Tilly’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the thirteen and twenty-six weeks ended August 1, 2020, not 2019 Q2 as indicated in the request metadata. Financial statements are unaudited and presented under U.S. GAAP.
Business Context and Reporting Period
Tilly’s is a specialty retailer of casual apparel, footwear and accessories, operating 238 stores in 33 states and an e-commerce platform as of August 1, 2020. Thirty-three California stores were temporarily closed because of government actions responding to COVID-19. The company operated 229 stores at the comparable date in 2019.
The pandemic materially affected store traffic, store operations, supply chains, staffing, inventory management and consumer demand. E-commerce became a substantially larger portion of sales as store operations were restricted.
Financial Metrics
| Metric | Q2 2020 | Q2 2019 | First Half 2020 | First Half 2019 |
|---|---|---|---|---|
| Net sales | $135.8 million | $161.7 million | $213.1 million | $292.0 million |
| Gross profit | $41.7 million | $51.7 million | $43.3 million | $87.4 million |
| Gross margin | 30.7% | 32.0% | 20.3% | 29.9% |
| SG&A expense | $34.0 million | $39.6 million | $64.0 million | $75.1 million |
| Operating income (loss) | $7.7 million | $12.1 million | $(20.7) million | $12.3 million |
| Net income (loss) | $5.3 million | $9.3 million | $(12.1) million | $10.0 million |
| Diluted EPS | $0.18 | $0.31 | $(0.41) | $0.33 |
- Q2 physical-store sales fell 39.6% to $83.9 million, while e-commerce sales increased 127.8% to $52.0 million. E-commerce represented 38.3% of total sales versus 14.1% in the prior-year quarter.
- First-half physical-store sales declined 47.6% to $130.8 million, while e-commerce sales increased 93.8% to $82.3 million.
- Q2 SG&A declined in dollars because of lower store payroll and benefits, but increased to 25.0% of sales from 24.5% because of lower revenue and higher marketing and fulfillment costs.
- First-half operating results included approximately $0.9 million of impairment charges relating to ten stores.
- Cash and cash equivalents were $133.0 million at August 1, 2020, supplemented by $15.9 million of marketable securities. Merchandise inventories were $68.1 million.
- Working capital was $61.6 million at August 1, 2020, compared with $63.6 million at February 1, 2020.
- Operating cash flow was $18.8 million in the first half of 2020 versus $14.1 million in the prior-year period. Investing cash flow was $50.0 million, primarily reflecting $70.2 million of marketable-securities maturities.
- Cash increased by $62.8 million during the first half to $133.0 million, aided by marketable-securities maturities and $23.7 million of revolver borrowings.
- The company paid $29.7 million of dividends during the first half, including a $1.00-per-share special dividend paid in February 2020.
Material Changes Versus the Prior Comparable Period
- Q2 net sales decreased 16.0%, while first-half net sales decreased 27.0%, primarily because stores were closed or operated under restrictions during the pandemic.
- Q2 gross margin decreased 130 basis points. Product margins improved because of stronger regular-price selling after reopening, but occupancy, distribution and buying costs deleveraged against lower sales.
- First-half gross margin decreased 960 basis points, reflecting increased markdowns and significant occupancy and distribution-cost deleverage.
- First-half results shifted from operating income of $12.3 million and net income of $10.0 million to an operating loss of $20.7 million and net loss of $12.1 million.
- The sales mix shifted materially toward e-commerce, while third-party branded merchandise represented 77% of sales versus 74% in the prior-year periods.
- Cash liquidity increased from the prior year, but this included revolver borrowings and deferred store lease payments.
Guidance, Outlook, Risks and Unusual Items
- Management stated that it could not reliably predict future sales or earnings because of uncertainty surrounding COVID-19, consumer behavior, store closures and the back-to-school season.
- Fiscal August 2020 sales were $50.2 million, down 35.6% from the prior year. Store sales declined 46.3%, while e-commerce sales increased 40.6%.
- Cumulative comparable sales in reopened stores decreased 23.0% over the period from May 15 through September 7, 2020, compared with the respective prior-year dates.
- As of August 29, 2020, 205 of 238 stores were open. After subsequent California guidance, 24 of the 33 closed stores reopened between August 31 and September 4; nine remained closed as of the filing.
- Management expected fiscal 2020 capital expenditures of approximately $8 million to $10 million and planned to open two stores, subject to pandemic conditions.
- The company withheld $13.9 million of contractual store lease payments as of August 1, 2020 and had reached agreements in principle covering approximately 70% of stores for rent abatements and/or deferrals.
- The company borrowed $23.7 million under its $25.0 million revolving facility. The facility is secured by substantially all assets and bears interest at LIBOR plus 0.75% or the prime rate.
- At August 1, 2020, the company was out of compliance with fixed-charge coverage, funded-debt-to-EBITDAR, minimum-profitability and certain lease-payment covenants. Reported measures included a 0.8-to-1.0 fixed-charge coverage ratio, 4.9 funded-debt-to-EBITDAR ratio and trailing twelve-month pretax loss of $2.3 million. The bank provided a limited waiver, and the company was negotiating further covenant relief.
- Management believed available cash, marketable securities and credit-facility availability would support operations for at least the next twelve months, but noted that additional financing could be required if operating cash flows were insufficient.
- The CARES Act generated a first-half income-tax benefit of $7.8 million, including an anticipated benefit from carrying fiscal 2020 net operating losses back to prior years. A $2.3 million income-tax receivable was recorded.
- Two California wage-and-hour matters remained pending. The company stated that losses were not probable or estimable and recorded no accrual.
Most Important Facts to Verify
- Confirm the intended period: the source filing is for Q2 and the first half of fiscal 2020, despite the request identifying 2019 Q2.
- Monitor compliance with the revolving-credit covenants and the status of any additional bank waiver or amendment.
- Assess the effect of withheld lease payments, lease concessions and ongoing fixed lease obligations on liquidity.
- Track store reopening progress, customer traffic, comparable sales and the sustainability of e-commerce growth.
- Evaluate inventory levels, markdown exposure and gross-margin recovery during the back-to-school and holiday periods.
- Verify the duration and economic effects of COVID-19 restrictions, including potential additional closures or operating limitations.
- Review the potential exposure from pending wage-and-hour litigation, despite the absence of an accrual.