Tilly’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the thirteen and thirty-nine weeks ended October 31, 2020, compared with November 2, 2019. Although the request metadata identifies “2019 Q3,” the filing itself is a fiscal 2020 third-quarter report filed December 9, 2020.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear and accessories operating stores and an e-commerce platform. It operated 238 stores in 33 states at October 31, 2020, versus 232 stores a year earlier. Results were materially affected by COVID-19, including store closures, operating-hour and traffic restrictions, delayed back-to-school demand, supply-chain pressures and increased reliance on e-commerce.
Financial Performance
| Metric | 13 weeks ended October 31, 2020 | 13 weeks ended November 2, 2019 | 39 weeks ended October 31, 2020 | 39 weeks ended November 2, 2019 |
|---|---|---|---|---|
| Net sales | $140.3 million | $154.8 million | $353.4 million | $446.8 million |
| Gross profit | $40.7 million | $47.2 million | $83.9 million | $134.6 million |
| Gross margin | 29.0% | 30.5% | 23.7% | 30.1% |
| SG&A | $37.1 million | $39.5 million | $101.1 million | $114.6 million |
| Operating income (loss) | $3.5 million | $7.7 million | $(17.2) million | $20.0 million |
| Net income (loss) | $2.1 million | $6.4 million | $(10.0) million | $16.3 million |
| Diluted EPS | $0.07 | $0.21 | $(0.34) | $0.55 |
- Third-quarter sales declined 9.4%; first-nine-month sales declined 20.9%.
- Third-quarter comparable sales declined 1.4%, while first-nine-month comparable sales increased 4.3% under the company’s COVID-19-adjusted methodology.
- Physical-store sales declined 20.8% in the quarter and 38.3% year to date. E-commerce sales increased 57.3% in the quarter and 81.1% year to date.
- E-commerce represented 25.5% of third-quarter sales and 33.4% of year-to-date sales, versus 14.7% and 14.6%, respectively, in the prior-year periods.
- Third-quarter gross margin declined 150 basis points, primarily because buying, distribution and occupancy costs deleveraged against lower sales. Product margins improved 70 basis points.
- Year-to-date SG&A decreased 11.8% in dollars but increased to 28.6% of sales from 25.7%, reflecting reduced operating leverage and higher marketing and fulfillment costs.
Cash Flow, Liquidity and Capital Structure
| Metric at or for 39 weeks ended October 31, 2020 | Amount |
|---|---|
| Cash and cash equivalents | $99.3 million |
| Marketable securities | $26.0 million |
| Merchandise inventories | $65.9 million |
| Working capital | $66.1 million |
| Net cash provided by operating activities | $21.0 million |
| Net cash provided by investing activities | $37.8 million |
| Net cash used in financing activities | $(29.7) million |
| Capital expenditures | $6.4 million |
- Cash and marketable securities totaled approximately $125.3 million at quarter end. Total liabilities were $356.3 million, primarily operating lease liabilities; no revolving-credit borrowings were outstanding at October 31, 2020.
- The company borrowed and repaid $23.7 million under its prior revolving facility during the first nine months and paid $29.7 million in dividends.
- Operating cash flow declined from $24.5 million to $21.0 million year over year, while investing cash flow benefited from maturities of marketable securities.
- As of October 31, the company had withheld $12.4 million of contractual store lease payments while negotiating COVID-19-related concessions. Agreements in full or in principle covered approximately 90% of stores.
- On November 9, 2020, the company replaced its prior facility with a senior secured asset-based revolving facility of up to $65.0 million, maturing November 9, 2023. Borrowing availability was $40.1 million at closing, with no borrowings outstanding.
Material Changes Versus Prior Comparable Period
- COVID-19 drove significant store closures and restrictions; stores were available for only 50% of operating days in the first quarter, 65% in the second quarter and 94% in the third quarter.
- The sales mix shifted substantially toward e-commerce, partially offsetting the decline in physical-store sales.
- Year-to-date results moved from operating income of $20.0 million and net income of $16.3 million to an operating loss of $17.2 million and net loss of $10.0 million.
- Gross margin declined 640 basis points year to date, while SG&A as a percentage of sales increased 290 basis points.
- The company recorded approximately $0.9 million of impairment charges for twelve stores during the first nine months, including fourteen stores tested as potentially unable to recover their investments based on projected cash flows.
- The company’s retained earnings declined from $6.3 million at February 1, 2020 to an accumulated deficit of $3.7 million at October 31, 2020.
Outlook, Commentary, Risks and Unusual Items
- Through December 1, 2020, fourth-quarter comparable net sales decreased 0.6%. Physical-store comparable sales declined 14.2%, while e-commerce sales increased 42.4%.
- Management expected fiscal 2020 capital expenditures of approximately $8 million and fiscal 2021 capital expenditures of no more than $20 million. It expected to open seven stores in fiscal 2021 that had been deferred from fiscal 2020.
- Management stated that cash, marketable securities and credit-facility availability were expected to support operations for at least the next twelve months, subject to the duration and severity of COVID-19 and related assumptions.
- The company was not in compliance with several covenants under its prior credit agreement at October 31, including minimum profitability, fixed-charge coverage, funded debt-to-EBITDAR and payment of certain lease obligations. The bank provided a limited waiver.
- The CARES Act generated a year-to-date income-tax benefit of $6.4 million and an income-tax receivable of $1.8 million. The filing does not provide a broader quantified estimate of future CARES Act benefits.
- Third-quarter SG&A included a $1.7 million sales-tax assessment relating to 2015–2017 that the company disputes, partially offset by a $1.2 million CARES Act payroll-tax credit.
- Key risks include renewed COVID-19 restrictions, reduced traffic and consumer spending, supply-chain disruptions, inventory and markdown risk, lease obligations, covenant compliance, dependence on e-commerce execution, foreign sourcing and litigation.
- Pending employment-related litigation remains unaccrued because management believes losses are not probable or estimable. A separate wage-and-hour case had its class-certification motion denied in October 2020.
Investor Verification Checklist
- Verify the filing period, since the supplied metadata says 2019 Q3 but the filing reports fiscal 2020 third-quarter results.
- Assess whether e-commerce growth can offset sustained physical-store traffic declines and whether the higher digital mix remains profitable after fulfillment and shipping costs.
- Review the new $65.0 million asset-based credit facility, borrowing-base availability, collateral requirements, covenants and dividend restrictions.
- Monitor withheld lease payments, negotiated concessions and the risk of additional lease liabilities or store impairments.
- Reconcile the reported liquidity position with operating cash burn, inventory commitments, capital expenditures and potential renewed pandemic restrictions.
- Evaluate the sustainability of the CARES Act tax benefit and the effect of the disputed sales-tax assessment and other unusual items on recurring earnings.