Tilly’s, Inc. Form 10-Q Summary
Reporting-period note: The supplied filing is for the thirteen and thirty-nine weeks ended November 1, 2014, compared with November 2, 2013. This does not match the requested “2013 Q3” metadata.
Business Context and Reporting Period
Tilly’s operates a specialty retail chain selling casual apparel, footwear and accessories through stores and e-commerce. It operated 207 stores in 33 states as of November 1, 2014, compared with 189 stores a year earlier and 195 stores at February 1, 2014. The fiscal year ends on the Saturday closest to January 31. Results are seasonal, with the third and fourth quarters generally producing stronger sales and operating results.
Financial Performance and Position
| Metric | Q3 FY2014 | Q3 FY2013 | 39 Weeks FY2014 | 39 Weeks FY2013 |
|---|---|---|---|---|
| Net sales | $131.3 million | $123.8 million | $365.5 million | $355.9 million |
| Gross profit | $40.5 million | $37.8 million | $106.5 million | $107.5 million |
| Gross margin | 30.9% | 30.6% | 29.1% | 30.2% |
| SG&A expense | $32.0 million | $27.7 million | $94.5 million | $86.3 million |
| Operating income | $8.6 million | $10.2 million | $12.0 million | $21.3 million |
| Operating margin | 6.5% | 8.2% | 3.3% | 6.0% |
| Net income | $5.1 million | $6.1 million | $7.0 million | $12.7 million |
| Diluted EPS | $0.18 | $0.22 | $0.25 | $0.45 |
For the thirty-nine weeks, operating cash flow was $21.1 million versus $27.3 million in the prior year. Capital expenditures were $19.8 million versus $36.0 million, primarily for stores and the e-commerce fulfillment center. Net cash used in investing activities was $14.7 million, and net cash used in financing activities was $0.4 million.
At November 1, 2014, cash and cash equivalents were $31.4 million, marketable securities were $30.0 million, and total current assets were $142.0 million. Total liabilities were $102.0 million and stockholders’ equity was $150.7 million. The company had $2.7 million of capital lease obligations outstanding, including current and long-term portions, and no borrowings under its $25.0 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 6.1%, primarily from $9.2 million of sales at stores opened after the comparable prior-year period; comparable-store sales decreased 1.2%.
- For the first thirty-nine weeks, sales increased 2.7%, but comparable-store sales decreased 5.0%; new stores contributed $27.7 million of sales.
- Third-quarter gross margin improved 30 basis points because of higher product margin, although occupancy costs continued to deleverage.
- Thirty-nine-week gross margin declined 110 basis points, primarily because occupancy costs grew faster than sales.
- SG&A increased 16% in the quarter and 10% year to date, driven by store and field payroll, benefits, marketing, support costs, depreciation, consulting and other corporate expenses.
- Thirty-nine-week operating income fell 44% and net income fell 45%, reflecting negative comparable-store sales and expense growth exceeding sales growth.
- Inventory increased to $62.2 million from $46.3 million at February 1, 2014, reflecting holiday purchases and new-store growth.
- The company corrected an immaterial prior-period classification error, moving $0.3 million of quarterly and $1.0 million of year-to-date stock-based compensation from SG&A to cost of goods sold. Net income was unaffected.
Outlook, Liquidity, Risks and Unusual Items
Management planned to add five additional net stores by the end of fiscal 2014, following 12 net additions through the first thirty-nine weeks. The company expected to fund expansion with cash on hand and operating cash flow and did not expect to draw on its revolving credit facility during the next twelve months. Management stated that cash, marketable securities, operating cash flow and available credit were expected to cover working capital and anticipated capital expenditures for the next twelve months.
Key operating risks include changing fashion preferences, competition, promotional pressure, consumer spending, inflation and commodity costs, inventory and markdown risk, difficulty finding suitable store locations, and challenges managing rapid growth. Results are also affected by seasonality, weather and holiday timing.
Three putative class or representative actions were disclosed, involving credit-card information collection and California wage-and-hour matters. The company could not estimate any potential loss, and the outcomes could adversely affect financial condition, results of operations or cash flows. The company also disclosed related-party leases with entities owned by co-founders, including the corporate headquarters, distribution facilities and e-commerce distribution center.
The company was in compliance with all credit-facility covenants. Its fiscal 2012 federal income tax return was under IRS examination, although management did not expect a material fiscal 2014 impact. Disclosure controls and procedures were assessed as effective at the reasonable-assurance level, and no material changes to internal control were identified.
Most Important Facts to Verify
- Confirm that the intended period is Q3 fiscal 2014, because the supplied filing is not a 2013 Q3 filing.
- Assess whether negative comparable-store sales, particularly the 5.0% year-to-date decline, are improving after the holiday season.
- Monitor SG&A and occupancy-cost growth relative to sales and its effect on operating margins.
- Review inventory levels, markdown exposure and holiday-season sell-through.
- Verify planned store openings, required capital expenditures and the effect of new stores on cash flow.
- Track the three disclosed litigation matters and any subsequent changes in potential exposure.
- Review the amended credit agreement, covenant compliance and the company’s substantial reliance on cash and marketable securities rather than debt.