Tilly’s, Inc. Form 10-K Summary
Reporting period: Fiscal 2017 ended February 3, 2018, and included 53 weeks. The request metadata references “2016 Q4,” but the supplied filing is the annual report for fiscal 2017. Prior comparable period is fiscal 2016, ended January 28, 2017.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls. The company sells more than 400 third-party and proprietary brands through stores and its e-commerce platform. As of February 3, 2018, it operated 219 stores in 32 states and employed approximately 4,700 people, including seasonal fluctuations.
- Third-party brands represented approximately 74% of fiscal 2017 net sales; proprietary brands represented approximately 26%.
- E-commerce revenues were $75.8 million, or 13.1% of net sales.
- The company operates as one reportable segment.
Financial and Operating Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $576.9 million | $569.0 million | Up 1.4% |
| Gross profit | $175.4 million | $168.5 million | Up 4.1% |
| Gross margin | 30.4% | 29.6% | Up 0.8 percentage points |
| SG&A | $151.4 million | $149.1 million | Up $2.3 million |
| Operating income | $24.0 million | $19.3 million | Up 24.1% |
| Operating margin | 4.2% | 3.4% | Up 0.8 percentage points |
| Net income | $14.7 million | $11.4 million | Up 28.9% |
| Diluted EPS | $0.51 | $0.40 | Up $0.11 |
| Comparable store sales | Up 1.0% | Up 0.5% | Improved |
- Net sales growth included a $5.8 million contribution from comparable store sales and $2.1 million from non-comparable stores.
- Comparable store sales reflected a 1.6% increase in store sales, partly offset by a 2.5% decline in e-commerce sales.
- Product margins were flat; the gross-margin improvement primarily reflected lower buying, distribution and occupancy costs.
- SG&A remained 26.2% of sales. Legal provisions increased by $4.4 million and information-technology implementation costs increased by $2.8 million, partly offset by lower marketing, corporate payroll and impairment costs.
Cash Flow, Liquidity and Debt
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Cash provided by operating activities | $32.7 million | $48.5 million |
| Cash used in investing activities | $40.9 million | $21.7 million |
| Cash from or used in financing activities | $(17.6) million | $1.1 million |
| Capital expenditures | $13.8 million | $17.0 million |
| Cash, cash equivalents and marketable securities | $136.0 million | $133.9 million |
| Working capital | $107.4 million | $129.8 million |
- Operating cash flow declined primarily because of inventory purchases, legal loss contingencies and vendor-payment timing.
- Cash and cash equivalents were $53.2 million, supplemented by $82.8 million of marketable securities.
- The company had no outstanding borrowings under its $25.0 million Wells Fargo revolving credit facility at year-end and was in compliance with its covenants.
- Contractual obligations included $366.8 million of operating lease commitments and $8.3 million of purchase obligations.
- Fiscal 2017 financing cash outflows included $20.1 million of dividends paid. A $1.00-per-share special dividend, totaling approximately $29.1 million, was declared in January 2018 and paid on February 20, 2018.
Material Changes Versus the Prior Period
- Sales increased modestly, while profitability improved substantially because of higher gross margin and operating-cost leverage.
- Store count declined from 223 to 219 after two openings and six closures; total selling square footage declined to approximately 1.668 million square feet.
- E-commerce revenue declined from $76.4 million to $75.8 million and represented a smaller percentage of sales, due partly to transitional issues during implementation of a new omni-channel order-management system.
- Operating cash flow fell by $15.8 million, while cash and marketable securities increased slightly.
- The company adopted ASU 2016-09 for share-based compensation, producing a $0.2 million decrease to retained earnings and a $0.2 million increase to additional paid-in capital, without affecting operating results.
- The December 2017 Tax Cuts and Jobs Act produced a $0.2 million net reduction in fiscal 2017 tax expense, including a $0.5 million deferred-tax-asset impact. Management expected the fiscal 2018 effective tax rate to be approximately 27%.
Guidance, Outlook, Risks and Unusual Items
- Management planned up to 15 new stores and three RSQ-branded pop-up stores in fiscal 2018, with approximately $20 million of capital expenditures expected, funded from operating cash flow.
- The company planned continued investment in its website, mobile application, point-of-sale, order-management, customer-relationship-management and omni-channel capabilities.
- Management highlighted persistent declines in physical-store traffic and continued growth in online shopping as major industry trends.
- Approximately 120 lease decisions were expected during fiscal 2018 and 2019; stores could be closed if acceptable profitability cannot be achieved through occupancy negotiations.
- Legal loss provisions totaled approximately $7.5 million for probable and estimable matters. The company disclosed putative wage-and-hour and TCPA class actions, as well as a $1.4 million accrued maximum exposure related to a vendor copyright settlement guarantee.
- Key risks include fashion and inventory risk, markdown pressure, intense store and online competition, consumer-spending volatility, lease obligations, supply-chain and foreign-sourcing exposure, technology implementation and cybersecurity risks, labor costs, litigation, and dependence on key executives.
- Fiscal 2017 included $0.8 million of non-cash store-asset impairment charges, compared with $2.4 million in fiscal 2016.
- The company leases all stores and major facilities, including related-party facilities leased from entities owned by company co-founders.
- The founders control a substantial majority of voting power through the Class B common stock, which carries 10 votes per share. The company is a controlled company under NYSE rules.
Investor Verification Checklist
- Verify the reporting-period mismatch: the supplied Form 10-K covers fiscal 2017 ended February 3, 2018, not fiscal 2016 Q4.
- Assess whether the e-commerce decline and omni-channel implementation issues were resolved in fiscal 2018.
- Monitor comparable-store sales, store traffic, merchandise markdowns and gross-margin performance.
- Evaluate the economics and funding requirements of planned store openings, pop-ups, remodels and technology investments.
- Review lease commitments, related-party leases and upcoming lease-renewal or closure decisions.
- Track legal proceedings, the $7.5 million loss provision and the vendor settlement guarantee.
- Confirm the continuing impact of the Tax Cuts and Jobs Act and the expected approximately 27% fiscal 2018 effective tax rate.
- Consider the company’s limited debt but substantial operating-lease obligations and its reliance on operating cash flow for growth.
- Review the effect of the planned adoption of new revenue-recognition and lease-accounting standards.