TILLY’S, INC. Form 10-Q Summary
Reporting period: The supplied filing is for the three and six months ended July 30, 2016, compared with August 1, 2015. Although the request metadata states “2015 Q2,” the filing itself reports fiscal 2016 second-quarter results. The financial statements are unaudited.
Business Context
Tilly’s is a specialty retailer of West Coast-inspired apparel, footwear and accessories, selling through stores and e-commerce. It operated 225 stores in 32 states at July 30, 2016, compared with 216 stores in the prior-year period. Total store square footage was approximately 1.713 million square feet.
Key Financial Metrics
| Metric | Three Months Ended July 30, 2016 | Three Months Ended August 1, 2015 | Six Months Ended July 30, 2016 | Six Months Ended August 1, 2015 |
|---|---|---|---|---|
| Net sales | $136.4 million | $130.0 million | $256.6 million | $250.2 million |
| Gross profit | $38.8 million | $36.6 million | $71.4 million | $72.6 million |
| Gross margin | 28.5% | 28.1% | 27.8% | 29.0% |
| SG&A expense | $36.6 million | $35.5 million | $73.2 million | $69.4 million |
| Operating income (loss) | $2.2 million | $1.1 million | $(1.7) million | $3.2 million |
| Operating margin | 1.7% | 0.8% | (0.7)% | 1.3% |
| Net income (loss) | $1.4 million | $0.6 million | $(1.3) million | $1.8 million |
| Diluted EPS | $0.05 | $0.02 | $(0.05) | $0.06 |
| Comparable store sales change | 0.9% | 0.5% | (1.4)% | 1.2% |
Cash flow and liquidity: Cash provided by operating activities was $6.2 million in the first half of fiscal 2016, versus $0.6 million in the prior-year period. Capital expenditures were $10.4 million, and total investing cash flow was an outflow of $0.2 million after marketable securities activity. Cash and cash equivalents increased to $56.5 million from $51.0 million at fiscal year-end. Marketable securities totaled $39.9 million, providing approximately $96.4 million of cash and short-term investments.
Working capital was $113.2 million at July 30, 2016, compared with $114.9 million at January 30, 2016. The company had no outstanding borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. Capital lease obligations totaled $1.3 million, and deferred rent liabilities totaled $44.6 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 4.9%, driven by nine net new stores opened during the preceding twelve months and 0.9% comparable store sales growth.
- First-half sales increased 2.6%, but comparable store sales declined 1.4%, reflecting negative brick-and-mortar traffic trends partially offset by strong e-commerce growth.
- Second-quarter gross margin improved 40 basis points because of lower distribution, buying and occupancy costs, partly offset by higher markdowns.
- First-half gross margin declined 120 basis points due to higher markdowns and increased occupancy costs associated with new stores and negative comparable-store sales.
- Second-quarter operating income more than doubled to $2.2 million, while first-half operating results declined to a $1.7 million loss from $3.2 million of operating income.
- First-half SG&A increased 5.4%, including higher legal provisions, store impairment charges, store payroll and minimum-wage costs. These increases were partly offset by lower corporate payroll and benefits.
- Six stores were impaired during the first half, resulting in approximately $1.5 million of non-cash impairment charges, compared with one store and $0.6 million of charges in the prior-year period.
- The first-half effective tax rate was 16%, compared with 43% in the prior-year period, reflecting discrete tax effects related to restricted stock settlements and stock-option expirations.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued declines in traffic to brick-and-mortar teen retail stores and continued growth in online shopping.
- The company plans to slow new-store openings during the remainder of fiscal 2016 and focus on existing-store performance and omni-channel and digital capabilities.
- Fiscal 2016 capital expenditures were expected not to exceed $20 million. Management expected to fund operations through cash, marketable securities and operating cash flow without borrowing under the revolving facility over the following twelve months.
- Results are seasonal, with the third and fourth quarters generally producing stronger sales and operating results because of back-to-school and holiday selling periods.
- The company had approximately $2.2 million of provisions for legal matters where losses were considered probable and reasonably estimable. Several wage-and-hour and other class-action matters remained pending or subject to settlement approval.
- A vendor-related copyright settlement requires the vendor to pay $2.0 million over three years, which Tilly’s guaranteed. The estimated reasonably possible exposure if the vendor defaults was zero to $1.5 million, before potential offsets and other recovery rights.
- The company recorded non-cash store-asset impairment charges based on projected store cash flows. Further impairments could result if store performance or sales trends deteriorate.
- New lease accounting and share-based compensation accounting standards were issued. The filing states that the company was evaluating their effects; the lease standard was effective for the company in fiscal 2019 and the share-based compensation standard in fiscal 2017.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the period. The filing states that no material changes occurred in previously disclosed risk factors.
Important Facts for Investors to Verify
- Verify that the applicable period is fiscal 2016 second quarter, not 2015 second quarter, and compare results with the August 1, 2015 period.
- Assess whether e-commerce growth can offset declining physical-store traffic and negative first-half comparable store sales.
- Monitor markdown levels, inventory growth, occupancy costs and additional store impairment risk.
- Review the sustainability of operating cash flow, particularly because the first-half increase was attributed substantially to vendor-payment timing.
- Confirm the status and potential cost of wage-and-hour litigation, settlement approvals and the vendor-payment guarantee.
- Evaluate liquidity after planned capital expenditures and the May 31, 2017 maturity of the revolving credit facility.