Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended July 30, 2022, compared with July 31, 2021. Although the request identifies “2021 Q2,” the provided filing is for fiscal 2022 second quarter. Tilly’s operated 242 stores in 33 states and an e-commerce platform at quarter-end, versus 244 stores in the prior-year period.
Financial Performance
| Metric | Q2 FY2022 | Q2 FY2021 | First Half FY2022 | First Half FY2021 |
|---|---|---|---|---|
| Net sales | $168.3 million | $202.0 million | $314.1 million | $365.1 million |
| Gross profit | $52.0 million | $74.7 million | $95.8 million | $129.6 million |
| Gross margin | 30.9% | 37.0% | 30.5% | 35.5% |
| Operating income | $5.2 million | $26.4 million | $6.3 million | $41.3 million |
| Operating margin | 3.1% | 13.1% | 2.0% | 11.3% |
| Net income | $3.8 million | $20.4 million | $4.6 million | $31.4 million |
| Diluted EPS | $0.13 | $0.66 | $0.15 | $1.02 |
Second-quarter store sales declined 16.7% to $137.1 million and e-commerce sales declined 16.4% to $31.2 million. E-commerce represented 18.5% of quarterly sales and 18.9% of first-half sales. Comparable store sales declined 16.4% in the quarter and 14.9% for the first half.
SG&A declined modestly in dollars during the quarter to $46.8 million but increased to 27.8% of sales from 23.9%. First-half SG&A increased to $89.5 million from $88.3 million and rose to 28.5% of sales from 24.2%.
Cash Flow, Liquidity, Debt and Capital Allocation
- First-half operating cash flow was negative $7.1 million, compared with positive $37.4 million in the prior-year period, primarily because of lower sales and profitability.
- Investing activities provided $59.4 million, primarily from $96.2 million of marketable-security maturities, partially offset by $29.9 million of purchases and $6.9 million of capital expenditures.
- Financing activities used $9.0 million, including $9.0 million for share repurchases. No dividends were paid in the first half, compared with $30.7 million in the prior-year period.
- Cash and cash equivalents were $85.5 million at July 30, 2022, and marketable securities were $30.9 million. Working capital was $86.4 million, compared with $91.8 million at January 29, 2022.
- The company had no outstanding borrowings under its $25.0 million secured revolving credit facility and was in compliance with all covenants. The facility matures January 20, 2024 and is secured by company assets.
- The company repurchased 987,427 Class A shares for $9.0 million during the first half, with 1,012,573 shares remaining under the authorization.
Material Changes Versus the Prior Comparable Period
- Sales declined due principally to the comparison against fiscal 2021’s pent-up demand and federal stimulus benefits, as well as inflationary pressure on consumers.
- Gross margin contracted 610 basis points in the quarter and 500 basis points in the first half. Management attributed the deterioration primarily to higher markdown rates and deleveraging of buying, distribution and occupancy costs.
- Operating margin fell 1,000 basis points in the quarter and 930 basis points in the first half.
- Wage inflation increased store payroll, benefits and e-commerce fulfillment costs. Technology costs and insurance premiums also increased.
- The effective tax rate increased to approximately 28% from approximately 24% for the first half, primarily because of discrete tax effects of stock-based compensation.
- Inventory increased to $89.3 million from $86.9 million at July 31, 2021, while accounts payable declined to $47.9 million from $59.1 million.
Guidance, Outlook and Risks
- Management expects fiscal 2022 operating results to remain below fiscal 2021 levels in each quarter.
- The company expected to open 11 new stores during fiscal 2022, four of which had opened by the filing date, primarily in California, Texas and the Northeast.
- Fiscal 2022 capital expenditures were expected to range from approximately $22 million to $24 million, including new stores, website and mobile-app upgrades, distribution efficiencies and information technology infrastructure.
- Key risks include inflation and reduced consumer spending, COVID-19 effects, supply-chain and port disruptions, late merchandise deliveries, excess inventory and markdowns, labor shortages and wage inflation, changing fashion preferences, competition, store traffic, e-commerce execution and significant lease obligations.
- Operating lease liabilities totaled $251.5 million on a present-value basis, including $26.5 million related to related-party leases. Additional uncommenced lease commitments were approximately $8.0 million, with approximately $2.3 million of additional contracts or modifications executed after quarter-end and before filing.
- A putative wage-and-hour class action and related PAGA matter remains pending. The company believes a loss is not probable or estimable and has recorded no accrual; the staffing-company co-defendant is contractually required to indemnify Tilly’s for losses and expenses.
- Management stated that disclosure controls and procedures were effective as of July 30, 2022, with no material change in internal control over financial reporting.
Most Important Facts to Verify
- Whether sales trends, comparable-store performance and e-commerce demand improved after the sharp second-quarter declines.
- Whether elevated markdowns, inventory levels and supply-chain disruptions continue to pressure gross margin.
- Whether operating cash flow returns to positive levels after the first-half use of $7.1 million.
- Execution of the planned store openings and $22 million to $24 million capital-expenditure program.
- Liquidity relative to substantial operating lease obligations and the $25 million secured revolving facility.
- Progress and potential exposure from the pending wage-and-hour and PAGA litigation.