Tilly’s, Inc. Form 10-Q Summary
Business context and reporting period
Tilly’s, Inc. is a specialty retailer of casual apparel, footwear and accessories for teens and young adults. As of August 1, 2015, it operated 216 stores in 33 states and an e-commerce platform. The filing covers the thirteen and twenty-six weeks ended August 1, 2015, compared with the corresponding periods ended August 2, 2014. The supplied metadata identifies “2014 Q2,” but the filing itself is a fiscal 2015 second-quarter report.
Key financial metrics
| Metric | 13 weeks ended August 1, 2015 | 13 weeks ended August 2, 2014 | 26 weeks ended August 1, 2015 | 26 weeks ended August 2, 2014 |
|---|---|---|---|---|
| Net sales | $130.0 million | $123.1 million | $250.2 million | $234.2 million |
| Gross profit | $36.6 million | $34.7 million | $72.6 million | $66.0 million |
| Gross margin | 28.1% | 28.2% | 29.0% | 28.2% |
| Operating income | $1.1 million | $2.3 million | $3.2 million | $3.4 million |
| Operating margin | 0.8% | 1.9% | 1.3% | 1.5% |
| Net income | $0.6 million | $1.3 million | $1.8 million | $1.9 million |
| Diluted EPS | $0.02 | $0.05 | $0.06 | $0.07 |
Comparable store sales increased 0.5% in the quarter and 1.2% in the first half, versus declines of 7.1% and 6.9%, respectively, in the prior-year periods. Total square footage increased to approximately 1.65 million from 1.56 million, reflecting 13 net new stores opened during the prior twelve months.
Cash and cash equivalents were $51.7 million at August 1, 2015, compared with $49.8 million at January 31, 2015. Marketable securities were $25.0 million, down from $35.0 million. Merchandise inventories were $79.9 million, up from $51.5 million, while total current assets were $181.2 million and total current liabilities were $75.5 million, producing working capital of $105.7 million.
Net cash provided by operating activities was $0.6 million in the first half, compared with $11.7 million in the prior-year period. Net cash used in investing activities was $1.5 million, including $11.5 million of capital expenditures, partially offset by net proceeds from marketable securities. Net cash provided by financing activities was $2.8 million, primarily from stock-option exercises and related tax benefits. Capital expenditures for fiscal 2015 were expected to total approximately $27 million to $29 million.
The company had no outstanding borrowings under its $25.0 million revolving credit facility at August 1, 2015 and was in compliance with its covenants. The facility matures May 31, 2017, bears interest at LIBOR plus 1.00% or the bank’s prime rate, and is secured by substantially all company assets. The facility also supports up to $15.0 million of standby and commercial letters of credit. Capital lease obligations totaled $2.1 million, and the filing does not report other outstanding funded debt.
Material changes versus the prior comparable period
- Second-quarter sales increased 5.6%, driven primarily by $6.3 million of non-comparable sales from new stores and $0.6 million from comparable-store growth.
- First-half sales increased 6.8%, with $13.3 million from new stores and $2.7 million from comparable-store growth.
- Second-quarter gross margin declined modestly to 28.1% because of increased markdowns on seasonal summer inventory, partly offset by distribution and fulfillment efficiencies.
- First-half gross margin improved to 29.0%, primarily from lower buying, distribution and occupancy costs as a percentage of sales and improved product margins.
- SG&A increased 9.9% in the quarter and 10.9% in the first half. Higher legal costs, a non-cash store impairment, increased marketing, corporate compensation and store payroll more than offset lower e-commerce fulfillment labor costs.
- Operating income declined 52.2% in the quarter and 5.9% in the first half, while net income declined 53.8% in the quarter and slightly in the first half.
- Working-capital investment increased, particularly in inventory and receivables, contributing to the substantial decline in operating cash flow.
Outlook, commentary, risks and unusual items
Management expects to fund operations and growth from cash, marketable securities and operating cash flow without borrowing under the revolving facility during the next twelve months. The business is seasonal, with historically stronger sales and operating results in the third and fourth quarters due to back-to-school and holiday demand; interim results are not necessarily indicative of full-year performance.
The company recorded approximately $0.4 million of non-cash impairment charges in the second quarter for one store. It also recorded approximately $0.5 million of legal loss provisions for matters where losses were probable and reasonably estimable. The effective tax rate was affected by a prior-year tax settlement and other discrete items, reaching 50% for the quarter and 43% for the first half.
Tilly’s guaranteed up to $2.0 million of payments over three years by a vendor under a copyright-infringement settlement. If the vendor defaults, the estimated reasonably possible loss to Tilly’s is zero to $1.8 million, subject to offset rights and a security interest in the vendor’s intellectual property. Several putative wage-and-hour and other class-action matters remain pending; their ultimate outcomes and potential losses are uncertain.
Key risks include rapidly changing fashion preferences, excess inventory and markdown exposure, intense retail competition, dependence on consumer discretionary spending, execution of new-store growth, seasonal and regional concentration, lease obligations, supplier and import risks, e-commerce and information-security risks, litigation, and the effects of the company’s controlled-company ownership structure. Management stated that disclosure controls and procedures were effective as of August 1, 2015, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether comparable-store sales momentum and traffic trends continued after the quarter, particularly because growth was driven more by new stores than by mature-store productivity.
- Inventory levels, markdown activity and gross-margin trends entering the back-to-school and holiday periods.
- Whether SG&A growth, legal costs, marketing spending and store impairment charges continue to pressure operating leverage.
- The conversion of limited first-half operating cash flow into full-year cash generation and the planned $27 million to $29 million of capital expenditures.
- The status and potential financial exposure of pending class actions and the vendor settlement guarantee.
- Compliance with credit-facility covenants and available liquidity if operating performance weakens.
- The impact of the prior-year tax settlement and other discrete tax items on future effective tax rates.