Tilly’s, Inc. (NYSE:TLYS) Q4 2022 Earnings Call Transcript

Tilly’s, Inc. (NYSE:TLYS) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good afternoon, and welcome to the Tilly’s Fiscal Fourth Quarter 2022 Results Conference Call. . Please also note that this event is being recorded today. I would 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 2022 Fourth Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, 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 website 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, March 9, 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 2022 fourth 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 1 hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Ed.

Edmond Thomas: Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. Our fourth quarter results exceeded the revised sales and earnings outlook ranges we provided in early January in connection with the annual ICR conference. Overall, fiscal 2022 was a very challenging year for us and our customers, particularly in light of one of the worst inflationary environments over the past 40 years. Fiscal 2023 has gotten off to a slow start thus far as we have anniversaried last year’s February comparable net sales increase of 15.4% while also experiencing unseasonably cold and wet weather over the last several weeks, particularly here in California wherein approximately 40% of our stores reside, and we’ve seen a meaningful decline in our business relative to our fourth quarter run rate.

From March onward, we are going up against negative double-digit monthly comp results for the remainder of the year. Consequently, we believe we will see an improving trend in our business very soon. And despite a slow start to the first quarter, we are cautiously optimistic about the spring/summer season overall based on the product newness that has just started to roll out to stores in recent weeks. In men’s, we expect graphic tees will continue to be a leading product for us, and we have a variety of new fabrics and silhouettes in short-sleeve button-up shirts. Within men’s bottoms, we expect to see growing interest in non-denim shorts and pants with an improved inventory position compared to last year. In women’s, we are optimistic about newness and trend color and silhouettes.

We are investing more in fashion tops in a number of ways, and we expect to have compelling offerings in bottoms with new silhouettes emerging to complement a strong cargo trend. We also have seen growing interest in our swimwear, dresses and skirt offerings compared to last year. In footwear, we believe we have a strong brand portfolio for both genders. In accessories, we believe we have improved our women’s collection in particular with trends that are more feminine and current. Additionally, we will have an expanded home collection compared to last year, and we are optimistic about a new lower-priced designer sunglasses — sunglass business. For boys and girls, we expect to be in a much better inventory position on branded graphic tees than we had last year when we were experiencing supply chain issues.

Altogether at this time, we feel good about our spring assortment and believe we will see more favorable comparable results for the remainder of the quarter and fiscal year based on the significantly easier comparisons we will be going up against from hereon in. In terms of store real estate, we currently expect to open approximately 10 new stores during fiscal 2023, with 1 store set to open near the end of March, 4 expected in the third quarter and the remainder expected to open between the back-to-school and holiday seasons, subject in each case to finalizing acceptable lease terms. For existing stores, we have nearly 80 lease decisions to make this year and are just over halfway through those decisions. Given the current environment, we continue to approach all these renewals with reasonable conservatism to contain lease costs as much as possible.

If we are unable to negotiate what we believe to be reasonable lease costs, we will close stores as necessary to protect our overall profitability. At this time, we are aware of 2 planned store closures in 2023 based on the current status of negotiations, one of which closed in late February. Our anticipated capital expenditure priorities in fiscal 2023 beyond new stores include an upgrade to our mobile app, updating our warehouse management systems to allow for more efficient inventory management across facilities and continuing IT infrastructure in cyber security investments to better position ourselves for future growth. We currently expect our total capital expenditures for the year, inclusive of new stores, to be within the $15 million to $20 million range.

In terms of other uses of capital, we are taking a wait-and-see approach to fiscal 2023 before we consider any additional significant capital outlays, including cash dividends or potential repurchase of stock, and would not anticipate to incur such outlays until we feel more confident that we have stable economic environment underneath us and are able to generate improved sales performance. In closing, although potential recessionary impacts on our customers remain a significant concern, we are cautiously optimistic about our prospects for improving operating results during fiscal 2023 relative to 2022, given the significantly lower comp sales comparisons we will be going up against for the remainder of the year. I will now turn the call over to Mike to provide additional details on our fiscal 2022 fourth quarter operating performance and introduce our fiscal 2023 first quarter outlook.

Mike?

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Michael Henry: Thanks, Ed. Good afternoon, everyone. Our fiscal 2022 fourth quarter results compared to last year’s fourth quarter were as follows: Total net sales were $180.4 million, a decrease of 11.8% compared to a company fourth quarter record of $204.5 million last year; total net sales from physical stores were $135 million, a decrease of 11.3% compared to $152.2 million last year; net sales from physical stores represented 74.9% of our total net sales compared to 74.4% of total net sales last year; e-commerce net sales were $45.3 million, a decrease of 13.4% compared to $52.3 million last year. E-com net sales represented 25.1% of total net sales compared to 25.6% of total net sales last year. We ended the fiscal year with 249 total stores, a net increase of 8 stores compared to the end of fiscal 2021.

Gross profit, including buying, distribution and occupancy expenses, was $52.4 million or 29.1% of net sales compared to a fourth quarter record of $70.4 million or 34.4% of net sales last year. Product margins declined by 290 basis points compared to last year’s near historical peak fourth quarter product margins, primarily due to higher markdowns needed to manage inventory levels. Buying, distribution and occupancy costs deleveraged by 240 basis points collectively despite being $0.4 million lower than last year with 8 net new stores due to carrying these costs against lower net sales. Total SG&A expenses were $53.5 million or 29.7% of net sales, compared to $53.1 million or 25.9% of net sales last year. Primary dollar increases in SG&A were from labor-related expenses across store payroll, corporate payroll and e-com fulfillment.

These increases were partially offset by a $1 million reduction in bonus expense due to the lack of any bonus accrual this year. Operating loss was $1.1 million or 0.6% of net sales compared to operating income of $17.3 million or 8.5% of net sales last year as a result of the combined factors just noted. Other income was $1.1 million compared to other expense of $0.4 million last year, primarily due to earnings significantly higher rates of return on our marketable securities compared to last year, and the write-off of certain unamortized costs associated with transitioning our credit facility last year. Pretax results were essentially breakeven compared to pretax income of $16.9 million or 8.3% of net sales last year. Income tax benefit was $0.3 million compared to income tax expense of $4.9 million, or 28.7% of pretax income last year.

This year’s income tax benefit was primarily due to certain allowable deductions and tax credits. Net income was $0.3 million or $0.01 per diluted share compared to net income of $12.1 million or $0.38 per diluted share last year. Weighted average diluted shares were 30 million this year compared to 31.4 million last year. Turning to our balance sheet. We ended the fiscal year with total cash and marketable securities of $113 million and no debt outstanding compared to $139 million and no debt last year. We repurchased approximately $11 million worth of company stock during fiscal 2022. We ended the fiscal year with total inventories at cost down 8% per square foot and down 15% in total units compared to last year. Total capital expenditures for fiscal 2022 were $15.1 million compared to $13.4 million last year, the increase being primarily due to the increased cost of new store openings.

Turning to the first quarter of fiscal 2023. Total comparable net sales through March 7 decreased by 19.9% compared to last year, with a 21% decrease in fiscal February and a 17.3% decrease thus far in fiscal March. Based on current and historical trends, we currently estimate that our total net sales for the first quarter of fiscal 2023 will be in the range of approximately $122 million to $133 million, translating to a comparable store net sales decline in the range of approximately 11% to 18.5% for the first quarter of fiscal 2023 compared to last year. We expect our SG&A to be in the range of $43 million to $44 million. At these sales levels, we would expect to report an estimated loss per share in the range of $0.27 to $0.41 for the first quarter of fiscal 2023 with an estimated income tax rate of 27% and total shares outstanding of 29.9 million.

We currently expect to have 249 total stores at the end of the first quarter compared to 241 at the end of last year’s first quarter. Operator, we’ll now go to our Q&A session.

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Q&A Session

Operator: . And our first question here will come from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen: Just wanted to follow up on Q1 so far. Just anything you’re noticing in the difference between regions. Obviously, the weather in Southern California hasn’t been spectacularly wonderful. Maybe also touch on kind of the promotional backdrop, if you would. And then maybe touch on inventory out there. It seems like most folks have kind of brought down their inventory levels. And then if you could touch on new store performance that you experienced in 2022 and how that plays into your store opening plans.

Edmond Thomas: Jeff, it’s Ed. In terms of performance, regionally, we are down in every region of the country, so we’re seeing it across the board. Clearly, California, where we have a great amount of stores, we’ve seen a bigger impact in the California stores with the weather being tough for the last couple of weeks. That’s been a challenge for sure. But regionally, traffic is down across the chain and sales are down accordingly. In terms of inventory, our inventory is very clean coming into the quarter. I would have liked to have seen a little bit more newness at the beginning of the quarter, but we’re in really good shape now. And honestly, some of that newness is seasonal categories like swim, more spring/summer merchandise that probably would not have had a great sell-through with the weather being as challenging as it has been. I think you asked me like 4 questions — you’ve asked 4 questions, so I might have missed.

Jeff Van Sinderen: I did. I did.

Michael Henry: He was asking about the promotional environment.

Edmond Thomas: As far as the promotional environment, I’m not seeing anything abnormal out there. I don’t think promotions are driving customers into stores. I think this is more of a — partially economic, where I think a lot of customers are challenged economically. And part of it is to make sure that you have a compelling assortment in our merchandise mix. And I think, actually, I think we do. I think it’s just that our customers’ probably a little bit more challenged than some. So promotionally, I don’t see it at the — after there’s a lot of clear in inventory in the market, from our price guys to others. There’s a lot more than what I think we normally see. But we expected that with so many companies being over-inventoried being in a tough inventory position. But I don’t believe that’s been any — abnormal challenge to us as a company.

Jeff Van Sinderen: Okay. And then just one more in there, I was asking about — I had a lot of questions wrapped up into one. Just the new store performance that you experienced in 2022, and I guess how that plays into your store opening plans for ’23?

Edmond Thomas: The new stores overall outperformed their plans. And that was in — we opened stores in different parts of the country. One of our most recent store openings is in our backyard, in Cerritos. That store has been record-breaking for us. It’s a little bit bigger than the average store. It’s about 9,000 square feet. But the results there have been phenomenal. So there’s plenty of availability of real estate out there, as you would imagine. We are capitalizing on where we think the expansion is appropriate. We’re still staying with our strategy of doing both off-mall and mall, and the economics obviously have to be right. But we’re being very thoughtful. My guess is, right now, we’ll probably do 10 or 11 stores this year. That could change during the course of the year if we see our business start to turn faster.