Tilly’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the thirteen and twenty-six weeks ended July 31, 2021, compared with the periods ended August 1, 2020. The request metadata identifies “2020 Q2,” but the filing is for fiscal 2021 second quarter. The financial statements are unaudited.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods serving young men, women, boys and girls through stores and e-commerce. As of July 31, 2021, the company operated 244 stores in 33 states, compared with 238 stores a year earlier. Six stores opened during the quarter. Results were materially affected by the COVID-19 pandemic, including prior-year store closures, changing customer behavior, e-commerce demand, supply-chain conditions and labor availability.
Financial Performance and Position
| Metric | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 |
|---|---|---|---|---|
| Net sales | $202.0 million | $135.8 million | $365.1 million | $213.1 million |
| Gross profit | $74.7 million | $41.7 million | $129.6 million | $43.3 million |
| Gross margin | 37.0% | 30.7% | 35.5% | 20.3% |
| Operating income (loss) | $26.4 million | $7.7 million | $41.3 million | $(20.7) million |
| Operating margin | 13.1% | 5.7% | 11.3% | (9.7)% |
| Net income (loss) | $20.4 million | $5.3 million | $31.4 million | $(12.1) million |
| Diluted EPS | $0.66 | $0.18 | $1.02 | $(0.41) |
- Quarterly store sales increased 96.3% to $164.6 million, while e-commerce revenue decreased 28.2% to $37.3 million. E-commerce represented 18.5% of quarterly sales versus 38.3% in the prior year.
- First-half store sales increased 123.5% to $292.3 million, while e-commerce revenue declined 11.6% to $72.8 million.
- Quarterly comparable store sales increased 10.6%; first-half comparable store sales increased 9.5%. The company used a COVID-19-adjusted comparable-sales methodology based on stores open on corresponding fiscal dates.
- Quarterly SG&A was $48.3 million, or 23.9% of sales, compared with 25.0% in the prior year. First-half SG&A was $88.3 million, or 24.2% of sales, compared with 30.0%.
- Cash and cash equivalents were $81.9 million at July 31, 2021, supplemented by $66.6 million of marketable securities. Total current assets were $256.3 million and working capital was $89.9 million.
- Merchandise inventories were $86.9 million, up from $55.7 million at January 30, 2021 and $68.1 million at August 1, 2020. Accounts payable were $59.1 million.
- Operating cash flow for the first half was $37.4 million, compared with $18.8 million in the prior year. Capital expenditures were $8.5 million.
- Investing cash flow was a use of $10.1 million, primarily reflecting marketable-security purchases and capital expenditures. Financing cash flow was a use of $21.6 million, including the $30.7 million special dividend, partly offset by $9.1 million from stock-option exercises.
- The company had no borrowings under its $65.0 million asset-backed revolving facility and was eligible to borrow up to $63.0 million at July 31, 2021. The facility matures November 9, 2023 and is secured by company assets.
Material Changes Versus the Prior Comparable Period
- Sales and profitability improved substantially because all stores operated during the current-year quarter, whereas only 65% of total store operating days were available in the prior-year quarter due to government-mandated closures.
- Gross margin expanded by 630 basis points in the quarter and 1,520 basis points for the first half. The improvement reflected leverage of buying, distribution and occupancy costs and, for the first half, lower markdowns.
- Quarterly product margins declined 170 basis points year over year because the prior-year period benefited from strong full-price selling after store reopenings; product margins were nevertheless 190 basis points above the second quarter of fiscal 2019.
- The company shifted toward physical-store sales as stores reopened. Proprietary-branded merchandise represented 30% of quarterly sales and 29% of first-half sales, compared with 23% in both prior-year periods.
- The company paid a one-time special cash dividend of $1.00 per share, or $30.7 million, on July 9, 2021, under a lender consent agreement.
- One store impairment charge of approximately $0.1 million was recorded during the first half. The company also corrected an immaterial prior balance-sheet presentation error related to operating lease assets and liabilities, with no net cash-flow impact.
Outlook, Risks and Unusual Items
Management stated that it expects existing cash, marketable securities, operating cash flow and credit-facility availability to fund operations, planned store growth, remodels, working-capital needs and anticipated capital expenditures for at least the next 12 months. No formal sales or earnings guidance is provided in the filing.
- Management cautioned that fiscal 2021 comparisons are affected by federal stimulus payments, prior-year store closures, unusually strong post-reopening sales and atypical back-to-school timing. Future trends cannot be predicted reliably.
- COVID-19 resurgence, variants, quarantines, labor shortages, supply-chain disruptions, store closures, changing consumer spending and reduced stimulus support could materially affect results.
- The business is seasonal, with the third and fourth quarters historically generating stronger sales and operating results due to back-to-school and holiday demand.
- Operating lease liabilities totaled approximately $249.0 million on a present-value basis. Less than 10 stores and approximately $0.4 million of withheld COVID-related rents remained unresolved at July 31, 2021. The company also disclosed approximately $2.9 million of additional leases not yet commenced and $3.6 million of lease modifications executed after the balance-sheet date.
- Two California wage-and-hour matters remain pending. Management believes losses are not probable or estimable and has recorded no accrual. One matter includes an indemnification obligation from a staffing-company co-defendant.
- The company disclosed no material changes in market risk and stated that disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level.
Investor Verification Checklist
- Verify the period designation: the filing is for the quarter ended July 31, 2021, not 2020 Q2.
- Assess whether the significant year-over-year improvement reflects sustainable operations or unusually favorable comparisons with pandemic-affected 2020 results.
- Monitor store traffic, comparable sales, e-commerce trends and the effect of back-to-school and holiday timing.
- Review inventory growth, markdown exposure, gross-margin durability and potential supply-chain or merchandise-availability issues.
- Evaluate liquidity after the $30.7 million special dividend, including cash, marketable securities, lease obligations and revolver availability.
- Review COVID-19 developments, labor costs and shortages, lease concessions, pending litigation and the company’s ability to maintain covenant compliance.