Tilly’s, Inc. Form 10-K Summary
Business context and reporting period
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls. As of February 3, 2024, it operated 248 stores in 33 states and an e-commerce platform serving all 50 states and the District of Columbia. The filing covers fiscal 2023, a 53-week year ended February 3, 2024; fiscal 2022 ended January 28, 2023 and included 52 weeks. The request references “2022 Q4,” but the supplied document is an annual Form 10-K for fiscal 2023, not a quarterly filing.
Financial performance and key metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $623.1 million | $672.3 million | Down 7.3% |
| Gross profit / margin | $165.7 million / 26.6% | $202.7 million / 30.2% | Margin down 360 bps |
| Operating income (loss) / margin | $(31.0) million / (5.0%) | $11.2 million / 1.7% | Declined $42.2 million |
| Net income (loss) | $(34.5) million | $9.7 million | Turned to loss |
| Diluted EPS | $(1.16) | $0.32 | Declined $1.48 |
| Cash flow from operations | $(6.7) million | $(1.4) million | Greater cash use |
| Capital expenditures | $14.0 million | $15.1 million | Down $1.2 million |
| Comparable store sales | Down 10.6% | Down 14.6% | Improved, but remained negative |
Physical-store sales decreased 8.6% to $485.6 million, while e-commerce sales decreased 2.6% to $137.5 million. E-commerce represented 22.1% of total sales versus 21.0% in fiscal 2022. Average sales per store declined to $1.9 million from $2.2 million, and sales per square foot declined to $267 from $297.
Total cost of goods sold was 73.4% of sales versus 69.8% in the prior year. Product margins declined by approximately 150 basis points, primarily because of increased markdowns. Total markdowns on a cost basis increased to $65.0 million from $58.7 million. SG&A increased to $196.6 million, or 31.6% of sales, from $191.6 million, or 28.5%.
The company recorded $3.4 million of non-cash store asset impairment charges, compared with approximately $17,000 in fiscal 2022. It also recorded a $15.4 million valuation allowance against net deferred tax assets, contributing to an $8.7 million income tax expense despite a pre-tax loss.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $47.0 million and marketable securities were $48.0 million at February 3, 2024, for total cash and marketable securities of approximately $95.0 million.
- Working capital was $71.5 million, down from $94.1 million.
- The company had no outstanding borrowings under its asset-backed credit facility and was eligible to borrow up to $42.4 million. A $2.025 million standby letter of credit was outstanding.
- The credit facility provides a revolving commitment of up to $65.0 million, matures April 27, 2026, is secured by company assets, and includes an accordion feature of up to $12.5 million subject to conditions.
- Total operating lease liabilities were $231.6 million, including $22.4 million related to facilities leased from entities owned by the company’s co-founders.
- Fiscal 2023 net cash used in operating, investing and financing activities was $6.7 million, $20.0 million and $0.2 million, respectively. Cash declined by $26.5 million during the year.
Material changes versus the prior comparable period
- Sales declined despite the additional 53rd week, reflecting lower consumer spending, inflationary pressure and weaker traffic and demand.
- The store base decreased modestly to 248 from 249; seven stores opened and eight closed during fiscal 2023.
- Gross margin contracted materially because of markdowns, occupancy deleverage and other buying, distribution and occupancy costs.
- SG&A increased despite lower sales, including higher store payroll, the estimated impact of the 53rd week and increased impairment charges. Store payroll represented approximately 47% of SG&A, and the average hourly store wage was 7% higher than fiscal 2022.
- Other income increased to $5.2 million from $2.0 million, primarily because of higher returns on marketable securities.
- The company replaced its prior credit agreement with a larger asset-backed facility and remained compliant with all covenants.
Guidance, outlook, commentary and risks
Management expects to open five stores in fiscal 2024 and expects fiscal 2024 capital expenditures not to exceed $15 million, including new stores and distribution and information technology upgrades. Management expects minimum-wage increases to add approximately $2 million to fiscal 2024 costs compared with fiscal 2023. It also plans to complete warehouse-management system upgrades and further enhance planning, allocation, e-commerce and mobile capabilities.
Management believes cash on hand, marketable securities, operating cash flow and credit-facility availability will fund operations and planned capital expenditures for at least the next 12 months. However, fiscal 2023 produced negative operating cash flow, and the company depends on future operating cash generation to fund lease obligations, inventory, store investments and growth.
Key risks include discretionary consumer spending declines, inflation and wage pressure, intense retail and e-commerce competition, fashion and inventory execution, markdowns and shrinkage, mall traffic and lease obligations, supply-chain and foreign sourcing risks, cybersecurity and privacy incidents, disruptions at the concentrated Irvine facilities, litigation, climate and severe-weather events, and the ability to improve underperforming stores. The company tested 45 stores for impairment and recorded charges for 27 stores.
The company is controlled by co-founder Hezy Shaked and co-founder Tilly Levine through Class B shares carrying 10 votes per share. The company does not currently have formal plans to pay dividends; its credit agreement restricted dividends and share repurchases before April 27, 2024 and imposes conditions thereafter.
There were no unresolved SEC staff comments, no material legal proceedings expected to affect consolidated results or financial position, and no known cybersecurity incidents that materially affected or were reasonably likely to materially affect the company. Management and the independent auditor reported effective internal control over financial reporting and issued unqualified audit opinions.
Most important facts for investors to verify
- Whether comparable sales, traffic and gross margin stabilize after two consecutive years of declines.
- Whether markdowns and inventory levels decline without impairing sales or product relevance.
- Whether the company returns to positive operating and free cash flow while funding leases, store openings and technology investments.
- The availability, borrowing-base capacity and covenant headroom under the asset-backed facility.
- The realizability of deferred tax assets following the $15.4 million valuation allowance and the company’s operating losses.
- The performance and profitability of the 248-store fleet, particularly the stores subject to impairment testing and upcoming lease decisions.
- The effect of wage increases, inflation, occupancy costs and other fixed expenses on future margins.
- Related-party lease payments, governance implications of founder control and the absence of a current dividend plan.