Tillys Inc. will open fewer and smaller stores with less inventory in 2014 as it pivots toward the larger opportunity offered by e-commerce and outlet stores, the company’s CEO said last week while reviewing disappointing fiscal fourth quarter financial results.
“We have reduced our expectations for annual net store growth in the near-term to low double digits compared to our prior targets of mid-teens growth,” said CEO Daniel Griesemer. “For fiscal 2014, we expect at least 18 net new stores. And we plan to reduce the average new stores size by approximately 10% representing a target of 6,700 square feet to 7,200 square feet compared to our prior target store size of approximately 7,500 to 8,000 square feet. And we are launching an outlet strategy in fiscal 2014.”
Some of the downsizing will be driven by the launch of up to six of the company’s first “true outlet stores.” While TLYS already operates 10 to 12 stores in outlet malls, Griesemer said those operate more as full-line stores, while the new outlet stores will offer “well-priced” private label and branded merchandise sourced specifically for the outlet channel.
“The offering will be meaningfully different and priced in an appropriately compelling way with margin structure and cost structure commensurate with outlets and we look for that to be even more profitable than the full-line venues,” said Griesemer. “So it's a full outlet strategy.”
In fiscal 2013, TLYS opened 27 new stores that increased its square footage by roughly 15 percent.
Conversely, TLYS leadership now believes e-commerce sales, which accounted for 14 percent of sales in the fourth quarter ended Feb. 1, could easily surpass the 15 percent target executives have discussed until now.
“We’ve just recognized that given all of the initiatives we have in place, our customers’ engagement and activity online and in mobile really indicates that there is a significantly greater opportunity than just 15 percent,” said Griesemer.
After two years of investment, Tilly’s has created an integrated digital platform that can analyze data from its loyalty program, mobile apps and e-commerce site to present much more personalized marketing messages to customers. In 2014 it will increase its spending on digital marketing to leverage those investments as well as a new e-commerce fulfillment center expected to come online later this year.
Fourth quarter results
TLYS reported net sales dipped 0.6 percent to $139.9 million in the fourth quarter ended Feb. 1, compared to $140.8 million in the fourth quarter of 2012. Comparable store sales, including e-commerce sales, decreased 4.9% compared to the same 13-week period in 2012. Juniors performed a little bit better then Men’s, which performed a little bit better than Footwear and Accessories. E-commerce sales were $19.1 million, up approximately 2% compared to the same thirteen-week period in 2012. Griesemer attributed tepid online growth to a lack of clearance inventory.
Gross profit reached $43.8 million, or 31.3% of net sales, down 200 basis points (bps) from the fourth quarter of 2012. Product margins increased 40 basis points, offset primarily by deleverage in buying, distribution and occupancy costs as a result of the negative comparable store sales.
SG&A increased 10.2 percent , or by $3.27 million, to 25.2 percent of net sales, up 240 bps from a year earlier.
Operating income was $8.5 million and included $1.8 million in store asset impairment charges recorded in the fourth quarter. This compares to operating income of $14.8 million in the fourth quarter of 2012. The retailer reported net income of $5.4 million, or 19 cents per fully diluted share, compared to $9.8 million, or 35 cents per share, a year earlier.
The company ended the quarter and fiscal year with merchandise inventories valued at $46.3 million, down 13.5 percent per square foot of retail space. The company plans to reduce inventory per square foot by the same amount by the end of the current fiscal first quarter.
First quarter oultook
TLYS initial guidance for the quarter calls for comp stores sales to decline in the mid-single digits and net income per diluted share of 0 to 4 cents, compared to first quarter 2013 net income of 8 cents per diluted share. The outlook assumes a continuation of volatile and weak traffic trends in a highly promotional environment as well as lack of visibility into the very important spring selling period as a result of the Easter shift, said CFO Jennifer Ehrhardt.
Griesemer said TLYS will seek to drive incremental sales in 2014 by expanding its home and electronics offerings and expanding it offering of small brands as well as exclusive products from major vendors such as Nike, RCVA and Volcom, particularly in men’s and juniors. This, combined with its growing digital marketing skills, will enable it to wean itself off of clearance sales.