Tilly’s, Inc. Announces Fiscal 2018 Third Quarter Results

IRVINE, Calif.–(BUSINESS WIRE)–Tilly’s, Inc. (NYSE: TLYS) today announced financial results for the
third quarter and first three quarters of fiscal 2018 ended November 3,
2018.

“Tillys continued its positive momentum with its tenth consecutive
quarter of flat to positive comparable store net sales and its strongest
back-to-back quarterly comparable store net sales performance since the
first half of fiscal 2012,” commented Ed Thomas, President and Chief
Executive Officer. “We believe we are well positioned to continue our
momentum during the holiday season.”

Third Quarter Results Overview

The following comparisons refer to operating results for the third
quarter of fiscal 2018 versus the third quarter of fiscal 2017 ended
October 28, 2017:

  • Comparable store net sales, including e-commerce, increased 4.3%.
    Comparable store net sales in physical stores increased 1.3% and
    represented approximately 86% of total net sales. E-commerce net sales
    increased 26.7% and represented approximately 14% of total net sales.
    Comparable store net sales, including e-commerce, increased 1.5% in
    the third quarter last year.
  • Total net sales of $146.8 million decreased by $6.0 million, or 3.9%,
    from $152.8 million last year, due to the calendar shift impact of
    last year’s 53rd week in the retail calendar. This retail calendar
    shift caused a portion of the back-to-school season to shift into the
    second quarter this year from the third quarter last year, reducing
    last year’s comparable net sales base for the third quarter by
    approximately $14 million. This retail calendar shift impact was
    partially offset by an aggregate increase of approximately $8 million
    in comparable store net sales and net sales from seven net new stores.
  • Gross profit of $45.8 million decreased by $4.3 million, or 8.6%, from
    $50.1 million last year, primarily due to the calendar shift impact on
    net sales described above. Gross margin, or gross profit as a
    percentage of net sales, decreased to 31.2% from 32.8% last year due
    to the retail calendar shift impact on net sales. Buying, distribution
    and occupancy costs deleveraged 200 basis points against lower total
    net sales. Product margins improved 40 basis points, primarily due to
    lower total markdowns as a percentage of net sales.
  • Selling, general and administrative expenses (“SGA”) were $37.6
    million, or 25.6% of net sales, compared to $36.0 million, or 23.5% of
    net sales, last year. As expected, SGA deleveraged 210 basis points
    compared to last year primarily due to the calendar shift impact on
    net sales described above. The $1.6 million increase in SGA was
    primarily attributable to an increase in store payroll of $0.9 million
    due in part to minimum wage increases, expenses of $0.7 million
    associated with our secondary offering completed in early September
    2018, and increased online marketing costs of $0.6 million associated
    with e-commerce net sales growth, partially offset by a legal matter
    accrual of $0.7 million in the prior year.
  • Operating income was $8.2 million, or 5.6% of net sales, compared to
    $14.1 million, or 9.2% of net sales, last year. The $5.9 million
    reduction in operating income was attributable to the retail calendar
    shift impact on net sales described above.
  • Income tax expense was $2.4 million, or 26.8% of pre-tax income,
    compared to $5.7 million, or 39.6% of pre-tax income last year. The
    reduction in this year’s income tax rate was attributable to the
    change in corporate tax rates signed into law late last year.
  • Net income was $6.4 million, or $0.21 per diluted share, compared to
    $8.8 million, or $0.30 per diluted share, last year. The $0.09
    decrease in earnings per share was attributable to the combination of
    the retail calendar shift impact on net sales of approximately $0.11
    per diluted share and costs associated with the secondary offering
    completed in early September 2018 of approximately $0.02 per diluted
    share. The remaining positive variance was primarily due to improved
    operating results driven by increased comparable store net sales. On a
    non-GAAP basis, excluding the impact of the secondary offering costs
    this year and the impact of the legal matter accrual last year, net
    income was $7.1 million, or $0.24 per diluted share, this year
    compared to $9.2 million, or $0.31 per diluted share, last year.

Year-to-Date Results Overview

The following comparisons refer to operating results for the first three
quarters of fiscal 2018 versus the first three quarters of fiscal 2017
ended October 28, 2017:

  • Comparable store net sales, including e-commerce, increased 3.1%.
    Comparable store net sales in physical stores increased 2.2% and
    represented approximately 87% of total net sales. E-commerce net sales
    increased 9.2% and represented approximately 13% of total net sales.
    Comparable store net sales, including e-commerce, increased 1.5% in
    the first three quarters last year.
  • Total net sales of $427.9 million increased by $15.3 million, or 3.7%,
    from $412.6 million last year, primarily due to increased comparable
    store net sales and net sales from seven net new stores.
  • Gross profit of $130.9 million increased by $6.9 million, or 5.6%,
    from $123.9 million last year. Gross margin increased to 30.6% from
    30.0% last year primarily due to leveraging lower total occupancy
    costs on higher total net sales. Product margins improved by 10 basis
    points due to lower markdowns as a percentage of net sales.
  • SGA was $108.8 million, or 25.4% of net sales, compared to $111.4
    million, or 27.0% of net sales, last year. Last year’s SGA included
    an estimated $6.8 million in provisions related to legal matters. This
    year’s SGA includes a $1.5 million reduction to such provisions as a
    result of the final settlement of the related legal matter in early
    August 2018, and $0.7 million in expenses associated with our
    secondary offering completed in early September 2018. The net
    year-over-year impact of these legal matter provisions, partially
    offset by our secondary offering expenses, accounted for the
    improvement in SGA as a percentage of net sales. After consideration
    of the legal matter impacts and secondary offering costs, primary
    dollar increases in SGA were attributable to an increase in store
    payroll of $2.1 million primarily due to minimum wage increases and
    higher comparable store net sales, increased corporate bonus
    provisions of $1.2 million due to improved operating results, and
    increased online marketing costs of $1.1 million associated with
    e-commerce net sales growth. On a non-GAAP basis, excluding the impact
    of legal provisions from both years and the secondary offering costs
    from this year, SGA was $109.6 million, or 25.6% of net sales,
    compared to $104.6 million, or 25.3% of net sales, last year.
  • Operating income of $22.0 million, or 5.2% of net sales, increased by
    $9.5 million compared to $12.5 million, or 3.0% of net sales, last
    year. Of this $9.5 million improvement in year-over-year operating
    income, approximately $7.6 million was attributable to the net
    aggregate year-over-year impact of the legal matters and secondary
    offering expenses noted above, and approximately $1.9 million was
    attributable to increased comparable store net sales results and
    occupancy reductions. On a non-GAAP basis, excluding the impact of
    legal provisions from both years and the secondary offering costs from
    this year, operating income was $21.3 million, or 5.0% of net sales,
    compared to $19.4 million, or 4.7% of net sales, last year.
  • Income tax expense was $6.1 million, or 26.1% of pre-tax income,
    compared to $5.4 million, or 40.1% of pre-tax income, last year. The
    reduction in this year’s income tax rate was primarily attributable to
    the change in corporate tax rates signed into law late last year. On a
    non-GAAP basis, excluding the impact of legal provisions from both
    years and the secondary offering costs from this year, income tax
    expense was $5.8 million compared to $8.0 million last year.
  • Net income was $17.4 million, or $0.58 per diluted share, compared to
    $8.0 million, or $0.28 per diluted share, last year. Of the $0.30
    improvement in year-over-year earnings per share, approximately half
    was attributable to the aggregate legal matter and secondary offering
    expenses noted above, and the other half was due to improved operating
    results driven by increased comparable store net sales and occupancy
    reductions. On a non-GAAP basis, excluding the impact of the legal
    provisions from both years and the secondary offering costs from this
    year, net income was $17.0 million, or $0.57 per diluted share,
    compared to $12.1 million, or $0.42 per diluted share, last year.

Balance Sheet and Liquidity

As of November 3, 2018, the Company had $120.5 million of cash and
marketable securities and no debt outstanding. This compares to $121.9
million of cash and marketable securities and no debt outstanding as of
October 28, 2017. The Company paid special cash dividends to its
stockholders of approximately $29.1 million and $20.1 million in the
aggregate during February of 2018 and 2017, respectively.

Fiscal 2018 Fourth Quarter Outlook

The Company expects its fourth quarter total net sales to range from
approximately $163 million to $168 million based on an assumed 2% to 5%
increase in comparable store net sales. Last year’s fourth quarter
included an extra week as a result of the 53rd week in last year’s
retail calendar, which accounted for approximately $7.1 million in added
sales for such quarter versus the comparable 13-week period this year.
The Company expects fourth quarter operating income to range from
approximately $8.5 million to $10.0 million, and earnings per diluted
share to range from $0.22 to $0.26. This outlook assumes an anticipated
effective tax rate of approximately 26% and weighted average shares of
approximately 30.1 million.

Pursuant to the settlement terms of the previously noted legal matter,
the Company issued non-transferable discount coupons to approximately
612,000 existing Tillys customers in early September 2018 which allows
for a one-time 50% discount on a single, future purchase transaction of
up to $1,000. Any unused coupons will expire on September 4, 2019. To
date, less than 1% of these coupons have been redeemed, resulting in no
material impact to the Company’s comparable store net sales or operating
results as a whole. Although redemptions have been very low in number
thus far, there can be no assurance that the impact of any future coupon
redemptions during the 2018 holiday season, or during fiscal 2019, will
remain immaterial. Our fourth quarter outlook does not contemplate any
specific impacts from future usage of these coupons.

Preliminary Fiscal 2019 New Store, Capital Expenditure and Expense
Expectations

The Company expects to open up to 15 to 20 new, full-size stores and an
as-yet undetermined number of RSQ-branded pop-up shops during fiscal
2019, in each case assuming appropriate lease economics are obtained.
The specific timing of any new store openings is not yet known. The
Company expects total capital expenditures for fiscal 2019 not to exceed
$25 million, comprised primarily of new store costs supplemented by
continuing technology investments. Finally, the Company expects the
impact of legislated minimum wage increases, merit increases, new
systems costs, and the new lease accounting standard to result in an
aggregate increase of approximately $6 million in its annualized
operating costs before consideration of any comparable store net sales
assumption. The Company estimates that its fiscal 2019 comparable store
net sales would need to increase by approximately 3% in order to absorb
these anticipated cost increases without creating any deleverage of
expenses as a percentage of net sales.

Non-GAAP Financial Measures

In addition to reporting financial measures in accordance with GAAP, the
Company is providing certain non-GAAP financial measures including
“non-GAAP SGA,” “non-GAAP operating income,” “non-GAAP income tax
expense,” “non-GAAP net income,” and “non-GAAP income per diluted
share.” These amounts are not in accordance with, or an alternative to,
GAAP. The Company’s management believes that these measures help provide
investors with insight into the underlying comparable financial results,
excluding items that may not be indicative of, or are unrelated to, the
Company’s core day-to-day operating results.

For a description of these non-GAAP financial measures and
reconciliations of these non-GAAP financial measures to the most
directly comparable financial measures prepared in accordance with GAAP,
please see the accompanying table titled “Supplemental Financial
Information; Reconciliation of Select GAAP Financial Measures to
Non-GAAP Financial Measures” contained in this press release.

Conference Call Information

A conference call to discuss these financial results is scheduled for
today, November 28, 2018, at 4:30 p.m. ET (1:30 p.m. PT). Investors and
analysts interested in participating in the call are invited to dial
(877) 407-4018 at 4:25 p.m. ET (1:25 p.m. PT). The conference call will
also be available to interested parties through a live webcast at www.tillys.com.
Please visit the website and select the “Investor Relations” link at
least 15 minutes prior to the start of the call to register and download
any necessary software.

A telephone replay of the call will be available until December 12,
2018, by dialing (844) 512-2921 (domestic) or (412) 317-6671
(international) and entering the conference identification number:
13684938. Please note participants must enter the conference
identification number in order to access the replay.

About Tillys

Tillys is a leading specialty retailer of casual apparel, footwear and
accessories for young men, young women, boys and girls with an extensive
assortment of iconic global, emerging, and proprietary brands rooted in
an active and social lifestyle. Tillys is headquartered in Irvine,
California and currently operates 229 total stores, including four RSQ
pop-up stores, across 33 states and its website, www.tillys.com.

Forward-Looking Statements

Certain statements in this press release and oral statements made from
time to time by our representatives are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. In particular, statements regarding our future financial and
operating results, including but not limited to future comparable store
net sales, future operating income, future net income, future earnings
per share, future gross, operating or product margins, anticipated tax
rate, future impacts of legal settlements, future inventory levels,
future capital expenditures, and market share and our business and
strategy, including but not limited to expected store openings and
closings, expansion of brands and exclusive relationships, development
and growth of our e-commerce platform and business, promotional
strategy, and any other statements about our future expectations, plans,
intentions, beliefs or prospects expressed by management are
forward-looking statements. These forward-looking statements are based
on management’s current expectations and beliefs, but they involve a
number of risks and uncertainties that could cause actual results or
events to differ materially from those indicated by such forward-looking
statements, including, but not limited to, our ability to respond to
changing customer preferences and trends, attract customer traffic at
our stores and online, execute our growth and long-term strategies,
expand into new markets, grow our e-commerce business, effectively
manage our inventory and costs, effectively compete with other
retailers, enhance awareness of our brand and brand image, general
consumer spending patterns and levels, the effect of weather, and other
factors that are detailed in our Annual Report on Form 10-K, filed with
the Securities and Exchange Commission (“SEC”), including those detailed
in the section titled “Risk Factors” and in our other filings with the
SEC, which are available from the SEC’s website at www.sec.gov
and from our website at www.tillys.com
under the heading “Investor Relations”. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as
of the date of this press release. We do not undertake any obligation to
update or alter any forward-looking statements, whether as a result of
new information, future events or otherwise. This release should be read
in conjunction with our financial statements and notes thereto contained
in our Form 10-K.

 

Tilly’s, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(unaudited)

 

 

 

November 3,
2018

February 3,
2018

October 28,
2017

ASSETS

Current assets:

Cash and cash equivalents

$

24,751

$

53,202

$

38,912

Marketable securities

95,766

82,750

82,961

Receivables

7,608

4,352

3,647

Merchandise inventories

73,772

53,216

62,242

Prepaid expenses and other current assets

10,707

 

9,534

 

9,759

Total current assets

212,604

203,054

197,521

Property and equipment, net

78,679

83,321

87,576

Other assets

3,667

 

3,736

 

7,805

Total assets

$

294,950

 

$

290,111

 

$

292,902

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

34,352

$

21,615

$

27,329

Accrued expenses

20,292

22,731

31,854

Deferred revenue

7,144

10,879

8,335

Accrued compensation and benefits

9,487

6,119

6,005

Dividends payable

29,067

Current portion of deferred rent

5,466

5,220

5,762

Current portion of capital lease obligation

 

 

155

Total current liabilities

76,741

95,631

79,440

Long-term portion of deferred rent

31,624

31,340

31,377

Other

1,997

 

2,715

 

2,955

Total liabilities

110,362

129,686

113,772

Stockholders’ equity:

Common stock (Class A), $0.001 par value; 100,000 shares authorized;
21,536, 14,927 and 14,357 shares issued and outstanding, respectively

21

15

14

Common stock (Class B), $0.001 par value; 35,000 shares authorized;
7,944, 14,188 and 14,488 shares issued and outstanding, respectively

8

14

15

Preferred stock, $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding

Additional paid-in capital

149,141

143,984

140,240

Retained earnings

35,204

16,398

38,765

Accumulated other comprehensive income

214

 

14

 

96

Total stockholders’ equity

184,588

 

160,425

 

179,130

Total liabilities and stockholders’ equity

$

294,950

 

$

290,111

 

$

292,902

 

 

Tilly’s, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 

 

Three Months Ended

Nine Months Ended

November 3,
2018

 

October 28,
2017

November 3,
2018

 

October 28,
2017

Net sales

$

146,826

$

152,824

$

427,866

$

412,581

Cost of goods sold (includes buying, distribution, and occupancy
costs)

101,041

 

102,730

 

296,999

 

288,653

Gross profit

45,785

50,094

130,867

123,928

Selling, general and administrative expenses

37,558

 

35,982

 

108,831

 

111,384

Operating income

8,227

14,112

22,036

12,544

Other income, net

585

 

375

 

1,457

 

810

Income before income taxes

8,812

14,487

23,493

13,354

Income tax expense

2,364

 

5,730

 

6,134

 

5,354

Net income

$

6,448

 

$

8,757

 

$

17,359

 

$

8,000

Basic income per share of Class A and Class B common stock

$

0.22

$

0.30

$

0.59

$

0.28

Diluted income per share of Class A and Class B common stock

$

0.21

$

0.30

$

0.58

$

0.28

Weighted average basic shares outstanding

29,373

28,782

29,221

28,746

Weighted average diluted shares outstanding

30,075

29,031

29,746

28,954

 

 

Tilly’s, Inc.

Supplemental Financial Information

Reconciliation of Select GAAP Financial Measures to Non-GAAP
Financial Measures

(In thousands, except per share data)

(unaudited)

 

 

Third Quarter Ended

Nine Months Ended

November 3,
2018

 

October 28,
2017

November 3,
2018

 

October 28,
2017

Selling, general and administrative, as reported

$

37,558

$

35,982

$

108,831

$

111,384

Legal settlement

(650

)

1,458

(6,816

)

Secondary offering costs

(714

)

 

(714

)

 

Non-GAAP selling, general and administrative

$

36,844

 

$

35,332

 

$

109,575

 

$

104,568

 

 

Operating income, as reported

$

8,227

$

14,112

$

22,036

$

12,544

Legal settlement

650

(1,458

)

6,816

Secondary offering costs

714

 

 

714

 

 

Non-GAAP operating income

$

8,941

 

$

14,762

 

$

21,292

 

$

19,360

 

 

Income tax expense, as reported

$

2,364

$

5,730

$

6,134

$

5,354

Income tax effect of legal settlement (1)

255

(386

)

2,679

Income tax effect of secondary offering costs (1)

189

189

Income tax effect of non-deductibility of a portion of secondary
offering costs (1)

(165

)

 

(165

)

 

Non-GAAP income tax expense

$

2,388

 

$

5,985

 

$

5,772

 

$

8,033

 

 

Net income, as reported

$

6,448

$

8,757

$

17,359

$

8,000

Legal settlement

650

(1,458

)

6,816

Secondary offering costs

714

714

Less: Income tax effects (1)

(24

)

(255

)

362

 

(2,679

)

Non-GAAP net income

$

7,138

 

$

9,152

 

$

16,977

 

$

12,137

 

 

Diluted income per share, as reported

$

0.214

$

0.30

$

0.584

$

0.28

Legal settlement, net of taxes (1)

0.01

(0.036

)

0.14

Secondary offering costs, net of taxes (1)

0.023

 

 

0.023

 

 

Non-GAAP diluted income per share

$

0.237

 

$

0.31

 

$

0.571

 

$

0.42

 

 

Weighted average basic shares outstanding

29,373

28,782

29,221

28,746

Weighted average diluted shares outstanding

30,075

29,031

29,746

28,954

 

 

Tilly’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

Nine Months Ended

November 3,
2018

 

October 28,
2017

Cash flows from operating activities

 

Net income

$

17,359

$

8,000

Adjustments to reconcile net income to net cash provided by
operating activities:

Depreciation and amortization

16,966

17,644

Stock-based compensation expense

1,662

1,773

Impairment of assets

786

848

Loss on disposal of assets

11

170

Gain on marketable securities

(983

)

(510

)

Deferred income taxes

(419

)

(1,194

)

Changes in operating assets and liabilities:

Receivables

(3,256

)

342

Merchandise inventories

(20,746

)

(14,474

)

Prepaid expenses and other assets

(1,290

)

(777

)

Accounts payable

12,859

9,177

Accrued expenses

(6,006

)

4,202

Accrued compensation and benefits

3,368

(1,254

)

Deferred rent

530

(4,394

)

Deferred revenue

(1,562

)

(1,868

)

Net cash provided by operating activities

19,279

 

17,685

 

Cash flows from investing activities

Purchase of property and equipment

(10,394

)

(9,716

)

Purchases of marketable securities

(116,442

)

(112,612

)

Proceeds from marketable securities

104,678

 

85,134

 

Net cash used in investing activities

(22,158

)

(37,194

)

Cash flows from financing activities

Dividends paid

(29,067

)

(20,080

)

Proceeds from exercise of stock options

3,606

288

Taxes paid in lieu of shares issued for stock-based compensation

(111

)

(101

)

Payment of capital lease obligation

 

(680

)

Net cash used in financing activities

(25,572

)

(20,573

)

Change in cash and cash equivalents

(28,451

)

(40,082

)

Cash and cash equivalents, beginning of period

53,202

 

78,994

 

Cash and cash equivalents, end of period

$

24,751

 

$

38,912

 

 

 

Tilly’s, Inc.

Store Count and Square Footage

 

 

 

 

 

Stores
Open at
Beginning of
Quarter

Stores
Opened
During Quarter

Stores
Closed
During
Quarter

Stores
Open at
End of Quarter

Total Gross
Square Footage
End of
Quarter

(in thousands)

2017 Q3

221

1

220

1,681

2017 Q4

220

2

3

219

1,668

2018 Q1

219

4

1

222

1,675

2018 Q2

222

4

226

1,698

2018 Q3

226

5

4

227

1,693

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