Tilly’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the thirteen and thirty-nine weeks ended October 29, 2022, despite the request metadata identifying “2021 Q3.” The financial statements are unaudited and should be read with the fiscal 2021 Form 10-K.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls. It operated 247 stores in 33 states as of October 29, 2022, compared with 243 stores a year earlier, and also sold merchandise through its e-commerce platform.
Financial Results and Key Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | First 39 Weeks FY2022 | First 39 Weeks FY2021 |
|---|---|---|---|---|
| Net sales | $177.8 million | $206.1 million | $491.9 million | $571.2 million |
| Gross profit | $54.6 million | $76.7 million | $150.4 million | $206.3 million |
| Gross margin | 30.7% | 37.2% | 30.6% | 36.1% |
| Operating income | $6.3 million | $29.0 million | $12.6 million | $70.3 million |
| Operating margin | 3.6% | 14.1% | 2.6% | 12.3% |
| Net income | $5.1 million | $20.8 million | $9.8 million | $52.2 million |
| Diluted EPS | $0.17 | $0.66 | $0.32 | $1.68 |
Third-quarter comparable store net sales declined 14.9%, including e-commerce, while first-nine-month comparable sales also declined 14.9%. Q3 physical-store sales declined 14.4% and e-commerce sales declined 11.1%. E-commerce represented 20.4% of Q3 sales and 19.5% of first-nine-month sales.
SG&A increased to $48.3 million from $47.7 million in Q3 and to $137.8 million from $136.0 million for the first nine months. SG&A rose to 27.1% of Q3 sales and 28.0% of nine-month sales, versus 23.2% and 23.8%, respectively, in the prior periods.
At October 29, 2022, cash and cash equivalents were $75.8 million and marketable securities were $30.0 million, compared with combined cash and marketable securities of $155.6 million at October 30, 2021. Merchandise inventories were $81.6 million, down from $86.7 million year over year but up from $65.6 million at fiscal year-end.
Working capital was $90.0 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.
Net cash used in operating activities was $11.1 million for the first nine months, compared with $46.9 million of cash provided in the prior-year period. Investing activities provided $55.5 million, primarily from marketable-security maturities, while capital expenditures were $11.9 million. Financing activities used $10.8 million, including $10.9 million for share repurchases. Ending cash increased by $33.6 million to $75.8 million.
Total operating lease liabilities were approximately $252.6 million at October 29, 2022, including $25.9 million related to related-party leases. The company also reported $303.0 million of total minimum operating lease payments before interest.
Material Changes Versus the Prior Comparable Period
- Sales declined 13.7% in Q3 and 13.9% for the first nine months, primarily reflecting the comparison against prior-year pent-up demand and federal stimulus effects.
- Gross margin declined 650 basis points in Q3 and 550 basis points for the first nine months. Management attributed the deterioration primarily to higher markdown rates and deleveraging of buying, distribution and occupancy costs.
- Operating income fell 78.2% in Q3 and 82.1% for the first nine months; net income fell 75.3% and 81.3%, respectively.
- Labor and wage inflation, four net additional stores, higher software costs and other expenses increased SG&A, although lower or absent corporate bonus expense partially offset the increases.
- Cash flow from operations shifted from positive $46.9 million to negative $11.1 million, while the company shifted from paying a $30.7 million dividend in the prior-year period to repurchasing $10.9 million of stock.
- The company repurchased 1.26 million Class A shares at an average price of $8.63, leaving 741,670 shares authorized for repurchase through March 14, 2023.
Guidance, Outlook, Risks and Unusual Items
Management stated that fourth-quarter fiscal 2022 operating results were expected to remain below fiscal 2021 levels. The filing identifies inflation, reduced consumer spending, lower store traffic, supply-chain delays, higher freight and merchandise costs, labor shortages and wage inflation as continuing pressures. Management also noted that fiscal 2021 benefited from unusually strong post-pandemic demand and stimulus payments.
For fiscal 2023, the company preliminarily expects to open up to 15 stores, primarily in California, Texas and the Northeast, subject to acceptable lease economics. Capital expenditures are expected not to exceed $25 million, including new stores and distribution and information-technology upgrades.
Management expects existing cash, marketable securities, operating cash flow and credit-facility availability to fund operations and planned capital expenditures for at least the next 12 months. It cautioned that additional financing could be required if operating cash flow is insufficient, and that financing may not be available on acceptable terms.
Unusual or notable items include less than $0.1 million of non-cash store-asset impairment charges during the first nine months, $1.8 million of share-based compensation expense, and $0.9 million of other income for the first nine months, including gains on marketable securities. The effective tax rate was 27.2% for the first nine months, compared with 25.5% in the prior-year period, primarily due to discrete stock-compensation tax effects.
The company disclosed a pending California wage-and-hour PAGA matter filed in 2017 and a new putative California wage-and-hour class action filed in November 2022. Management believes losses are not probable or estimable for either matter and has recorded no accrual. The older matter is subject to an indemnification arrangement with co-defendant BaronHR.
Related-party leases with entities owned by company co-founders generated approximately $2.7 million of rent expense during the first nine months. The filing states that disclosure controls and procedures were effective as of October 29, 2022, with no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the filing period, because the supplied request metadata says “2021 Q3,” while the filing covers the period ended October 29, 2022.
- Assess whether sales trends, comparable-store performance and e-commerce demand improve during the holiday quarter.
- Monitor markdown rates, inventory levels and gross-margin recovery, particularly in light of inflation and weaker consumer demand.
- Evaluate operating cash flow and liquidity after inventory purchases, lease payments, capital expenditures and share repurchases.
- Review compliance with the secured credit facility’s leverage and fixed-charge coverage covenants.
- Consider the company’s substantial operating lease commitments and related-party lease arrangements.
- Track the fiscal 2023 store-opening and capital-expenditure plans and whether acceptable lease economics can be achieved.
- Follow developments in the disclosed wage-and-hour litigation and any potential effect on cash flows or financial statements.