Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended August 3, 2013, compared with July 28, 2012. Although the request metadata identifies “2012 Q2,” the supplied filing is the 2013 second-quarter Form 10-Q, filed September 11, 2013.
Business context
Tilly’s operates specialty retail stores and an e-commerce platform selling casual apparel, footwear and accessories to teens and young adults. The company operated 182 stores in 31 states as of August 3, 2013, compared with 155 stores at the comparable prior-year period. E-commerce revenue, including shipping fees, was $12.8 million in the quarter and $25.4 million year to date.
Financial performance and liquidity
| Metric | 13 weeks ended Aug. 3, 2013 | 13 weeks ended July 28, 2012 | 26 weeks ended Aug. 3, 2013 | 26 weeks ended July 28, 2012 |
|---|---|---|---|---|
| Net sales | $123.0 million | $105.1 million | $232.2 million | $201.6 million |
| Gross profit | $38.2 million | $31.1 million | $70.4 million | $61.6 million |
| Gross margin | 31.0% | 29.6% | 30.3% | 30.5% |
| SG&A | $31.0 million | $34.5 million | $59.2 million | $58.9 million |
| Operating income | $7.2 million | $(3.3) million | $11.1 million | $2.7 million |
| Operating margin | 5.8% | (3.2%) | 4.8% | 1.3% |
| Net income | $4.3 million | $(1.2) million | $6.6 million | $4.8 million |
| Diluted EPS | $0.15 | $(0.04) | $0.23 | $0.20 |
For the twenty-six weeks ended August 3, 2013, operating cash flow was $17.2 million versus $15.7 million in the prior-year period. Investing cash outflow was $13.7 million, including $23.8 million of capital expenditures, while financing cash flow was $0.1 million. Cash and cash equivalents increased to $20.9 million from $17.3 million at February 2, 2013; marketable securities totaled $29.9 million, providing approximately $50.8 million of cash and short-term investments.
Merchandise inventories were $63.4 million, up from $46.6 million at fiscal year-end, primarily reflecting purchases for the back-to-school season and new stores. Total liabilities were $109.8 million, including $3.6 million of capital lease obligations and $45.98 million of deferred rent. The company had no borrowings under its $25.0 million secured revolving credit facility and was in compliance with all covenants.
Material changes versus the prior comparable period
- Quarterly sales increased 17%, driven primarily by newly opened stores and 30% growth in e-commerce revenue; comparable store sales declined 0.5%.
- Year-to-date sales increased 15%, while comparable store sales increased 0.2%.
- Quarterly gross margin improved 140 basis points, primarily from higher initial margins, lower markdowns, and lower buying and distribution costs as a percentage of sales.
- Quarterly SG&A declined 10% despite store expansion. The comparison benefited from the absence of a $7.6 million one-time stock-based compensation charge recorded in the 2012 quarter in connection with the IPO.
- Year-to-date gross margin declined 20 basis points because higher occupancy costs more than offset lower product, buying and distribution costs.
- Income taxes shifted from a $2.1 million benefit in the 2012 quarter to $2.9 million of expense in 2013. The prior period included tax effects from the company’s conversion from an S corporation to a C corporation and a one-time deferred tax benefit.
- The company added 14 net stores during fiscal 2013 through August 3 and increased total square footage to approximately 1.42 million square feet.
Outlook, commentary, risks and unusual items
- Management planned to add at least 11 additional net stores by the end of fiscal 2013 and stated an intention to grow the store base at approximately 15% annually for the following several years.
- Expansion is expected to be funded through cash on hand and operating cash flow. Management stated that available liquidity should cover working capital and anticipated capital expenditures for the next 12 months and did not expect to draw on the revolving facility.
- The business is seasonal, with the third and fourth quarters historically producing stronger sales and operating results due to back-to-school and holiday periods.
- Key operating risks include changing fashion preferences, competition, promotional pressure, consumer spending weakness, inflation and product-cost increases, difficulty finding suitable store locations, execution of rapid growth, and inventory or markdown risk.
- Pending matters include putative class actions involving customer credit-card information, California wage-and-hour practices, and gift-card redemption policies. Damages are unspecified or cannot be reasonably estimated, and management warns that adverse outcomes could materially affect financial condition, results or cash flows.
- Related-party leases with entities owned by company co-founders remain in place for headquarters, distribution and other facilities. Management stated that independent market analyses supported the reasonableness of the lease terms.
- Stock-based compensation expense was $1.7 million year to date in 2013, compared with $8.2 million in the prior-year period, which included the $7.6 million IPO-related catch-up charge.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Investor verification checklist
- Verify that sales growth is being sustained through comparable-store performance rather than primarily through new-store openings.
- Monitor inventory growth, markdowns, occupancy costs and working-capital requirements as the store base expands.
- Reconcile reported earnings with the effects of the prior-year IPO-related compensation charge and unusual tax benefits.
- Assess whether operating cash flow can fund planned capital expenditures and store expansion without drawing on the credit facility.
- Review the maturity and covenant terms of the $25.0 million revolving facility, which was scheduled to mature May 3, 2014.
- Track the status and potential exposure of the disclosed California class-action litigation and related-party lease commitments.