Tilly’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the three and nine months ended November 3, 2018, compared with October 28, 2017. Although the request metadata identifies “2017 Q3,” the filing itself reports fiscal 2018 third-quarter results. Tilly’s operated 227 stores in 33 states, including four RSQ-branded pop-up stores, and an e-commerce platform.
Financial Performance and Position
| Metric | Q3 Fiscal 2018 | Q3 Fiscal 2017 | 9M Fiscal 2018 | 9M Fiscal 2017 |
|---|---|---|---|---|
| Net sales | $146.8 million | $152.8 million | $427.9 million | $412.6 million |
| Gross profit | $43.7 million | $50.1 million | $128.7 million | $123.9 million |
| Gross margin | 29.7% | 32.8% | 30.1% | 30.0% |
| Operating income | $6.7 million | $14.1 million | $20.5 million | $12.5 million |
| Operating margin | 4.6% | 9.2% | 4.8% | 3.0% |
| Net income | $5.4 million | $8.8 million | $16.3 million | $8.0 million |
| Diluted EPS | $0.18 | $0.30 | $0.55 | $0.28 |
- Comparable store sales, including e-commerce, increased 4.3% in the quarter and 3.1% year to date.
- E-commerce revenue increased to $21.2 million from $19.0 million in the quarter and to $56.0 million from $52.1 million year to date. E-commerce represented 14.5% and 13.1% of sales, respectively.
- At November 3, 2018, cash and cash equivalents were $24.8 million and marketable securities were $95.8 million. Total liquidity, including these balances, was approximately $120.5 million.
- Merchandise inventories were $71.5 million, compared with $62.2 million at October 28, 2017 and $53.2 million at February 3, 2018.
- Working capital was $134.8 million, compared with $107.4 million at February 3, 2018.
- Nine-month operating cash flow was $19.3 million, versus $17.7 million in the prior-year period. Capital expenditures were $10.4 million.
- Nine-month investing cash outflow was $22.2 million, primarily reflecting purchases of marketable securities and capital expenditures. Financing cash outflow was $25.6 million, including $29.1 million of dividends.
- The Company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. The facility matures June 26, 2020.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 3.9% despite 4.3% comparable-store sales growth. Management attributed the decline primarily to the prior year’s 53rd retail week, which shifted approximately $14 million of back-to-school sales into the prior-year comparison period; seven net new stores contributed approximately $8 million.
- Third-quarter gross margin fell 310 basis points. Buying, distribution and occupancy costs deleveraged by 190 basis points, while product margins declined 120 basis points due to higher markdowns and an approximately $1.2 million cumulative inventory adjustment related to prior periods.
- Third-quarter SG&A increased 2.6% to $36.9 million and rose to 25.1% of sales from 23.5%, reflecting higher store payroll, secondary-offering costs and online marketing expenses.
- Nine-month operating income increased $8.0 million, primarily because the prior-year period included a $6.2 million provision for a TCPA legal matter. The final settlement resulted in a $1.5 million reduction of that accrual in fiscal 2018.
- The effective tax rate declined to 26.9% in the quarter and 26.1% year to date, primarily due to the U.S. Tax Cuts and Jobs Act, compared with 39.6% and 40.1%, respectively, in the prior-year periods.
- The Company adopted ASC 606 on February 4, 2018 using the modified retrospective method. Opening retained earnings increased by approximately $1.4 million. The standard changed gift-card breakage recognition and recognized e-commerce revenue when merchandise ships.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2019 store growth of up to 15–20 new full-size stores, plus an undetermined number of RSQ pop-up stores, subject to suitable lease economics.
- Fiscal 2019 capital expenditures were expected not to exceed $25 million.
- Minimum-wage and merit increases, new systems costs and lease-accounting adoption were expected to increase annualized operating costs by approximately $6 million. Management estimated that approximately 3% comparable-store sales growth would be needed to absorb these costs without expense deleverage.
- The Company expected its fiscal 2018 effective tax rate to be approximately 26%.
- ASC 842 lease accounting was scheduled for adoption on February 3, 2019 and was expected to have a material balance-sheet effect through recognition of right-of-use assets and lease liabilities. The filing also anticipated approximately $2 million of additional occupancy expense during fiscal 2019 related to adoption.
- A TCPA settlement required discount coupons to be issued to approximately 612,000 customers. Less than 1% had been redeemed as of November 3, 2018, but the potential effect through September 4, 2019 could be material. Redemption transactions had larger average sales but significantly lower margin rates.
- Two stores were impaired during the first nine months, resulting in approximately $0.8 million of non-cash impairment charges.
- Pending or unresolved legal matters included a California wage-and-hour PAGA action and an appeal in the Skylar Ward wage-and-hour case. The filing states that potential losses could not be reasonably estimated.
- Retail results remain seasonal and exposed to customer traffic, fashion trends, promotions, weather, competition, inventory execution, occupancy costs and the continuing shift from physical stores to e-commerce.
Important Facts for Investors to Verify
- Confirm the applicable reporting period: the filing is for fiscal 2018 third quarter, not fiscal 2017 third quarter.
- Assess whether the third-quarter gross-margin deterioration and approximately $1.2 million inventory adjustment were temporary or indicative of ongoing markdown and product-mix pressure.
- Monitor inventory growth, holiday performance and the conversion of marketable securities into operating liquidity.
- Evaluate the effect of the 53rd-week calendar comparison on reported quarterly sales and earnings.
- Track redemption rates and margin effects of the 612,000 legal-settlement coupons through their September 4, 2019 expiration.
- Review the balance-sheet and earnings effects of ASC 842 lease adoption, including the expected right-of-use assets, lease liabilities and additional occupancy expense.
- Verify covenant compliance, dividend capacity and the Company’s ability to fund planned store expansion without drawing on its revolving credit facility.