Tilly’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the thirteen and thirty-nine weeks ended October 30, 2021, with comparisons to October 31, 2020. The request metadata identifies “2020 Q3,” but the filing itself is for fiscal 2021 third quarter. Tilly’s operated 243 stores in 33 states and also sold merchandise through its e-commerce platform.
Financial Results and Key Metrics
| Metric | Q3 2021 | Q3 2020 | First 39 Weeks 2021 | First 39 Weeks 2020 |
|---|---|---|---|---|
| Net sales | $206.1 million | $140.3 million | $571.2 million | $353.4 million |
| Gross profit | $76.7 million | $40.7 million | $206.3 million | $83.9 million |
| Gross margin | 37.2% | 29.0% | 36.1% | 23.7% |
| Operating income (loss) | $29.0 million | $3.5 million | $70.3 million | $(17.2) million |
| Operating margin | 14.1% | 2.5% | 12.3% | (4.9)% |
| Net income (loss) | $20.8 million | $2.1 million | $52.2 million | $(10.0) million |
| Diluted EPS | $0.66 | $0.07 | $1.68 | $(0.34) |
- Q3 net sales increased 46.9%; physical-store sales increased 58.1% to $165.3 million, while e-commerce sales increased 14.3% to $40.8 million.
- For the first 39 weeks, net sales increased 61.6%. Store sales increased 94.4% to $457.6 million, while e-commerce sales decreased 3.7% to $113.6 million as the prior-year period benefited from pandemic-related store closures.
- Comparable store net sales increased 31.3% in Q3 and 18.2% for the first 39 weeks. The company’s fiscal 2021 comparable-sales definition incorporates e-commerce and stores open on corresponding fiscal dates because of pandemic-related distortions.
- SG&A was $47.7 million, or 23.2% of sales, in Q3 and $136.0 million, or 23.8% of sales, for the first 39 weeks, versus 26.5% and 28.6%, respectively, in the prior-year periods.
- Cash provided by operating activities was $46.9 million for the first 39 weeks, compared with $21.0 million in the prior-year period.
- Capital expenditures were $10.9 million. Net cash used in investing activities was $42.1 million, primarily reflecting purchases of marketable securities.
- Cash and cash equivalents totaled $59.4 million at October 30, 2021, and marketable securities totaled $96.2 million. Working capital was $109.0 million.
- The company had no outstanding borrowings under its $65.0 million asset-backed revolving credit facility and was eligible to borrow up to $63.0 million. The facility matures November 9, 2023.
- Total liabilities were $357.6 million, including $258.6 million of operating lease liabilities. The company reported no material changes to contractual obligations.
Material Changes Versus the Prior Comparable Period
- Results benefited from a more normalized back-to-school season and the absence of pandemic-forced store closures during Q3 2021.
- Gross margin expanded 820 basis points in Q3 and 1,240 basis points for the first 39 weeks. Management attributed the improvement to lower markdowns and better leverage of buying, distribution and occupancy costs.
- Operating results changed from a prior-year loss for the first 39 weeks to substantial profitability in 2021. The prior-year period included extensive store closures and unusually elevated e-commerce demand.
- E-commerce represented 19.8% of Q3 sales and 19.9% of first-nine-month sales, down from 25.5% and 33.4%, respectively, in the prior-year periods.
- Inventory increased to $86.7 million from $65.9 million at October 31, 2020, reflecting higher sales levels and inventory planning amid supply-chain uncertainty.
- The company paid a $30.7 million, or $1.00 per share, special dividend in July 2021. A further $1.00 per share special dividend was declared on November 18, 2021, payable December 15, 2021.
- The company completed an amendment extending its related-party e-commerce distribution-center lease through October 31, 2031, with annual rent increases based on the greater of 5% or the Consumer Price Index.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately 15 to 20 new stores in fiscal 2022, primarily in California, Texas and the Northeast, subject to acceptable lease economics.
- Fiscal 2022 capital expenditures were expected to be approximately $25 million to $30 million, including new stores, website and mobile-app upgrades, distribution efficiencies and information-technology investments.
- Management stated that cash on hand, marketable securities, operating cash flow and credit-facility availability should fund operations, store growth and planned capital expenditures for at least the next 12 months.
- COVID-19 remained a significant uncertainty, with potential effects from new variants, labor shortages, store disruptions, changing consumer behavior, supply-chain interruptions and economic volatility.
- Global transportation and port delays, particularly in Southern California, caused merchandise-delivery delays and higher shipping costs. Management could not predict the impact on fourth-quarter sales, holiday inventory or year-end results.
- Unresolved COVID-19-related lease concessions involved fewer than 10 stores and approximately $0.4 million of withheld rent as of October 30, 2021. Approximately $2.3 million of additional lease modifications were executed after the balance-sheet date but before filing.
- The company recorded a $0.1 million impairment charge for one store during the first 39 weeks. No material litigation accrual was recorded; pending wage-and-hour matters were considered not probable or estimable, and one previously certified-class appeal was dismissed, leaving only individual claims.
- A prior-year $1.7 million disputed California sales-tax assessment was resolved in the company’s favor and reversed in the first quarter of fiscal 2021.
Investor Verification Priorities
- Verify that the strong comparable-sales and margin performance is sustainable after normalizing for pandemic-related comparisons, stimulus effects and unusual back-to-school timing.
- Monitor holiday-period inventory availability, port and transportation delays, freight costs, labor constraints and potential markdown exposure.
- Assess the shift from e-commerce toward physical-store sales and whether e-commerce growth can resume without pressuring margins.
- Review cash deployment, including the November 2021 special dividend, planned capital expenditures and proposed store expansion, relative to available liquidity.
- Evaluate the substantial operating lease commitments, including related-party leases and rent escalation provisions.
- Follow COVID-19 developments, pending wage-and-hour claims, lease-concession settlements and compliance with the revolving credit facility’s availability covenants.