Tilly’s, Inc. Form 10-Q Summary
Business Context and Reporting Period
Tilly’s operates specialty retail stores and an e-commerce platform selling casual clothing, footwear and accessories to teens and young adults. This filing covers the thirteen and thirty-nine weeks ended October 27, 2012, compared with the corresponding periods ended October 29, 2011. The source metadata identifies “2011 Q3,” but the filing itself is for the third quarter of fiscal 2012.
At October 27, 2012, Tilly’s operated 161 stores in 27 states, versus 134 stores at the comparable prior-year period, and had 9,281,625 Class A and 18,400,000 Class B shares outstanding.
Financial Performance and Liquidity
| Metric | 13 Weeks Ended Oct. 27, 2012 | 13 Weeks Ended Oct. 29, 2011 | 39 Weeks Ended Oct. 27, 2012 | 39 Weeks Ended Oct. 29, 2011 |
|---|---|---|---|---|
| Net sales | $124.9 million | $107.3 million | $326.5 million | $277.7 million |
| Gross profit | $41.8 million | $35.9 million | $103.4 million | $87.8 million |
| Gross margin | 33.5% | 33.4% | 31.7% | 31.6% |
| Operating income | $13.9 million | $12.3 million | $16.6 million | $20.9 million |
| Operating margin | 11.1% | 11.5% | 5.1% | 7.5% |
| Net income | $9.3 million | $12.2 million | $14.1 million | $20.5 million |
| Diluted EPS | $0.33 | $0.59 | $0.55 | $1.00 |
For the quarter, sales increased 16%, driven by 27 additional stores, $15.7 million of sales from stores opened since the prior-year period, a 1.9% comparable-store sales increase and 17% growth in e-commerce revenue to $12.9 million. For the year-to-date period, sales increased 18%, comparable-store sales rose 3.6%, and e-commerce revenue increased 23% to $33.7 million.
Year-to-date net cash provided by operating activities was $26.6 million, compared with $31.8 million in the prior-year period. Capital expenditures were $25.6 million, including $19.7 million for new stores, remodels and improvements. Investing activities also included $60.4 million of marketable-securities purchases and $35.5 million of sales. Financing cash flow was $22.9 million, including $106.8 million of IPO proceeds and $84.3 million of distributions to former shareholders.
At October 27, 2012, the company had $24.9 million of cash and cash equivalents, $24.9 million of marketable securities and $118.2 million of current assets against $50.1 million of current liabilities. Total assets were $197.0 million and total liabilities were $90.3 million. The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. Capital lease obligations totaled $4.1 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was strong, but comparable-store sales decelerated to 1.9% in the quarter from 8.5% in the prior-year quarter and to 3.6% year-to-date from 13.4%.
- Quarterly gross margin improved slightly, while year-to-date gross margin increased by 0.1 percentage point.
- Quarterly operating income rose 12%, but the operating margin declined 0.4 percentage point as SG&A increased to 22.4% of sales from 21.9%.
- Year-to-date operating income declined 21%, primarily because of $8.9 million of stock-based compensation expense, including a $7.6 million one-time charge triggered by the IPO, and higher public-company costs.
- Year-to-date net income declined 31%. Comparability was affected by the company’s May 2, 2012 conversion from an S corporation to a C corporation and the resulting higher income taxes.
- The May 2012 IPO generated approximately $107 million of net proceeds. The company used $84.0 million to repay notes payable to former shareholders.
- Inventory increased to $49.9 million from $36.5 million at January 28, 2012, reflecting holiday-season purchases and new-store growth.
Guidance, Outlook, Risks and Unusual Items
Management planned to open seven additional net stores by the end of fiscal 2012 and targeted approximately 15% annual net store growth for several years thereafter, funded primarily through cash on hand and operating cash flow. Management stated that cash, marketable securities, operating cash flow and available revolver capacity should be sufficient for working capital and anticipated capital expenditures for the next 12 months.
Key risks include changing fashion preferences, difficulty securing desirable store locations, managing rapid expansion, weaker consumer spending, inflation or commodity cost increases, promotional pressure, inventory and margin risk, and the ability to generate sufficient sales leverage over occupancy and distribution costs.
The filing identifies several unusual or nonrecurring items: the IPO-related $7.6 million stock-compensation charge; the broader $8.9 million year-to-date stock-based compensation expense; the S-to-C corporation tax conversion, including a $3.0 million deferred tax benefit and related tax adjustments; and $0.8 million of insurance proceeds related to prior smoke damage at a store.
A putative California class action concerning gift-card redemption policies remains pending. Management believes the matter is unlikely to have a material effect, but states that the ultimate outcome and potential liability cannot be estimated. The company also has related-party leases with entities owned by its co-founders.
Important Facts for Investors to Verify
- Confirm the reporting period: the filing is for the quarter ended October 27, 2012, not 2011.
- Separate underlying operating trends from IPO-related stock compensation, public-company costs and the S-to-C corporation tax effects.
- Assess whether comparable-store sales can improve from the 1.9% quarterly increase while the company continues rapid store expansion.
- Review inventory growth, holiday-season sell-through and potential markdown exposure.
- Verify the funding requirements and returns associated with the planned 15% annual store-growth rate.
- Monitor liquidity, credit-facility covenants, capital expenditures and the lack of revolver borrowings.
- Review the pending gift-card litigation and the terms of related-party leases.