Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 1, 2021, compared with the thirteen weeks ended May 2, 2020. The supplied metadata identifies “2020 Q1,” but the filing is the first quarter of fiscal 2021. Results are unaudited and reflect a highly disrupted prior-year comparison due to COVID-19 store closures.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods serving young men, women, boys and girls. It operated 238 stores in 33 states at May 1, 2021, compared with 239 stores at May 2, 2020. During the current quarter, the Company opened two stores and permanently closed two stores. It also sells through its e-commerce platform.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $163.2 million | $77.3 million | Up 111.1% |
| Gross profit | $54.8 million | $1.6 million | Up $53.2 million |
| Gross margin | 33.6% | 2.1% | Up 3,150 basis points |
| SG&A expense | $40.0 million | $30.0 million | Up $10.0 million |
| SG&A as percentage of sales | 24.5% | 38.8% | Down 14.3 percentage points |
| Operating income (loss) | $14.9 million | $(28.4) million | Improved $43.3 million |
| Operating margin | 9.1% | (36.7)% | Improved 45.8 percentage points |
| Net income (loss) | $11.0 million | $(17.4) million | Improved $28.4 million |
| Diluted EPS | $0.36 | $(0.59) | Improved $0.95 |
| Cash flow from operations | $19.3 million | $(19.6) million | Improved $38.8 million |
Store sales were $127.7 million, up 171.9%, while e-commerce sales were $35.5 million, up 17.0%. E-commerce represented 21.7% of sales versus 39.2% in the prior-year quarter. Comparable store sales increased 7.5% under the Company’s pandemic-adjusted methodology.
Balance Sheet, Liquidity and Debt
- Cash and cash equivalents were $81.0 million at May 1, 2021, compared with $65.1 million a year earlier and $76.2 million at January 30, 2021.
- Marketable securities were $76.6 million, resulting in cash and marketable securities of approximately $157.6 million.
- Merchandise inventories were $65.3 million, compared with $67.7 million at May 2, 2020.
- Total liabilities were $349.6 million, including $257.3 million of operating lease liabilities.
- The Company had no outstanding borrowings under its asset-backed revolving facility and was eligible to borrow up to $48.5 million at May 1, 2021. The facility has total commitments of up to $65.0 million and matures November 9, 2023.
- Working capital increased to $91.6 million from $78.6 million at January 30, 2021.
- Net cash provided by operating activities was $19.3 million. Investing activities used $17.1 million, primarily for marketable securities purchases and $5.5 million of capital expenditures. Financing activities provided $2.7 million from stock-option exercises.
Material Changes Versus Prior Comparable Period
- All stores were closed for much of the prior-year first quarter, making the 111.1% sales increase and earnings improvement difficult to interpret as a normalized trend.
- Gross margin benefited from the prior-year $4.7 million inventory reserve and a lower markdown rate. Excluding the prior-year inventory reserve effect, product margin improved approximately 330 basis points.
- Buying, distribution and occupancy costs declined substantially as a percentage of sales due to sales leverage; occupancy costs also decreased by approximately $0.5 million in absolute dollars.
- SG&A increased because stores operated throughout the quarter, corporate staffing normalized, marketing costs rose with e-commerce activity, and corporate bonus accruals increased. These costs declined materially as a percentage of sales.
- The Company paid no dividends in the current quarter, compared with $29.7 million paid in the prior-year quarter. The current credit agreement restricted dividends and share repurchases before its first anniversary, subject to specified conditions thereafter.
Outlook, Risks and Unusual Items
Management stated that pandemic conditions had improved but remained unpredictable. Since the second week of April 2021, sales shifted materially toward stores as vaccination rates increased and restrictions eased, although e-commerce remained above pre-pandemic levels.
Management cautioned that first-quarter results may have benefited from federal stimulus payments and atypical back-to-school timing. It could not reliably predict whether these sales represented incremental demand or a pull-forward from the traditional back-to-school season. The filing does not provide formal full-year revenue or earnings guidance.
- Key risks include renewed COVID-19 effects, changing consumer behavior, store traffic, supply-chain and labor disruptions, merchandise availability, fashion trends, competition, e-commerce execution, lease obligations and retail-center performance.
- COVID-19 lease concessions were substantially negotiated; fewer than 10 stores and approximately $0.8 million of withheld rent remained unresolved at May 1, 2021.
- Operating lease liabilities had a present value of $257.3 million, with total minimum lease payments of $308.6 million before interest.
- No store impairment charge was recorded in the current quarter, compared with impairment charges affecting five stores in the prior-year quarter.
- Two California wage-and-hour matters remained pending. Management stated that losses were not probable or estimable and recorded no accrual.
- The Company expected cash on hand, marketable securities, operating cash flow and credit-facility availability to fund operations, growth and capital expenditures for at least the next 12 months.
Investor Verification Items
- Assess current sales and margin performance against fiscal 2019 or other normalized periods, rather than relying solely on the COVID-affected Q1 FY2020 comparison.
- Verify whether stimulus benefits and early back-to-school demand created a pull-forward that could weaken later-quarter sales.
- Monitor comparable store sales using the Company’s pandemic-adjusted definition and separately track the continuing normalization of store versus e-commerce mix.
- Review inventory levels, markdown rates and gross-margin sustainability as seasonal merchandise builds ahead of back-to-school and holiday periods.
- Confirm available borrowing capacity, covenant compliance and the impact of substantial operating lease obligations.
- Follow developments in the pending wage-and-hour litigation and unresolved lease concessions.