Tilly’s, Inc. Form 10-Q Summary
Reporting period: First quarter ended April 30, 2016, compared with the first quarter ended May 2, 2015. The supplied metadata labels the period “2015 Q1,” but the filing itself reports fiscal 2016 first-quarter results.
Business Context and Reporting Period
Tilly’s is a specialty retailer of West Coast-inspired apparel, footwear and accessories for young men, young women, boys and girls. It operated 224 stores in 32 states as of April 30, 2016, and also sold merchandise through its e-commerce platform. The business is seasonal, with stronger sales and operating results typically occurring in the third and fourth quarters.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $120.2 million | $120.2 million | Flat |
| Gross profit | $32.6 million | $36.1 million | Down 9.7% |
| Gross margin | 27.1% | 30.0% | Down 2.9 percentage points |
| SG&A expense | $36.6 million | $33.9 million | Up 8.0% |
| Operating income/(loss) | $(4.0) million | $2.1 million | Declined $6.1 million |
| Operating margin | (3.3)% | 1.8% | Down 5.1 percentage points |
| Net income/(loss) | $(2.7) million | $1.3 million | Declined $4.0 million |
| Diluted EPS | $(0.10) | $0.05 | Declined $0.15 |
| Cash flow from operations | $(8.0) million | $(3.0) million | Use increased $5.0 million |
| Capital expenditures | $4.3 million | $5.1 million | Decreased $0.8 million |
Liquidity and balance sheet: Cash and cash equivalents were $43.5 million, and marketable securities were $44.9 million at April 30, 2016. Total current assets were $170.1 million versus current liabilities of $58.1 million, producing working capital of approximately $112.0 million. Total assets were $270.0 million and total liabilities were $98.8 million.
The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. The facility matures May 31, 2017 and is secured by substantially all company assets. Capital lease obligations totaled $1.5 million, including current and long-term portions.
Material Changes Versus the Prior Comparable Period
- Net sales were essentially unchanged because a 4.6% comparable-store-sales decline offset a $4.6 million increase from 11 net new stores opened during the preceding twelve months.
- Comparable-store sales declined 4.1%, reflecting lower brick-and-mortar traffic, partly offset by stronger conversion rates and strong e-commerce growth.
- Gross margin fell to 27.1% from 30.0%. Management attributed the decline to higher occupancy costs, increased markdowns and higher distribution costs associated with e-commerce shipping.
- SG&A increased by $2.7 million, including a $1.7 million legal provision and a $0.7 million increase in non-cash store impairment charges.
- The company recorded approximately $0.7 million of non-cash impairment charges for three stores; no impairment charges were recorded in the prior-year quarter.
- Operating results shifted from income to loss, and net results shifted from $1.3 million of income to a $2.7 million loss.
- Operating cash usage increased to $8.0 million, primarily because of weaker operating results and the timing of vendor and income tax payments. Inventory increased by $8.4 million during the quarter, reflecting seasonal needs.
- Investing activities provided $0.7 million, principally because marketable-security maturities exceeded purchases by $5.1 million, partially offset by capital expenditures.
Guidance, Outlook, Risks and Unusual Items
- Management expects to slow the pace of new store openings in fiscal 2016 and focus on improving existing-store performance and expanding digital and omni-channel capabilities.
- Management expects approximately $25 million of total capital expenditures for fiscal 2016.
- The company expects to fund operations over the next twelve months with cash, marketable securities and operating cash flow, without borrowing under the revolving facility.
- Management identified continuing declines in brick-and-mortar traffic and increasing online shopping as important industry trends. Results remain exposed to consumer preferences, fashion trends, competition, weather, seasonality, markdowns, occupancy costs and e-commerce fulfillment costs.
- The company maintains approximately $2.2 million of provisions for legal matters where losses are probable and reasonably estimable. Several wage-and-hour and other putative class actions remain pending or subject to mediation or appeal.
- The company guaranteed up to $2.0 million of vendor settlement payments related to a copyright matter. If the vendor defaults, the estimated reasonably possible loss is currently zero to $1.6 million, before potential offsets and recovery from collateral.
- The Internal Revenue Service examination of the federal tax return for the year ended January 31, 2015 was completed during the quarter and is expected to settle without impact.
- The company is evaluating new accounting standards covering leases and share-based compensation. The lease standard is expected to affect the financial statements because substantially all retail and corporate operations are conducted in leased facilities.
- Management stated that disclosure controls and procedures were effective at the reasonable assurance level, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether comparable-store sales and brick-and-mortar traffic improve while e-commerce growth remains sufficient to offset store weakness.
- Whether gross margin pressure from markdowns, occupancy costs and distribution expenses persists.
- Inventory levels, markdown exposure and the company’s ability to convert seasonal inventory into cash.
- Compliance with the revolving-credit facility’s quarterly net-loss and leverage covenants, particularly given the reported quarterly loss.
- The ultimate cost and timing of the disclosed legal proceedings, including the vendor settlement guarantee.
- The impact of the planned $25 million fiscal-year capital-expenditure program on cash balances and liquidity.
- The future balance-sheet effects of adopting the new lease accounting standard.