Business Context and Reporting Period
Tilly’s, Inc. filed this unaudited Form 10-Q for the thirteen and twenty-six weeks ended July 28, 2012, with comparisons to July 30, 2011. The source metadata identifies “2011 Q2,” but the filing itself clearly covers the second quarter and first half of fiscal 2012. Tilly’s operates specialty retail stores and an e-commerce business selling casual apparel, footwear and accessories to teens and young adults. Store count increased to 155 from 131 a year earlier and 140 at January 28, 2012.
The period included a May 2, 2012 reorganization converting the business from an S corporation to a C corporation and a May 3, 2012 initial public offering.
Key Financial Metrics
| Metric | 13 Weeks Ended July 28, 2012 | 13 Weeks Ended July 30, 2011 | 26 Weeks Ended July 28, 2012 | 26 Weeks Ended July 30, 2011 |
|---|---|---|---|---|
| Net sales | $105.1 million | $87.3 million | $201.6 million | $170.4 million |
| Gross profit | $31.1 million | $25.7 million | $61.6 million | $51.9 million |
| Gross margin | 29.6% | 29.5% | 30.5% | 30.5% |
| SG&A expense | $34.5 million | $22.2 million | $58.9 million | $43.4 million |
| Operating income (loss) | $(3.3) million | $3.6 million | $2.7 million | $8.5 million |
| Operating margin | (3.2%) | 4.1% | 1.3% | 5.0% |
| Net income (loss) | $(1.2) million | $3.5 million | $4.8 million | $8.3 million |
| Diluted EPS | $(0.04) | $0.17 | $0.20 | $0.41 |
- Comparable-store sales increased 5.1% in the quarter and 4.7% year to date. E-commerce revenue, including shipping fees, increased 22% to $9.8 million in the quarter and 26% to $20.7 million year to date.
- Cash provided by operating activities was $15.7 million, compared with $15.4 million in the prior-year period.
- Capital expenditures were $16.4 million, including $13.4 million for new stores, remodeling and other store improvements. Net cash used in investing activities was $41.7 million, including purchases of marketable securities.
- At July 28, 2012, cash and cash equivalents were $21.5 million and marketable securities were $26.2 million, compared with cash of $25.1 million and no marketable securities at January 28, 2012.
- Total current assets were $122.6 million and current liabilities were $62.6 million, implying a current ratio of approximately 2.0 to 1. Total liabilities were $101.0 million and stockholders’ equity was $96.2 million.
- The company had $4.3 million outstanding under a capital lease obligation and no borrowings under its $25.0 million revolving credit facility. The facility permits up to $15.0 million of standby and commercial letters of credit and matures May 3, 2014.
Material Changes Versus the Prior Comparable Period
- Sales grew 20% in the quarter and 18% year to date, driven by new stores, positive comparable-store sales and e-commerce growth. The company added 24 stores year over year and 15 net stores during fiscal 2012 through July 28.
- Gross margin was broadly stable, but SG&A increased substantially faster than sales. Quarterly SG&A rose 56% and increased to 32.8% of sales from 25.4%; year-to-date SG&A rose 36% and increased to 29.2% from 25.5%.
- The company recorded a $7.6 million one-time stock-based compensation charge upon completion of the IPO, plus $0.6 million of ongoing post-IPO stock-based compensation expense. This was the primary reason for the quarterly operating loss and materially reduced year-to-date operating margin.
- Net income was affected by the change from S corporation to C corporation tax treatment. The company recorded a $2.1 million tax benefit in the quarter and year to date, including a one-time $3.0 million deferred tax benefit associated with the conversion.
- The IPO generated approximately $107 million of net proceeds. The company used $84.0 million to repay notes payable to former shareholders and retained the balance for working capital and general corporate purposes. Financing cash flow was therefore $22.4 million, compared with $(5.1) million in the prior-year period.
- Inventory increased to $54.7 million from $36.5 million at January 28, 2012, primarily reflecting purchases for the back-to-school season and new-store openings.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management planned to add at least 13 additional net stores by fiscal year-end and targeted approximately 15% annual net-store growth for the following several years. Management expected to fund expansion through cash on hand and operating cash flow.
- Management stated that cash, marketable securities, operating cash flow and the available revolving facility should cover working capital needs and anticipated capital expenditures for the next 12 months. No formal earnings guidance was provided in the filing.
- Key risks include changing fashion trends and customer preferences, difficulty securing attractive store locations, execution of rapid growth, weaker consumer spending, product-cost inflation, increased markdowns and competitive promotional activity.
- Retail results are seasonal, with the third and fourth quarters historically producing stronger sales and operating results. The reported interim results are not necessarily indicative of the full fiscal year.
- A putative California class action alleges issues with gift-card redemption policies. Management believes outstanding litigation is unlikely to have a material effect, but stated that it cannot predict the ultimate outcome or potential loss.
- Related-party leases with entities owned by company co-founders include the headquarters, distribution and warehouse facilities. The headquarters and distribution-center lease includes a capital-lease component with $4.3 million outstanding at July 28, 2012.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting.
Facts Investors Should Verify
- Reconcile reported earnings with normalized results excluding the $7.6 million IPO-triggered stock-compensation charge and the $3.0 million one-time tax benefit.
- Assess whether comparable-store sales and e-commerce growth can continue as the company expands rapidly and seasonal sales shift toward the second half.
- Monitor inventory growth, markdown levels, gross margin and operating expense leverage, particularly SG&A and post-IPO public-company costs.
- Verify the pace, capital requirements and productivity of planned new-store openings, including the company’s ability to fund expansion from operations.
- Review liquidity and covenant compliance under the secured $25.0 million revolving facility, as well as capital-lease and operating-lease commitments.
- Track the gift-card litigation and other ordinary-course claims, for which the filing provides no clear estimate of potential exposure.