Tilly’s, Inc. (NYSE:TLYS) Q3 2023 Earnings Call Transcript

Tilly’s, Inc. (NYSE:TLYS) Q3 2023 Earnings Call Transcript November 30, 2023

Tilly’s, Inc. beats earnings expectations. Reported EPS is $-0.03, expectations were $-0.07.

Operator: Good day, and welcome to Tilly’s Third Quarter 2023 Results Conference Call [Operator Instructions]. Please also note this event is being recorded. And I’d now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.

Gar Jackson: Good afternoon. And welcome to the Tilly’s Fiscal 2023 third quarter earnings call. Ed Thomas, President and CEO; and Michael Henry, EVP and CFO, will discuss the company’s results and then host a Q&A session. For a copy of Tilly’s earnings press release, please visit the Investor Relations section of the company’s Web site at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly’s judgment and analysis only as of today, November 30, 2023, and actual results may differ materially from current expectations based on various factors affecting Tilly’s business.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2023 third quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. Today’s call will be limited to one hour and will include a Q&A session after our prepared remarks. I now turn the call over to Ed.

Ed Thomas: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. We continue to believe that inflation remains a significant headwind on discretionary spending for our young family, young adult teen and pre-teen demographic. Despite what remains a challenging sales environment for us, I am proud of our team’s efforts towards protecting product margins, managing inventory and controlling expenses. Our third quarter results represent a sequential improvement from our first and second quarter earnings results and exceeded our expectations primarily due to achieving stronger product margins and lowering operating expenses more than we anticipated. After starting the quarter with a negative 3.7%, comp store sales declined in August amid the peak of the need driven back-to-school period.

Our comp sales decelerated sequentially in the post back-to-school period to negative double digits in each of September and October. For the quarter, all geographic markets comped negative within a 5 point range with reduced customer traffic across all store formats compared to last year. Total transaction volume was down high single digits while the average transaction value was slightly higher than in last year’s third quarter. From a merchandising perspective, girl’s apparel and footwear comped positive, while all other departments comped negative during the third quarter. While acknowledging that the environment remains challenging for our customer demographic, we believe that we have some product content issues on our part that we are working to fix as quickly as we can.

Graphic tees has been an area of weakness for us within both men’s and women’s apparel, and we have been lacking sufficient fashion newness in women’s overall. Within accessories, the strong backpack business wasn’t enough to overcome declines in other areas. We believe we have identified certain opportunities to improve our performance across departments as we finish fiscal 2023 and look into 2024. In terms of store real estate, we opened three new stores during the third quarter and an additional three stores just ahead of Thanksgiving. We currently expect to close four stores near the end of the fiscal year upon natural lease expiration. For fiscal 2024, we currently anticipate opening four new stores and have only one known store closure at this time.

We have nearly 100 lease actions to consider for fiscal 2024 affecting almost 40% of our store portfolio. Given where our current operating margins are, we plan to be aggressive in exiting stores that are not acceptably productive under the current conditions and lease terms. Our preliminary expectation for total fiscal 2024 capital expenditures is approximately $15 million inclusive of new stores and ongoing distribution and technology enhancements. Turning to the fourth quarter for fiscal 2023. Total comparable net sales, including both physical stores and e-com, decreased by 6.5% through November 28. 2023 with store comps down 13.6% while e-com was up 11% relative to last year’s comparable period. The double digit negative comps we saw in the post back-to-school period over the final seven weeks of the third quarter continued into the first two weeks of the fourth quarter.

However, the trend of our business began to improve during the final two weeks of fiscal November, including 2.6% comp sales growth for Black Friday weekend, the five day period from Thanksgiving Day through Cyber Monday. We believe this recent positive turn in our business was driven in part by a more aggressive promotional stance than we have historically taken to this period. Based on recent holiday seasons, we expect that our comp sales may slow down again in the early part of December before improving trend wise in the final days leading into Christmas. We are encouraged by the overall sequential improvement in our business trends over the last two quarters and are working diligently to attempt to accelerate that improvement going forward.

I now turn the call over to Mike to discuss our third quarter operating results and our fourth quarter outlook in more detail. Mike?

Michael Henry: Thanks, Ed. Our third quarter operating results compared to last year were as follows. Net sales were $166.5 million, a decrease of 6.4%. Net sales from physical stores decreased by 6.4% and represented 79.6% of total net sales, matching last year, while e-commerce net sales decreased by 6.2% and represented 20.4% of total net sales. Comparable net sales, including both physical stores and e-commerce, decreased by 9%. We ended the third quarter with 249 total stores, a net increase of two stores since the end of last year’s third quarter. Gross margin, including buying, distribution and occupancy expenses, was 29.3% of net sales compared to 30.7% of net sales last year. Buying, distribution and occupancy costs deleveraged by 90 basis points on lower net sales despite decreasing by $1 million collectively.

Reduced freight costs within distribution were partially offset by higher occupancy costs as a result of two net additional stores compared to last year and increased common area maintenance expenses overall. Product margins were just 50 basis points below last year and improved sequentially this year by 80 basis points compared to the second quarter and by 170 basis points compared to the first quarter. Total SG&A expenses were $51.2 million or 30.8% of net sales compared to $48.3 million or 27.1% of net sales last year. Primary increases in SG&A were attributable to noncash store asset impairment charges of $1.7 million, marketing expenses of $0.7 million and combined store and corporate payroll and related benefits expenses of $0.7 million.

Operating loss was $2.5 million or 1.5% of net sales compared to operating income of $6.3 million or 3.6% of net sales last year. Other income was $1.3 million compared to $0.7 million last year, primarily as a result of earning higher rates of return on our marketable securities this year. Income tax benefit was $0.3 million or 28% of pretax loss compared to income tax expense of $1.8 million or 26.3% of pretax income last year. Net loss was $0.8 million or $0.03 per share compared to net income of $5.1 million or $0.17 per diluted share last year. Weighted average shares were $29.9 million this year compared to $30 million last year. Turning to our balance sheet. We ended the third quarter with total cash and marketable securities of $94 million and no debt outstanding.

This compared to $106 million in no debt outstanding last year. We ended the third quarter with inventories at cost up 0.8% per square foot and unit inventories down 3.2% per square foot compared to last year. Total year-to-date capital expenditures were $10.5 million this year compared to $11.9 million last year. Turning to our outlook for the fourth quarter of fiscal 2023. Please note that this year’s fourth quarter includes an extra week, making it a 14 week quarter compared to 13 weeks last year. Based on our quarter-to-date comparable net sales results and current and historical trends, we currently anticipate our total net sales for the fourth quarter of fiscal 2023 to be in the range of approximately $172 million to $178 million, translating to an estimated comparable net sales decrease in the range of approximately 6% to 9%.

We expect our SG&A to be approximately $55 million to $56 million, pretax loss to be in the range of approximately $5 million to $8 million, our estimated income tax rate to be approximately 26% and loss per share to be in the range of $0.12 to $0.20 based on estimated weighted average diluted shares of approximately 29.9 million. We currently expect to end fiscal 2023 with 248 total stores, a net decrease of one store from the end of fiscal 2022. Operator, we’ll now go to our Q&A session.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen: I know you mentioned some things that you’re working on in terms of merchandise content. And I guess I’m wondering now that your new CMO has been there for a little bit, maybe you can just speak more about the opportunities that you’re seeing to improve merchandise content. I know you mentioned graphic tees, but maybe there’s other areas where you feel like you’ve got more opportunity, maybe concentration in various categories. Just any other color you can add there.

Ed Thomas: I would say the single biggest category where we have opportunity is on women’s fashion tops. That was the content actually we have is good, we just didn’t have enough. So I think one of the things that Laura has been working on is doing a better job of timing of the seasonality of certain goods but also shifting from categories that are underperforming like graphic tees, which has been a very strong category for a long time into more fashion tops. I wouldn’t say there would be any drastic changes to any particular categories at all.

Jeff Van Sinderen: And then I know you mentioned little bit higher promotional activity this year around the Black Friday weekend and you were positive comp. So maybe you can just talk about a couple of things around inventory, how you’re positioned in inventory in the areas that are selling well? In other words, you have enough of the stuff that’s moving well or moved well on Black Friday weekend? And maybe just touch on the planned promotional cadence this year versus last year for the remainder of Q4.

Ed Thomas: I would say the single biggest change we made from what we’ve done historically is we simplified their promotions into percent off as opposed to a lot of BOGOs. We simplified that and that drive business across — pretty much across — positive business across all categories for a couple of days for sure. And we weren’t as aggressive as one of our peers were in terms of what that percent off was, but it was a different approach for us. And it definitely simplified the buying process with our customers. Inventory is in pretty good shape, Jeff.

Michael Henry: Overall, our inventory age is better than it was at this time a year ago. So feel good about level of inventory and content of that inventory as we sit here right now. And then you also asked about Q4 promo cadence. And so we have various planned promotions on the biggest days of the season coming up in the big weekend days that are in between here and Christmas that it would be fairly consistent with what we’ve done traditionally.

Jeff Van Sinderen: Are you shifting those though to doing more of the percentage off versus the BOGOs since those work on Black Friday weekend?

Ed Thomas: It’s mixed, Jeff.

Operator: The next question comes from Matt Koranda with ROTH MKM.

Mike Zabran: It’s Mike Zabran on for Matt. Could you just talk a little bit more about the divergence between quarter-to-date store comps versus the e-commerce comp? I assume more promotions through the Web sites translating to better performance relative to stores, but just any other dynamics to call out here?

Michael Henry: Nothing specific to point to. It’s been kind of surprising to us quite honestly to see that kind of divergence between stores and e-com. We normally don’t see that wide of a gap. So honestly, I’m not sure if it’s just customer convenience at this early stage of the holiday season of people deciding to shop online as opposed to physically going to stores. It’s been a surprising divergence. There is a little higher level of promotions online than in stores because we do tend to clear a lot of our kind of end-of-life red tag goods online. So there is pretty consistently a higher level of promos online than in stores, generally, but that’s the case all year long, usually.

Ed Thomas: Yes, that’s pretty typical. And there’s clearly been a challenge in physical store traffic out there. And part of it, I think, has been more convenience orientated than not. And we offer a full assortment in every store and online. So the choices were very similar. I think it was probably customer choice of what channel they wanted to shop in.

Mike Zabran: I guess on health of inventory, any guideposts or just what are we looking to see to get inventory growth back in line with comps?

Michael Henry: It’s not too far off now. I mean we ended the quarter on a unit basis, down 3% and change versus the minus 6% comp. So it’s not too far apart as we speak. And as I mentioned earlier to Jeff’s question, inventory is more current right now than it was at this time last year. So we always endeavor to get inventory comp as close to sales comp as we can. And if we’re going to have a negative comp fourth quarter as indicated by our outlook, we’d expect to end the year with inventories down.

Mike Zabran: Last one for me. For fiscal ’24, can you just help us understand a little bit more what’s behind the lower store outlook? Four stores just seems a little bit behind normal cadence. Does that represent a more cautious view you might have on the consumer, is it more macro? Or is it more so around the hundred or so lease actions that you referenced earlier in the call?

Ed Thomas: It’s totally driven by what we — we’re being cautious because of the uncertainty of what the consumer environment is going to be. We have several stores in the pipeline that are targeted for expansion for us that are being negotiated. And when we decide that there’s more consistency in the environment out there, we’ll be in a good position to accelerate that growth when that time comes.

Operator: The next question comes from Marni Shapiro with The Retail Tracker.

Marni Shapiro: I have a couple of questions. I did want to follow up on the conversation you were just having. First, on the promotions over the holiday season, you moved to more percent off. I thought it was, by the way, really effective in the stores. It caught my eye and I wrote about it and have pictures about it. I’m curious if you saw a difference? Do people buy fewer units or were they the same number of units go out the door and just made it easier for people to shop?

Michael Henry: It was lower units and the average transaction value ended up lower. So we did get feedback from our store teams and district managers that it was well received by customers generally because it is so much easier to think about and manage than BOGOs throughout the assortment. So it seemed to get a good response in terms of how the customers viewed it, but it did end up eroding our transaction value and units per transaction.