Tilly’s Says Weak Third Quarter Signals Brutal Holiday Discounting

“Clearly there is significant pressure on the teen sector and the teen customers,” said TLYS President and CEO Daniel Griesemer, who predicted the holiday season for teen retailers would be extremely promotional. “[We] expect it to be pretty brutal out there,“ he told analysts during the company’s third quarter earnings call.

 

The teen retailer reported fiscal third quarter sales of $123.8 million, down 0.9 percent compared to the third quarter of 2012, when it operated 21 fewer stores. Accessories sales generally grew faster than apparel or footwear. TLYS attributed much the decline to a change in the retail calendar which shifted approximately $8.0 million in back-to-school sales from the third to the second quarter when compared with 2012. That caused year-over-year e-commerce sales to surge 30 percent in the second quarter and slow to 3 percent in the third quarter, when they reached $13.3 million.

 

Gross margin declined 260 basis points to 30.9 percent, while operating income fell 26.6 percent to $10.2 million. SG&A expenses reached 22.7 percent of net sales, up just 30 basis points from a year earlier. Operating margin slid 290 basis points to 8.2 percent as deleveraging of buying, distribution and occupancy costs more than offset slightly higher product margins. Net income before income taxes was $6.1 million compared with net income in the third quarter of 2012 of $9.3 million.

 

“During the quarter, we experienced a continuation of the weak traffic trends that have affected many retailers, leading to lower than expected comparable store sales,” said Griesemer. “This trend was consistent across all product categories, real estate formats and store vintages, as well as in our e-Commerce channel; affirming our view that our sales results were primarily driven by external factors.”

 

Despite this, Griesemer said the company was able to deliver “quality earnings” near the top end of its guidance. He said merchandize margins actually increased despite a 70 basis point hit from the shift in the retail calendar.

 

TLYS ended the quarter with merchandise inventories valued at $56.4 million, which was 15.7 percent less per square foot of retail selling space compared to the same date last year. The company opened seven new stores during the quarter, including in three new markets and four new states. It now operates 189 in on pace to open 27 net new stores in fiscal 2013-14.

 

To ensure healthy margins, TLYS plans inventory per square foot to be down in the low double digits by the end of January.

 

“Our inventory is clean and current, which we believe positions us well to effectively navigate through the fourth quarter, if the challenging retail environment persists,” Griesemer said.

 

 

If third quarter trends continue, comparable store sales could decline in the mid- to high- single digits and net income could decline by as little as one third and as much as on half compared with the fourth quarter in 2012.

 

 

For the full fiscal year, TLYS is now forecasting a comparable store sales decline in the low single digits. The forecast takes into account several negative trends, including six fewer shopping days between Thanksgiving and Christmas, significantly less carry over inventory from the third quarter, intense competition for teen dollars from the gaming companies and teen unemployment rates.

 

“I hope that we are being overly cautious here,” said Griesemer. “But…there is a lot of headwind that gives us reason to be cautious.”