Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen weeks ended April 29, 2023. The provided filing is the fiscal 2023 first-quarter Form 10-Q, not the 2022 first quarter indicated in the request metadata. Comparative figures are for the thirteen weeks ended April 30, 2022. Financial statements are unaudited and presented in accordance with U.S. GAAP.
Business Context
Tilly’s operates specialty retail stores and an e-commerce platform selling casual apparel, footwear, accessories and hardgoods. It operated 248 stores in 33 states at April 29, 2023, versus 241 stores a year earlier. E-commerce represented 20.9% of first-quarter net sales, compared with 19.4% in the prior-year period.
Key Financial Metrics
| Metric | Q1 Fiscal 2023 | Q1 Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $123.6 million | $145.8 million | Down 15.2% |
| Gross profit | $25.9 million | $43.8 million | Down $17.9 million |
| Gross margin | 21.0% | 30.1% | Down 910 basis points |
| SG&A | $43.2 million | $42.7 million | Up $0.5 million |
| SG&A as a percentage of sales | 34.9% | 29.3% | Up 560 basis points |
| Operating income (loss) | $(17.3) million | $1.1 million | Decrease of $18.4 million |
| Net income (loss) | $(12.0) million | $0.8 million | Decrease of $12.8 million |
| Diluted earnings (loss) per share | $(0.40) | $0.03 | Unfavorable change |
| Cash flow from operating activities | $(16.2) million | $(17.6) million | Use improved by $1.4 million |
Store sales declined 16.7% to $97.8 million, while e-commerce sales declined 8.7% to $25.8 million. Comparable store net sales declined 17.5%, including e-commerce under the company’s omni-channel methodology. Average net sales per physical store fell to $393,000 from $487,000, and average net sales per square foot fell to $54 from $66.
At April 29, 2023, cash and cash equivalents were $43.7 million and marketable securities were $49.7 million, for combined liquid investments of $93.4 million. Working capital was $77.1 million, compared with $94.1 million at January 28, 2023. Total assets were $473.2 million and total liabilities were $307.7 million. The balance sheet primarily reflects operating lease liabilities; the filing reports no outstanding borrowings.
Material Changes Versus the Prior Comparable Period
- Sales weakened across all geographic markets and merchandising departments except footwear. Management attributed the decline primarily to unseasonably cold and wet weather, particularly in California, and inflationary pressure on its young customer base.
- Gross margin contracted to 21.0% from 30.1%. Buying, distribution and occupancy costs deleveraged by 620 basis points, while product margins declined by 290 basis points, primarily because of higher markdowns used to manage inventory.
- SG&A increased slightly in dollars despite lower sales. Corporate payroll, software-as-a-service costs and outside recruiting expenses increased, partly offset by lower store payroll and related benefits.
- Merchandise inventories increased to $77.2 million from $62.1 million at January 28, 2023, while accounts payable increased to $24.7 million from $16.0 million.
- Operating cash use remained substantial at $16.2 million. Investing activities used $13.7 million, including $24.5 million of marketable-security purchases and $4.3 million of capital expenditures.
- The company did not repurchase shares during the quarter. The prior repurchase authorization expired on March 14, 2023 with 741,670 shares remaining unused.
Guidance, Outlook, Risks and Unusual Items
Management expects to open seven stores in existing markets during fiscal 2023 and estimates fiscal-year capital expenditures of approximately $15 million, including new stores and distribution and information-technology upgrades. Management expects to fund operations, growth and capital expenditures with cash on hand, marketable securities, operating cash flow and credit-facility availability.
Management identified inflation, weaker consumer confidence and spending, higher product, labor, shipping and digital-marketing costs, and potential recessionary effects as significant pressures. Store payroll averaged 25% above the pre-pandemic first quarter of fiscal 2019 and 8% above the prior-year quarter; minimum-wage increases are estimated to add approximately $3 million to fiscal 2023 costs.
On April 27, 2023, the company entered into a new asset-based senior secured revolving facility of up to $65 million, maturing April 27, 2026, with an uncommitted accordion feature of up to $12.5 million. The facility is secured by substantially all company assets. The borrowing base was initially deemed to be $25 million pending lender due diligence. There were no outstanding borrowings at April 29, 2023, and the company was in compliance with its covenants. A $2.025 million standby letter of credit was outstanding.
The new facility generally prohibits cash dividends and share repurchases before April 27, 2024 and imposes minimum-availability requirements. Total present-value operating lease liabilities were $243.9 million at April 29, 2023, including $24.5 million related to facilities leased from entities owned by company co-founders.
The company recorded $0.2 million of non-cash impairment charges for six stores, compared with approximately $13,000 for one store in the prior-year quarter. Management stated that no pending legal proceedings were expected to have a material adverse effect individually or in the aggregate. Disclosure controls and internal control over financial reporting were assessed as effective at the reasonable-assurance level.
Important Facts for Investors to Verify
- Confirm that the period analyzed is fiscal Q1 2023 ended April 29, 2023, rather than Q1 2022.
- Assess whether the 17.5% comparable-sales decline and sharply lower gross margin are temporary effects of weather and inflation or evidence of persistent demand and merchandising pressure.
- Monitor inventory levels, markdown rates and product margin recovery, given the 24.2% year-over-year increase in merchandise inventories and higher markdown activity.
- Evaluate liquidity under continued operating cash outflows, planned approximately $15 million of capital expenditures and significant lease obligations.
- Review the borrowing-base calculation, minimum-availability covenant and collateral terms of the new $65 million secured credit facility.
- Track the impact of wage inflation and the estimated $3 million fiscal 2023 minimum-wage cost increase on SG&A and profitability.
- Consider the effect of store expansion, including seven planned openings, on occupancy costs and sales productivity.
- Review related-party lease arrangements and their renewal, escalation and termination terms.