last year. SG&A as a percentage of net sales was 24.8 percent, an improvement of 50 basis points compared to 25.3 percent last year. Total e-commerce marketing and fulfillment expenses increased by $4.0 million associated with a significant increase in e-commerce activity compared to last year. This increase was largely offset by reduced store payroll and related benefits expenses of $2.5 million resulting from the reduced operating hours associated with COVID-19 and a reduction in print advertising costs of $1.0 million compared to last year.
- Operating income was $14.1 million, or 7.9 percent of net sales, compared to $8.5 million, or 4.9 percent of net sales, last year. The $5.6 million increase in operating income was primarily due to the combined impact of the factors noted above.
- Other expense was $0.1 million compared to other income of $0.6 million last year, primarily due to earning lower interest rates on our investments this year and approximately $0.2 million in costs associated with our new ABL credit facility.
- Income tax expense was $5.1 million, or 36.6 percent of pre-tax income, compared to $2.8 million, or 30.9 percent of pre-tax income, last year.
- Net income was $8.9 million, or $0.29 per diluted share, compared to $6.3 million, or $0.21 per diluted share, last year. Wall Street’s consensus estimate was 18 cents.
Fiscal 2020 Full Year Results Overview
The following comparisons refer to operating results for the fifty-two weeks of fiscal 2020 versus the fifty-two weeks of fiscal 2019:
- Total net sales were $531.3 million, a decrease of $88.0 million or 14.2 percent, compared to $619.3 million last year primarily as a result of the various periods of store closures, reduced store operating hours, and restrictions on customer traffic into physical stores resulting from COVID-19
- Net sales from physical stores were $357.9 million, a decrease of $162.9 million or 31.3 percent, compared to $520.8 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, 94 percent of the third quarter, and substantially all of the fourth quarter. Net sales from stores represented 67.4 percent of total net sales compared to 84.1 percent of total net sales last year.
- Net sales from e-commerce were $173.4 million, an increase of $74.9 million or 76.2 percent, compared to $98.5 million last year. E-commerce net sales represented 32.6 percent of total net sales compared to 15.9 percent last year.
- Gross profit was $142.2 million, a decrease of $44.5 million or 23.8 percent, compared to $186.7 million last year. Gross margin was 26.8 percent, a decrease of 330 basis points as a percentage of net sales, compared to 30.1 percent last year. Product margins improved 60 basis points as a percentage of net sales primarily due to reduced total markdowns. Total buying, distribution and occupancy costs improved by 400 basis points as a percentage of net sales. Occupancy costs deleveraged 200 basis points as a percentage of net sales, despite being reduced by $4.1 million and having two fewer stores compared to last year, against lower total net sales. Distribution costs deleveraged 190 basis points as a percentage of net sales primarily due to an increase in e-commerce shipping charges of $8.5 million resulting from a greater volume of e-commerce orders. Buying costs deleveraged 10 basis points as a percentage of net sales.
- SG&A expenses were $145.2 million, or 27.3 percent of net sales, compared to $158.3 million, or 25.6 percent of net sales, last year. The $13.0 million decrease in SG&A was primarily due to reduced store payroll and related benefits expenses of $18.9 million resulting from the various periods of pandemic-related store closures this year and reduced staffing levels upon reopening of stores and a $2.3 million decrease in print advertising costs. Several other expenses were also reduced to a much smaller degree. These expense reductions were partially offset by higher aggregate e-commerce marketing and fulfillment expenses of approximately $11.5 million associated with a significant increase in e-commerce activity compared to last year.
- Operating loss was $(3.0) million, or (0.6) percent of net sales, compared to operating income of $28.5 million, or 4.6 percent of net sales, last year. The decrease in operating results was primarily attributable to the impacts of COVID-19 on the company’s business as noted above.
- Other income was $0.6 million, a decrease of $2.3 million compared to $2.9 million last year, primarily due to earning lower interest rates on our investments and incurring approximately $0.2 million of costs in this year’s fourth quarter associated with our new ABL credit facility.
- Income tax benefit was $1.3 million, or 53.5 percent of the pre-tax loss, compared to income tax expense of $8.7 million, or 27.9 percent of pre-tax income, last year.
- Net loss was $(1.1) million, or $(0.04) per basic share, compared to net income of $22.6 million, or $0.76 per diluted share, last year.
Balance Sheet and Liquidity
As of January 30, 2021, the company had $141.1 million of cash and marketable securities, including $2.2 million of withheld store lease payments, and no debt outstanding. This compares to $139.9 million in cash and marketable securities with no withheld store lease payments and no debt outstanding as of February 1, 2020. The company ended fiscal 2020 with merchandise inventories per square foot down 0.7 percent compared to last year.
Fiscal 2021 First Quarter Outlook
On March 18, 2020, all of the company’s stores were closed as a result of COVID-19 and remained closed for the remainder of the first quarter of fiscal 2020 and beyond. During this store shutdown period, net sales from physical stores ceased while net sales from e-commerce increased significantly, but not enough to overcome the complete loss of sales from physical stores during the latter half of last year’s first quarter. The pandemic remains ongoing and continues to impact retail in physical stores in terms of reduced operating hours, restrictions on customer traffic compared to pre-pandemic levels, and other factors. As the company begins to anniversary last year’s store shutdown period, it expects its net sales and earnings per share will be significantly improved compared to its reported net sales of $77.3 million and loss per share of $(0.59) during last year’s first quarter. However, specific results are impossible to predict, particularly how close store performance will be relative to fiscal 2019 pre-pandemic levels as well as how e-commerce will perform relative to the significant net sales increases achieved during last year’s store shutdown period. Due to the continuing uncertainties surrounding the pandemic, including but not limited to its impacts on consumer behavior, future customer traffic to physical stores, the company’s ability to continue to operate some or all of its stores or e-commerce at any point in time, and ongoing port delivery delays, the company cannot provide any specific net sales or earnings per share guidance at this time.
The company is providing the following updates regarding its fiscal 2021 first-quarter business through March 8, 2021 compared to the comparable period of last year’s first quarter:
- The company’s total comparable net sales, including both physical stores and e-commerce, were $45.3 million, a decrease of $2.2 million or 4.6 percent, compared to $47.5 million last year. Total comparable net sales decreased in February 2021, but have been positive thus far in March 2021′
- Comparable net sales from physical stores were $34.5 million, a decrease of $5.3 million or 13.3 percent compared to $39.8 million last year. Store traffic has decreased by 28 percent compared to the corresponding period of last year, partially offset by increases in conversion rate and average transaction value;
- Net sales from e-commerce were $10.7 million, an increase of $3.1 million or 40.6 percent, compared to $7.6 million last year;
- As of March 9, 2021, the company had $138.7 million of cash and marketable securities, including an aggregate of $2.1 million of withheld store lease payments from last year’s store shutdown period, and no debt outstanding. This compares to $115.5 million of cash and marketable securities with no withheld store lease payments and no debt outstanding for the comparable fiscal date last year;
- In February 2020, the company paid aggregate cash dividends of $29.7 million, or $1.00 per share, to stockholders, which was not repeated this year due to certain temporary restrictions on such payments within the company’s asset-backed credit facility which expire in November 2021; and
- Based on all currently available information, the company believes the combination of its cash, marketable securities, cash flows from operations and credit facility availability will be more than sufficient to support its operations for at least the next twelve months.
Photo courtesy Tilly’s