Tilly’s, Inc. Fiscal 2021 Form 10-K Summary
Business context and reporting period
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls. As of January 29, 2022, the company operated 241 stores in 33 states and sold merchandise through its e-commerce platform. Fiscal 2021 consisted of 52 weeks and ended January 29, 2022. The filing provided is an annual report for fiscal 2021, not a fiscal 2020 fourth-quarter filing.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $775.7 million | $531.3 million | +46.0% |
| Gross profit | $276.7 million | $142.2 million | +94.6% |
| Gross margin | 35.7% | 26.8% | +890 basis points |
| SG&A, including related-party rent | $189.1 million | $145.2 million | +30.2% |
| Operating income (loss) | $87.6 million | $(3.0) million | Improved by $90.6 million |
| Operating margin | 11.3% | (0.6)% | +11.9 percentage points |
| Net income (loss) | $64.2 million | $(1.1) million | Improved by $65.4 million |
| Diluted EPS | $2.06 | $(0.04) | Improved by $2.10 |
| Net cash from operating activities | $63.4 million | $38.9 million | +62.9% |
Comparable sales increased 16.3% under the company’s pandemic-adjusted methodology. Physical-store sales increased 70.4% to $609.7 million, while e-commerce sales declined 4.3% to $165.9 million and represented 21.4% of total net sales versus 32.6% in fiscal 2020. Product margins improved 130 basis points, while buying, distribution and occupancy costs collectively leveraged 760 basis points against higher sales.
At January 29, 2022, cash and cash equivalents were $42.2 million, marketable securities were $97.0 million, merchandise inventories were $65.6 million and working capital was $91.8 million. Total assets were $504.8 million and total liabilities were $330.1 million. The company had no outstanding borrowings under its credit facility, although operating lease liabilities totaled $247.0 million on a present-value basis. Capital expenditures were $13.4 million. Financing cash outflows included $61.6 million of special dividends.
Material changes versus the prior comparable period
- Fiscal 2021 benefited from store reopenings, pent-up consumer demand following pandemic restrictions and federal stimulus payments. All 241 stores were operating at year-end, compared with significant closures and operating restrictions in fiscal 2020.
- Sales shifted from e-commerce toward physical stores as pandemic-related restrictions eased. E-commerce revenue decreased $7.5 million despite record total company sales.
- Gross margin expanded substantially because of lower markdowns and better leverage of buying, distribution and occupancy costs.
- SG&A increased $43.8 million in dollars but declined as a percentage of sales from 27.3% to 24.4%. Fiscal 2021 included higher store payroll, bonuses, marketing and credit-card fees, while fiscal 2020 included a $1.7 million California sales-tax assessment that was reversed in fiscal 2021.
- The company replaced its prior $65.0 million asset-backed facility with a $25.0 million revolving facility maturing January 20, 2024. The facility bears interest at daily simple SOFR plus 0.75%; no borrowings were outstanding at year-end.
- The company paid two $1.00-per-share special dividends during fiscal 2021 and does not have a formal plan for future dividends.
Guidance, outlook, risks and unusual items
- Management expected to open approximately 15 to 20 stores in fiscal 2022, primarily in California, Texas and the Northeast, subject to acceptable lease economics.
- Fiscal 2022 capital expenditures were expected to be approximately $25 million to $30 million, including new stores, website and mobile application upgrades, distribution efficiencies and information technology investments. Potential longer-term distribution investments were not included in this range.
- Management cautioned that fiscal 2021 results were significantly aided by pent-up demand and stimulus payments and therefore may not provide a reliable baseline for fiscal 2022.
- COVID-19 remained a material uncertainty, with potential effects from renewed store closures, labor shortages, supply-chain disruptions, delivery delays, changing consumer behavior and liquidity pressure.
- Supply-chain constraints, port congestion, higher transportation costs, inflation and rising gasoline and food prices could reduce merchandise availability, increase costs or weaken discretionary consumer spending.
- The company is highly dependent on leased retail locations and had approximately $292.4 million of undiscounted minimum operating lease payments, including related-party leases. Certain facilities are leased from entities owned by company co-founders.
- Two California wage-and-hour matters were disclosed. One PAGA matter remained unresolved with no accrual because management assessed the loss as not probable or estimable. A separate individual-claims matter was settled in March 2022, resulting in a $0.2 million loss provision.
- On March 14, 2022, the board authorized repurchases of up to 2.0 million Class A shares through March 14, 2023. Through April 12, 2022, the company had repurchased 508,929 shares for approximately $4.8 million.
- The founders control a majority of voting power through Class B shares carrying 10 votes per share, limiting the influence of Class A stockholders. The company is a controlled company under NYSE rules.
- BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter involved estimating incremental borrowing rates for leases.
Important facts for investors to verify
- Confirm whether the post-pandemic normalization of store traffic and the decline in e-commerce mix continued after January 29, 2022.
- Assess the sustainability of the 35.7% gross margin and 11.3% operating margin after the effects of stimulus-driven demand, lower markdowns and favorable expense leverage diminish.
- Monitor inventory levels, markdown accruals, product availability, freight costs and vendor delivery performance amid continuing supply-chain and inflationary pressures.
- Review cash usage from special dividends, share repurchases, new-store development and capital expenditures relative to operating cash flow.
- Evaluate fixed lease commitments, related-party leases, lease renewals and the company’s ability to satisfy credit-facility covenants while expanding.
- Review the status and potential exposure of disclosed wage-and-hour litigation and other legal contingencies.
- Consider the founders’ voting control, the absence of a formal recurring dividend policy and the terms and execution of the share-repurchase program.