Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 4, 2024, compared with thirteen weeks ended April 29, 2023. Although the request identifies “2023 Q1,” the filing is for the first quarter of fiscal 2024. Tilly’s operated 246 stores in 33 states at quarter-end, compared with 248 stores a year earlier, and also sold merchandise through its e-commerce platform.
Financial Performance and Liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $115.9 million | $123.6 million | Down 6.3% |
| Gross profit | $24.3 million | $25.9 million | Down 6.3% |
| Gross margin | 21.0% | 21.0% | Flat |
| SG&A | $45.1 million | $43.2 million | Up $1.9 million |
| Operating loss | $20.8 million | $17.3 million | Worsened $3.5 million |
| Net loss | $19.6 million | $12.0 million | Worsened $7.7 million |
| Net loss per share | $0.65 | $0.40 | Worsened $0.25 |
| Cash flow from operations | $(25.7) million | $(16.2) million | Higher use of $9.5 million |
- Retail-store sales declined 5.1% to $92.8 million; e-commerce sales declined 10.8% to $23.0 million. E-commerce represented 19.9% of sales versus 20.9% in the prior year.
- Comparable net sales declined 9.4%, including an 8.6% comparable-store decline excluding the e-commerce component.
- Product margins improved by 130 basis points, primarily from lower markdowns and improved initial markups, but buying, distribution, and occupancy costs deleveraged by 130 basis points.
- SG&A increased to 38.9% of sales from 34.9%, driven principally by higher non-cash store impairment charges, store payroll and benefits, and corporate payroll.
- Income tax benefit declined to $13,000 from $4.2 million. The effective tax rate was 0.1% because of a full valuation allowance on deferred tax assets.
- Cash and cash equivalents were $19.9 million at May 4, 2024, compared with $47.0 million at February 3, 2024 and $43.7 million at April 29, 2023. Marketable securities were $48.1 million.
- Working capital was $50.0 million, down from $71.5 million at fiscal year-end, primarily due to reduced cash and marketable securities and higher lease liabilities, partly offset by increased inventory net of accounts payable.
- Merchandise inventories were $78.5 million, up from $63.2 million at February 3, 2024 and $77.2 million a year earlier.
- The company had no outstanding borrowings under its $65.0 million asset-based revolving facility and was eligible to borrow up to $57.7 million. A $2.0 million standby letter of credit was outstanding.
- Operating lease liabilities totaled approximately $226.2 million on a present-value basis, including $21.6 million related to founder-owned properties.
Material Changes Versus the Prior Comparable Period
- Sales performance remained weak, with total comparable net sales down 9.4% and declines in both physical-store and e-commerce channels.
- Gross margin was unchanged at 21.0%, despite improved product margins, because buying, distribution, and occupancy costs absorbed the benefit.
- Operating loss increased 20.4% year over year, while net loss increased approximately 64%.
- Non-cash impairment charges increased to $1.7 million from $0.2 million. Eleven stores were impaired after 43 stores were tested, compared with six impaired stores out of 24 tested in the prior year.
- Operating cash use increased substantially, largely due to lower sales and working-capital needs, including a $15.4 million inventory investment.
- Total assets declined to $410.0 million from $473.2 million a year earlier, while stockholders’ equity declined to $126.0 million from $165.5 million, primarily reflecting accumulated losses.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to open four new stores during fiscal 2024 and expects fiscal-year capital expenditures not to exceed $15 million, including new stores and distribution and information-technology upgrades.
- Management expects to fund operations and planned capital expenditures with cash on hand, marketable securities, operating cash flow, and credit-facility availability, and believes liquidity is sufficient for the next 12 months from the filing date. The filing states that additional financing could be required if operating cash flow is insufficient.
- Management identified inflation, elevated fuel and labor costs, higher consumer credit balances and interest rates, reduced consumer savings, and shifting consumer preferences as continuing pressures on demand.
- Store payroll and related expenses represented approximately 47% of SG&A in the quarter. Average store hourly pay was 5% above the prior-year quarter and 31% above fiscal 2019; minimum-wage increases are expected to add approximately $2 million to fiscal 2024 costs versus fiscal 2023.
- The business is seasonal, with the third and fourth quarters historically producing stronger sales and operating results because of back-to-school and holiday demand.
- Key risks include fashion and consumer-demand changes, intense retail and online competition, supply-chain and vendor dependence, foreign sourcing and trade conditions, lease obligations, store performance and impairment, labor costs, information-technology and cybersecurity matters, litigation, adverse weather, and broader economic disruptions.
- The company recorded $1.7 million of non-cash store asset impairment charges and recognized $589,000 of investment gains in other income during the quarter.
- There were no material legal proceedings expected to have a material adverse effect, no material changes to previously disclosed contractual obligations or market risks, and management concluded that disclosure controls were effective at a reasonable-assurance level.
Investor Verification Items
- Verify whether comparable sales and e-commerce trends improve during the higher-volume back-to-school and holiday periods.
- Monitor inventory levels, markdown rates, product margins, shrinkage, and the risk of additional store impairments.
- Assess whether cash burn and working-capital requirements can be funded without drawing on the revolving facility or raising additional capital.
- Review the company’s ability to absorb approximately $2 million of projected incremental minimum-wage costs and other inflationary expense increases.
- Evaluate liquidity after considering approximately $226.2 million of present-value operating lease liabilities and substantial future minimum lease payments.
- Confirm compliance with the revolving facility’s availability covenant and conditions governing dividends or share repurchases.
- Track the valuation allowance on deferred tax assets, since the quarter generated virtually no tax benefit despite the pre-tax loss.