Tilly’s, Inc. Form 10-Q Summary
Reporting period: Three and six months ended July 29, 2017, compared with July 30, 2016. The provided metadata identifies “2016 Q2,” but the filing itself is for fiscal 2017 second quarter. Results are unaudited and seasonal.
Business Context
Tilly’s is a youth-culture specialty retailer of apparel, footwear and accessories, selling through stores and e-commerce. It operated 221 stores in 31 states at quarter-end, compared with 225 stores a year earlier. Management is emphasizing existing-store productivity, digital and omni-channel capabilities rather than significant store expansion.
Financial Performance
| Metric | Q2 FY2017 | Q2 FY2016 | H1 FY2017 | H1 FY2016 |
|---|---|---|---|---|
| Net sales | $138.8 million | $136.4 million | $259.8 million | $256.6 million |
| Gross profit | $40.9 million | $38.8 million | $73.8 million | $71.4 million |
| Gross margin | 29.5% | 28.5% | 28.4% | 27.8% |
| SG&A | $42.2 million | $36.6 million | $75.4 million | $73.2 million |
| Operating income (loss) | $(1.2) million | $2.2 million | $(1.6) million | $(1.7) million |
| Net income (loss) | $(0.6) million | $1.4 million | $(0.8) million | $(1.3) million |
| Diluted EPS | $(0.02) | $0.05 | $(0.03) | $(0.05) |
- Comparable-store sales increased 2.1% in the quarter and 1.4% in the first half, driven principally by improved store traffic.
- E-commerce revenue increased to $16.9 million in Q2 from $16.2 million and represented 12.1% of net sales, versus 11.9%. First-half e-commerce revenue was $33.1 million, or 12.7% of sales.
- Gross margin expanded due primarily to lower markdowns and improved leverage of buying, distribution and occupancy costs.
- SG&A increased 15.3% in Q2, including a $6.2 million legal provision, higher information-technology implementation costs and increased store payroll from minimum-wage increases.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $2.9 million, down from $6.2 million. Inventory consumed $27.3 million of cash, partly offset by a $24.1 million increase in accounts payable.
- Investing cash outflow was $17.8 million, including $7.0 million of capital expenditures and net purchases of marketable securities.
- Financing cash outflow was $20.5 million, primarily the $20.1 million special dividend of $0.70 per share paid in February 2017.
- Cash and cash equivalents were $43.6 million at July 29, 2017, compared with $79.0 million at fiscal year-end and $56.5 million a year earlier. Marketable securities totaled $66.1 million.
- Working capital was $106.7 million, down from $129.8 million at January 28, 2017.
- The company had no borrowings under its $25.0 million revolving credit facility, which matures June 26, 2020, and was in compliance with all covenants. The facility requires, among other items, at least $50.0 million of eligible inventory, cash, cash equivalents and marketable securities.
- Total liabilities were $127.2 million and stockholders’ equity was $169.6 million at quarter-end. The company’s primary obligations include operating leases, purchase obligations and a small capital lease obligation.
Material Changes, Outlook and Unusual Items
- The Q2 operating loss primarily reflects the $6.2 million provision for a proposed settlement of a Telephone Consumer Protection Act class action. Total litigation provisions were approximately $6.9 million.
- The company recorded approximately $0.5 million of non-cash impairment charges for two stores during Q2.
- Management expects to open two stores in the fourth quarter of fiscal 2017 and expects to fund operations from cash, marketable securities and operating cash flow without drawing on the revolver over the next twelve months.
- Management expects broader retail trends to continue, including declining physical-store traffic and increasing online shopping, although store traffic improved during the first half. No quantified earnings or sales guidance is provided in the filing text.
- The business is seasonal, with historically stronger sales and operating results in the third and fourth quarters, including back-to-school and holiday periods.
- The company adopted ASU 2016-09 for share-based compensation, resulting in a $0.2 million decrease to retained earnings and a corresponding increase to additional paid-in capital, without an effect on current-period operating results.
- Revenue recognition guidance was scheduled for adoption in fiscal 2018 and was expected to change the timing of gift-card breakage recognition, although management did not expect a material effect on consolidated results. New lease guidance, effective in fiscal 2019, is expected to affect the financial statements because the company operates primarily in leased facilities.
Risks and Contingencies
- The proposed $6.2 million TCPA settlement remained subject to court approval and execution of a final agreement at the filing date.
- A California wage-and-hour class action had been dismissed with prejudice, but the plaintiff’s appeal remained pending.
- The company guarantees up to $2.0 million of vendor settlement payments in a copyright matter; the estimated reasonably possible exposure in the event of vendor default was $0 to $0.7 million, before offsets and other remedies.
- Retail risks include consumer and traffic trends, fashion and merchandise execution, markdowns, inventory levels, competition, minimum-wage increases, technology implementation, lease costs and litigation.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Facts Investors Should Verify
- Whether the proposed TCPA settlement received court approval and whether the recorded $6.2 million provision represents the final obligation.
- Inventory growth, sell-through and markdown activity given $75.0 million of inventory at quarter-end and significant seasonal exposure.
- Whether improved comparable-store sales and traffic continue through the back-to-school and holiday periods.
- Progress and costs of information-technology and omni-channel initiatives.
- Compliance with the revolver’s trailing-twelve-month profitability and liquidity covenants.
- The eventual balance-sheet impact of the new lease accounting standard and the timing effect of new revenue-recognition requirements.