Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended October 28, 2023, compared with October 29, 2022. The request metadata identifies “2022 Q3,” but the filing is for the third quarter of fiscal 2023. The filing is unaudited. Tilly’s operated 249 stores in 33 states at quarter-end, compared with 247 stores a year earlier, and also sells through its e-commerce platform.
Key Financial Metrics
| Metric | Q3 FY2023 | Q3 FY2022 | First 39 Weeks FY2023 | First 39 Weeks FY2022 |
|---|---|---|---|---|
| Net sales | $166.5 million | $177.8 million | $450.1 million | $491.9 million |
| Sales change | (6.4%) | — | (8.5%) | — |
| Comparable net sales change | (9.0%) | (14.9%) | (11.3%) | (14.9%) |
| Gross profit | $48.7 million | $54.6 million | $119.0 million | $150.4 million |
| Gross margin | 29.3% | 30.7% | 26.4% | 30.6% |
| SG&A | $51.2 million | $48.3 million | $141.4 million | $137.8 million |
| Operating income (loss) | $(2.5) million | $6.3 million | $(22.5) million | $12.6 million |
| Net income (loss) | $(0.8) million | $5.1 million | $(13.9) million | $9.8 million |
| Diluted EPS | $(0.03) | $0.17 | $(0.47) | $0.32 |
Sales and Operating Performance
- Q3 physical-store sales declined 6.4% to $132.4 million; e-commerce sales declined 6.2% to $34.0 million. E-commerce represented 20.4% of sales, unchanged from the prior-year quarter.
- Comparable sales declined 9.0% in Q3. Comparable-store traffic and transaction volume each declined 9%, while average transaction value was flat.
- For the first 39 weeks, comparable sales declined 11.3%; comparable-store traffic declined 10%, transaction volume declined 12%, and average transaction value was flat.
- Q3 gross margin declined 140 basis points, primarily from higher markdowns and estimated inventory valuation reserves, together with deleveraging of buying, distribution and occupancy costs.
- Q3 SG&A increased $3.0 million and rose to 30.8% of sales from 27.1%. Drivers included higher non-cash store impairment charges, marketing costs, and store and corporate payroll costs related to wage and minimum-wage increases.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $44.4 million at October 28, 2023, versus $73.5 million at January 28, 2023 and $75.8 million at October 29, 2022.
- Marketable securities totaled $49.5 million, bringing cash and marketable securities to approximately $93.9 million.
- Working capital was $76.4 million, down from $94.1 million at fiscal year-end 2022.
- Cash used in operating activities was $10.5 million for the first 39 weeks, compared with $11.1 million used in the prior-year period. Inventory increased $20.6 million during the period.
- Cash used in investing activities was $18.7 million, including $10.5 million of capital expenditures and net purchases of marketable securities.
- The company had no outstanding revolver borrowings and was eligible to borrow up to $63.0 million under its $65.0 million asset-backed revolving facility, which matures April 27, 2026. A $2.025 million standby letter of credit was outstanding.
- The facility is secured by substantially all company assets and includes availability and other customary covenants. The company reported compliance with all covenants.
- Total operating lease liabilities were approximately $244.6 million, including $23.1 million related to related-party leases.
Material Changes and Unusual Items
- The company recorded $2.6 million of non-cash impairment charges on certain store long-lived and right-of-use assets during the first 39 weeks, compared with less than $0.1 million in the prior-year period. Eleven of 39 stores tested in Q3 were impaired; 21 of 41 stores tested year-to-date were impaired.
- Other income increased to $1.3 million in Q3 and $3.6 million year-to-date, primarily because of higher returns on marketable securities.
- The company reported an income tax benefit of $4.9 million for the first 39 weeks, compared with $3.7 million of tax expense in the prior-year period.
- There were no share repurchases during the first 39 weeks of fiscal 2023. The new credit agreement prohibits dividends and repurchases before April 27, 2024, subject to subsequent conditions.
- Related-party rent expense totaled $1.1 million in Q3 and $3.2 million year-to-date for facilities leased from entities owned by the company’s co-founders.
Outlook, Commentary and Risks
- Management expects inflation and reduced consumer confidence to continue pressuring spending, particularly among its younger customer demographic. Inflation is also increasing product, labor, shipping and digital-marketing costs.
- Minimum-wage increases are expected to increase fiscal 2023 costs by approximately $3 million versus fiscal 2022 and fiscal 2024 costs by another approximately $2 million versus fiscal 2023.
- Management expects approximately $13 million of fiscal 2023 capital expenditures, including seven new stores and distribution and information-technology upgrades.
- For fiscal 2024, management expects to open four new stores and currently expects capital expenditures not to exceed $15 million.
- Management expects existing cash, marketable securities, operating cash flows and credit-facility availability to fund operations and planned capital expenditures for at least the next 12 months. It notes that additional financing could be required if operating cash flows are insufficient.
- Principal risks include inflation and recessionary consumer demand, declining store traffic, fashion and promotional execution, markdown and inventory risk, labor and wage costs, competition, supply-chain disruptions, dependence on foreign sourcing, lease obligations, store impairments, technology and cybersecurity risks, litigation, weather and other unanticipated events.
- The business is seasonal, with historically stronger sales and operating results in the third and fourth quarters due to back-to-school and holiday periods.
Investor Verification Checklist
- Verify the filing period and fiscal-year labeling, since the request metadata says 2022 Q3 while the filing covers the period ended October 28, 2023.
- Assess whether comparable-sales declines, traffic weakness and higher markdowns are stabilizing during the holiday and subsequent periods.
- Review inventory levels, valuation reserves and future markdown exposure relative to sales trends.
- Monitor store impairment charges and the performance of the impaired locations.
- Evaluate cash consumption, operating lease commitments and the company’s ability to fund planned store growth and capital expenditures without borrowing.
- Review compliance with the asset-backed facility’s minimum-availability covenant and the restrictions on dividends and share repurchases.
- Consider the effect of wage inflation, minimum-wage increases and other operating-cost pressures on future margins.