Tilly’s, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 30, 2016, comprising 52 weeks. The filing also provides unaudited fourth-quarter results for the 13 weeks ended January 30, 2016. The supplied metadata references “2014 Q4,” but the filing is the fiscal 2015 Form 10-K.
Business Context
Tilly’s is a specialty retailer of West Coast-inspired casual apparel, footwear and accessories for young men, young women, boys and girls. It sells through stores and e-commerce. At year-end, the company operated 224 stores in 32 states, compared with 212 stores a year earlier, and generated e-commerce sales in all 50 states.
Third-party brands represented approximately 72% of net sales and proprietary brands approximately 28%. The company operated as one reportable segment and all identifiable assets were located in the United States.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $551.0 million | $518.3 million | 6.3% increase |
| Gross profit | $167.2 million | $155.5 million | 7.5% increase |
| Gross margin | 30.4% | 30.0% | 40 basis-point increase |
| SG&A expense | $149.2 million | $132.3 million | 12.8% increase |
| SG&A as a percentage of sales | 27.1% | 25.5% | 160 basis-point increase |
| Operating income | $18.1 million | $23.2 million | 22.0% decrease |
| Operating margin | 3.3% | 4.5% | 120 basis-point decrease |
| Net income | $7.5 million | $14.1 million | 46.8% decrease |
| Diluted EPS | $0.27 | $0.50 | Decrease |
| Net cash from operations | $36.9 million | $48.3 million | Decrease |
| Capital expenditures | $23.1 million | $23.6 million | Decrease |
Comparable store sales increased 1.2%, reversing a 2.8% decline in fiscal 2014. Average net sales per brick-and-mortar store decreased to $2.2 million from $2.3 million, and average net sales per square foot decreased to $290 from $292.
Fourth-quarter fiscal 2015 net sales were $159.1 million, gross profit was $50.0 million, operating income was $9.5 million and net income was $2.9 million. Fourth-quarter diluted EPS was $0.10, compared with $0.25 in the prior-year quarter.
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and marketable securities totaled $101.0 million at January 30, 2016, compared with $84.7 million at January 31, 2015.
- Working capital increased to $114.9 million from $98.0 million.
- Total liabilities were $97.5 million and stockholders’ equity was $173.2 million.
- The company had no borrowings under its $25.0 million Wells Fargo revolving credit facility and was in compliance with all covenants.
- The facility matures May 31, 2017, is secured by substantially all assets, and permits up to $15.0 million of letters of credit.
- Capital lease obligations totaled $1.7 million. Operating lease commitments totaled $429.1 million, and total disclosed contractual obligations were $432.5 million.
- No cash dividends were declared or anticipated because the credit facility restricts dividends and management intends to retain earnings.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by $26.5 million from non-comparable stores and $6.2 million from the 1.2% comparable-store-sales increase.
- Gross margin improved because of lower buying, distribution and occupancy costs as a percentage of sales, reflecting operational efficiencies in the distribution and e-commerce fulfillment centers.
- SG&A increased faster than sales. The increase included higher marketing expense, higher corporate payroll and benefits, $1.1 million of non-recurring severance obligations, higher store payroll from net new store openings, and $1.6 million of additional non-cash store impairment charges.
- Non-cash impairment charges increased to $2.6 million from $1.0 million and affected nine stores compared with two stores in fiscal 2014.
- The effective tax rate increased to 58.4% from 39.3%, primarily because of discrete tax items related to stock option expirations and exercises, restricted stock unit settlements and a prior-year tax settlement.
- Operating cash flow declined by $11.4 million, principally because of lower operating income, higher cash taxes and less favorable working-capital timing.
- Merchandise markdowns increased to $41.5 million from $37.0 million, while the inventory balance remained broadly stable at $51.4 million.
Guidance, Outlook and Management Commentary
Management expected continued declines in brick-and-mortar traffic and continued growth in online shopping during fiscal 2016. The company planned to slow new-store growth, focus on improving existing-store performance, expand digital and omni-channel capabilities, relaunch its loyalty program and continue remodeling selected high-volume stores.
Fiscal 2016 capital expenditures were expected to range from $25 million to $30 million, primarily for store remodels, new stores, information technology and e-commerce capabilities. Management expected to fund these investments through operating cash flow, cash on hand and marketable securities.
Management identified fashion risk, inventory markdowns, intense retail and online competition, declining store traffic, consumer spending, weather, lease obligations, supply-chain disruption, foreign sourcing, labor costs, information-system security and the ability to attract and retain employees as significant risks.
Unusual Items, Contingencies and Governance
- The company recorded $2.6 million of non-cash store impairment charges and incurred $1.1 million of non-recurring severance obligations.
- The effective tax rate was unusually high because of $2.6 million of discrete stock-compensation-related tax items.
- Legal proceedings included putative California wage-and-hour class actions, a credit-card personal-information case on appeal after denial of class certification, and a wage-and-hour matter that had reached a proposed settlement subject to court approval.
- The company established approximately $0.5 million of loss provisions for matters where losses were probable and reasonably estimable.
- Tilly’s guaranteed up to $2.0 million of a vendor’s copyright-infringement settlement payments; the estimated reasonably possible exposure was stated as zero to $1.7 million if the vendor defaults.
- The founders controlled a substantial majority of voting power through Class B shares, which carry 10 votes per share. The company was a controlled company under NYSE rules.
- Several facilities were leased from entities owned by company co-founders, creating related-party lease obligations.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of January 30, 2016. The independent auditor did not provide an attestation opinion on internal controls because the company qualified for an emerging-growth-company exemption.
Important Facts for Investors to Verify
- Whether comparable-store and e-commerce growth can offset declining physical-store traffic and lower sales productivity.
- Whether SG&A can be leveraged as store growth slows and whether operating margins can recover from 3.3%.
- The sustainability of the $101.0 million liquidity position after planned fiscal 2016 capital expenditures and ongoing lease payments.
- Inventory aging, markdown levels and future impairment risk, particularly given the increase in markdowns and nine impaired stores.
- The effect of the unusually high 58.4% effective tax rate and whether future tax rates normalize.
- Potential cash exposure from wage-and-hour litigation, the credit-card information appeal and the vendor settlement guarantee.
- The magnitude and duration of contractual operating lease obligations, including related-party leases.
- Execution of the e-commerce, mobile, loyalty-program, omni-channel and store-remodeling initiatives.
- Future accounting effects from the adoption of revenue-recognition and lease-accounting standards.