Tilly’s, Inc. Form 10-K Summary
Reporting period: Fiscal year ended February 1, 2020 (fiscal 2019; 52 weeks). The provided filing is not a 2018 Q4 filing; it is the fiscal 2019 annual report, with fiscal 2018 as the primary comparable period.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls. It operated 240 stores in 33 states, including 239 full-size stores and one RSQ-branded pop-up store, and sold through its e-commerce platform. E-commerce represented 15.9% of fiscal 2019 net sales. Third-party brands accounted for approximately 75% of sales and proprietary brands 25%; Vans and RSQ each represented approximately 10% of sales.
Financial and Operating Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $619.3 million | $598.5 million | Up 3.5% |
| Gross profit | $186.7 million | $180.9 million | Up 3.2% |
| Gross margin | 30.1% | 30.2% | Down 10 bps |
| SG&A | $158.3 million | $149.4 million | Up $8.8 million |
| Operating income | $28.5 million | $31.5 million | Down 9.6% |
| Operating margin | 4.6% | 5.3% | Down 70 bps |
| Net income | $22.6 million | $24.9 million | Down 9.3% |
| Diluted EPS | $0.76 | $0.84 | Down $0.08 |
| Cash flow from operations | $36.4 million | $46.7 million | Down $10.3 million |
| Capital expenditures | $14.3 million | $14.9 million | Down $0.6 million |
| Cash, cash equivalents and marketable securities | $139.9 million | $144.1 million | Down $4.2 million |
Comparable store sales increased 0.8%, versus 4.0% in fiscal 2018. Physical-store comparable sales declined 0.7%, while e-commerce revenue increased 9.7% to $98.5 million. The company opened 14 stores and closed three, increasing the store count from 229 to 240. Average net sales per square foot remained $301.
Fiscal 2019 included $29.5 million of cash dividends paid, including a $1.00 per-share special dividend. The company reported no borrowings under its credit facility at February 1, 2020, but had $296.1 million of operating lease liabilities following adoption of ASC 842.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by 14 new stores and higher e-commerce sales; comparable sales momentum slowed materially.
- Gross margin was broadly stable, but occupancy costs deleveraged by approximately 10 basis points.
- SG&A increased due primarily to higher marketing, store payroll and benefits, temporary labor, workers’ compensation reserves and nonrecurring prior-year benefits that did not recur.
- Operating income and net income declined despite higher sales, as SG&A growth exceeded gross-profit growth.
- Operating cash flow decreased primarily because of vendor payment timing, lower accrued compensation and benefits, and lower net income.
- ASC 842 lease accounting was adopted in fiscal 2019, adding operating lease assets and liabilities to the balance sheet. Comparative periods were not recast.
- The company launched an enhanced loyalty program, including instant award redemption and a 365-day award expiration period.
Guidance, Outlook, Risks and Unusual Items
The filing provides no quantitative fiscal 2020 sales, earnings or capital-expenditure guidance. Management stated that it could not determine the number of new stores or expected capital expenditures because of the COVID-19 pandemic. Subject to assumptions about the pandemic, management believed operating cash flow, cash and marketable securities, and credit availability would cover working capital and anticipated capital expenditures for the next 12 months from the filing date.
- On March 18, 2020, Tilly’s temporarily closed all 239 stores and closed the distribution center serving stores. The e-commerce operation initially remained open but could also be suspended.
- On March 24, 2020, the company borrowed approximately $23.7 million, the maximum permitted under its revolving facility, at approximately 1.7% interest.
- On March 27, 2020, the company furloughed most store associates, a significant majority of distribution-center staff and some corporate employees. Management and directors also implemented salary and fee reductions or waivers.
- At year-end, Tilly’s was below its minimum fixed-charge coverage covenant, with a ratio of 1.19 to 1.0 versus a required 1.25 to 1.0. The bank waived the fiscal 2019 breach. Management expected not to meet the covenant in the first quarter of fiscal 2020 and was seeking an amendment.
- COVID-19 risks include store closures, lower consumer spending and traffic, supply-chain and vendor delays, inventory markdowns, lease obligations, liquidity pressure and possible covenant breaches.
- The company has approximately $335.5 million of total minimum operating lease payments, including $296.1 million recorded as lease liabilities at February 1, 2020. Approximately $5 million of additional operating lease contracts had not yet commenced.
- Two California wage-and-hour matters remained pending. One involved continued settlement discussions under a PAGA claim; the other was proceeding through discovery after an appellate ruling favorable to the plaintiff’s ability to state a claim. Potential exposure was not clearly quantified.
- The company reported related-party leases for facilities owned by entities associated with its co-founders and approved $200,000 of annual support for Tilly’s Life Center in fiscal 2019.
Most Important Facts for Investors to Verify
- Confirm that the relevant filing period is fiscal 2019 ended February 1, 2020, rather than 2018 Q4.
- Assess the duration and financial effects of COVID-19 store closures, e-commerce disruptions, inventory delays and furloughs.
- Monitor the fixed-charge coverage covenant, the requested bank amendment and utilization of the $25 million revolving credit facility.
- Evaluate liquidity after the $23.7 million borrowing, recurring lease payments, inventory needs and special-dividend payments.
- Review whether comparable-store sales, physical-store traffic and e-commerce growth support profitability after reopening.
- Review pending wage-and-hour litigation, lease-renegotiation risks and potential impairment or markdown charges.
- Consider that the filing’s financial statements and outlook largely predate the full economic impact of COVID-19 and do not quantify its eventual effect.