TILLY's, INC. annual report, FY2022

Tilly’s, Inc. Fiscal 2022 Form 10-K Summary

Business context and reporting period

Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods serving young men, young women, boys and girls through stores and e-commerce. The filing covers the 52-week fiscal year ended January 28, 2023, with comparison to the 52-week fiscal year ended January 29, 2022. Although the request identifies “2021 Q4,” this filing is an annual report for fiscal 2022.

As of year-end, Tilly’s operated 249 stores in 33 states, compared with 241 stores in the prior year. E-commerce represented 21.0% of fiscal 2022 net sales. The company is controlled by co-founder Hezy Shaked and co-founder Tilly Levine through dual-class voting rights.

Key financial metrics

Metric	Fiscal 2022	Fiscal 2021	Change
Net sales	$672.3 million	$775.7 million	Down 13.3%
Gross profit	$202.7 million	$276.7 million	Down 26.7%
Gross margin	30.2%	35.7%	Down 550 basis points
SG&A, including related-party rent	$191.6 million	$189.1 million	Up $2.5 million
Operating income	$11.2 million	$87.6 million	Down 87.2%
Operating margin	1.7%	11.3%	Down 960 basis points
Net income	$9.7 million	$64.2 million	Down 84.9%
Diluted EPS	$0.32	$2.06	Down $1.74
Comparable store sales	Down 14.6%	Up 16.3%	Down 30.9 percentage points
E-commerce sales	$141.1 million	$165.9 million	Down 15.0%

Physical-store sales declined 12.9% to $531.1 million. Average net sales per store decreased to $2.2 million from $2.5 million, and sales per square foot declined to $297 from $342.

Gross margin contracted primarily because of higher markdowns and deleveraging of buying, distribution and occupancy costs. Product margins declined 270 basis points, while buying, distribution and occupancy costs deleveraged by 290 basis points. Total markdowns on a cost basis increased to $58.7 million from $52.5 million.

SG&A increased despite lower sales, primarily due to higher store payroll and benefits, eight net additional stores, higher hourly wage rates, software costs and the absence of a prior-year benefit from reversing a disputed California sales tax assessment. Corporate bonus expense declined because no bonus accrual was recorded in fiscal 2022.

Cash flow, liquidity and debt

Operating cash flow was negative $1.4 million, compared with $63.4 million of operating cash flow in fiscal 2021.
Investing cash flow was positive $42.8 million, including $147.3 million of marketable-securities maturities, $89.3 million of purchases and $15.1 million of capital expenditures.
Financing cash flow was negative $10.1 million, including $10.9 million of share repurchases. No special cash dividends were paid in fiscal 2022.
Cash and cash equivalents were $73.5 million and marketable securities were $39.8 million at year-end, for combined cash and marketable securities of $113.3 million.
Working capital was $94.1 million, compared with $91.8 million at the prior year-end.
The company had no borrowings under its $25.0 million senior secured revolving credit facility at January 28, 2023. The facility matures January 20, 2024 and is secured by company assets.
The company was in compliance with its debt covenants at year-end. A January 2023 amendment temporarily increased the required total funded debt-to-EBITDAR ratio from 4.00:1.00 to 4.75:1.00 for specified quarters.

Management stated that cash on hand, marketable securities, operating cash flow and credit-facility availability are expected to fund operations, store growth, remodels and planned capital expenditures for at least the next 12 months. The company leases all stores and key facilities; minimum future operating lease payments totaled $289.8 million, including $242.0 million in present-value lease liabilities.

Material changes versus the prior comparable period

Sales and profitability fell sharply from a fiscal 2021 period that benefited from pent-up demand after pandemic restrictions and federal stimulus payments.
Inflation, lower consumer confidence and reduced discretionary spending pressured traffic and demand in fiscal 2022.
Comparable sales declined 14.6%, and e-commerce sales declined 15.0% despite the company’s continued omnichannel investments.
Third-party brands declined to 68% of sales from 70%, while proprietary brands increased to 32% from 30%. The RSQ proprietary brand represented 19% of fiscal 2022 sales and Full Tilt represented 8%.
The company opened 11 stores and closed three, ending the year with eight net additional stores.
The company repurchased 1.26 million Class A shares for $10.9 million at an average price of $8.63 per share.
No special dividends were declared or paid in fiscal 2022, compared with $61.6 million of dividends paid in fiscal 2021.

Guidance, outlook, risks and unusual items

Management expected to open up to 10 stores in fiscal 2023, subject to acceptable lease economics, and forecast capital expenditures of $15 million to $20 million, including new stores and distribution and information-technology upgrades. The company also planned a mobile-app upgrade and warehouse-management-system implementation, with the latter expected to be completed in early fiscal 2024.

Management identified inflation as a continuing threat to both consumer demand and operating costs. Store payroll represented approximately 40% of SG&A; average store hourly wages in early fiscal 2023 were 7% above fiscal 2022 and 24% above fiscal 2019. Expected 2023 minimum-wage increases were estimated to add approximately $3 million to fiscal 2023 costs versus fiscal 2022. The filing does not provide formal full-year sales or earnings guidance.

Key risks include discretionary consumer spending, inflation, wage and transportation costs, fashion and inventory risk, markdown pressure, mall and retail-center traffic, intense competition and supply-chain disruption.
All stores and major corporate, distribution and fulfillment facilities are leased, creating significant recurring lease obligations and exposure to unfavorable renewals or underperforming locations.
The company relies on foreign manufacturing sources through domestic vendors and remains exposed to tariffs, trade restrictions, shipping delays and labor or supplier disruptions.
Cybersecurity, privacy, information-technology failures and e-commerce execution remain material operating risks.
California wage-and-hour and PAGA litigation matters were outstanding. Management stated that losses were not probable or estimable and recorded no accrual for the disclosed matters.
Related-party leases with entities owned by company founders generated approximately $3.6 million of cost-of-goods-sold rent and $0.5 million of SG&A rent in fiscal 2022.
Non-cash impairment charges were less than $0.1 million in fiscal 2022, compared with $0.1 million in fiscal 2021.
BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned incremental borrowing rates used for lease accounting.

Important facts for investors to verify

Whether comparable-store sales and traffic stabilize after the 14.6% fiscal 2022 decline.
Whether markdown rates and gross margin recover from the 30.2% fiscal 2022 level.
Whether operating cash flow returns to positive territory while the company funds store openings, technology projects and lease obligations.
The company’s ability to manage fiscal 2023 wage inflation, including the estimated $3 million minimum-wage impact.
Compliance with the amended credit-facility covenant and the facility’s January 2024 maturity.
Inventory aging, accrued markdowns and future clearance requirements.
Performance and profitability of new and underperforming stores, including the approximately 78 lease decisions expected during fiscal 2023.
Developments in wage-and-hour litigation and any related accruals or settlements.
Future dividend and share-repurchase policy, given the absence of formal dividend plans and the company’s controlled-company ownership structure.