Tilly’s, Inc. Form 10-K Summary
Reporting period: Fiscal 2018, the 52-week year ended February 2, 2019. The requested period metadata states “2017 Q4,” but the supplied filing is the fiscal 2018 annual report filed March 29, 2019. Fiscal 2017 ended February 3, 2018 and included 53 weeks.
Business context
Tilly’s is a specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls. At year-end, it operated 229 stores, including 225 full-size stores and four RSQ-branded pop-up stores, across 33 states, plus an e-commerce platform serving all 50 states. E-commerce represented 15.0% of fiscal 2018 net sales.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $598.5 million | $576.9 million | +3.7% |
| Gross profit | $180.9 million | $175.4 million | +3.2% |
| Gross margin | 30.2% | 30.4% | -20 basis points |
| SG&A | $149.4 million | $151.4 million | -$2.0 million |
| SG&A as a percentage of sales | 25.0% | 26.2% | -120 basis points |
| Operating income | $31.5 million | $24.0 million | +31.2% |
| Operating margin | 5.3% | 4.2% | +110 basis points |
| Net income | $24.9 million | $14.7 million | +69.7% |
| Diluted EPS | $0.84 | $0.51 | +$0.33 |
| Net cash from operations | $46.7 million | $32.7 million | +$14.0 million |
| Capital expenditures | $14.9 million | $13.8 million | +$1.2 million |
Comparable store net sales increased 4.0%; physical-store comparable sales increased 1.4% and e-commerce comparable sales increased 21.7%. E-commerce revenue increased to $89.6 million from $75.8 million. Cash, cash equivalents and marketable securities totaled $144.1 million at year-end, including $68.2 million of cash and $75.9 million of marketable securities. Working capital was $119.9 million, compared with $107.4 million in the prior year.
The company had no outstanding borrowings under its $25.0 million revolving credit facility. Total operating lease obligations were $324.1 million, and purchase obligations were $6.1 million. Stockholders’ equity was $163.3 million.
Material changes versus the prior comparable period
- Sales increased despite fiscal 2017 containing an extra week; management estimated the extra week contributed approximately $5.8 million of fiscal 2017 sales.
- Gross margin declined 20 basis points because of higher distribution costs, particularly e-commerce shipping, and lower product margins from a greater branded-merchandise mix. Lower occupancy costs partially offset these pressures.
- SG&A decreased primarily because fiscal 2017 included a $6.2 million legal provision related to the TCPA litigation. The provision was reduced by $1.5 million in fiscal 2018 after final settlement terms were approved.
- Net income benefited from both improved operating results and a lower effective tax rate, which declined to 26.2% from 41.7% following the Tax Cuts and Jobs Act.
- The company opened 16 stores and closed six, increasing the year-end store count from 219 to 229.
- Operating cash flow improved substantially, while investing cash use declined to $6.3 million from $40.9 million, primarily because marketable-security purchases and maturities differed from the prior year.
- The company adopted ASC 606 in fiscal 2018 using the modified retrospective method. The adoption increased opening retained earnings by approximately $1.4 million and increased fiscal 2018 reported net sales by approximately $1.0 million and gross profit by approximately $0.6 million compared with amounts under the prior standard.
Guidance, outlook, risks and unusual items
- Management planned to open 10 to 15 new full-size stores in fiscal 2019, subject to acceptable lease economics, and expected capital expenditures not to exceed approximately $25 million.
- Expected fiscal 2019 cost increases from minimum-wage and merit increases, new systems costs and lease-accounting adoption were estimated at approximately $6 million annually, before mitigating actions or comparable-sales growth. Management estimated comparable store sales would need to increase approximately 3% to absorb these costs without operating-expense deleverage.
- The company planned further mobile-app and omni-channel investments, including same-day delivery from select stores and ship-from-store capabilities.
- Approximately 612,000 customers received non-transferable coupons under the TCPA settlement. About 1.5% had been redeemed by February 2, 2019, but coupons remained valid through September 4, 2019. Management warned that future redemptions could materially affect results because redemption transactions carried significantly lower margins.
- A California wage-and-hour case was reinstated at the appellate level after the Court of Appeal overturned dismissal; the company petitioned the California Supreme Court for review. The filing does not provide a clear quantified exposure.
- The company faces substantial retail lease commitments, including related-party leases with entities owned by co-founders. The company also expects adoption of ASC 842 to place material right-of-use assets and lease liabilities on the balance sheet; it estimated approximately $2 million of additional occupancy costs in fiscal 2020.
- Principal operating risks include rapidly changing fashion preferences, intense store and online competition, declining physical-store traffic, inventory markdowns, supplier and foreign-trade exposure, labor costs, cybersecurity and privacy compliance, dependence on leased locations, regional concentration, natural disasters and execution risk related to technology upgrades.
- The company paid a special cash dividend of $1.00 per share in February 2019. Management stated that it did not anticipate additional dividends at that time, and future dividends were not assured.
- BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of February 2, 2019.
Most important facts for investors to verify
- Whether comparable-store and e-commerce growth continued after fiscal 2018, particularly given the industry’s longer-term decline in physical-store traffic.
- The effect of coupon redemptions through September 4, 2019 on sales, gross margin and cash flow.
- The final outcome and potential exposure from the reinstated California wage-and-hour litigation.
- Whether the planned 10 to 15 store openings and approximately $25 million of capital expenditures generated acceptable returns.
- The balance-sheet and expense effects of ASC 842 lease accounting, including recognition of approximately $324.1 million of disclosed operating-lease commitments.
- Gross-margin trends, especially distribution and e-commerce fulfillment costs, product markdowns and the mix between third-party and proprietary brands.
- Compliance with credit-facility covenants and liquidity after special dividends, lease payments and planned investment.
- The significance of related-party leases and the company’s dual-class voting structure, under which Class B shares carry 10 votes per share.