Tilly’s, Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the thirteen and twenty-six weeks ended August 2, 2014, with comparisons to August 3, 2013. Tilly’s operates specialty retail stores and an e-commerce business selling apparel, footwear, and accessories to teens and young adults. The company operated 203 stores in 33 states at quarter-end, versus 182 stores in the prior-year period.
The request metadata identifies “2013 Q2,” but the filing itself clearly reports the second quarter of fiscal 2014.
Key financial metrics
| Metric | 13 weeks ended Aug. 2, 2014 | 13 weeks ended Aug. 3, 2013 | 26 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 3, 2013 |
|---|---|---|---|---|
| Net sales | $123.1 million | $123.0 million | $234.2 million | $232.2 million |
| Gross profit | $34.7 million | $37.9 million | $66.0 million | $69.7 million |
| Gross margin | 28.2% | 30.8% | 28.2% | 30.0% |
| SG&A expense | $32.3 million | $30.7 million | $62.6 million | $58.6 million |
| Operating income | $2.3 million | $7.2 million | $3.4 million | $11.1 million |
| Operating margin | 1.9% | 5.8% | 1.5% | 4.8% |
| Net income | $1.3 million | $4.3 million | $1.9 million | $6.6 million |
| Diluted EPS | $0.05 | $0.15 | $0.07 | $0.23 |
| Net cash from operations | Not separately reported | Not separately reported | $11.7 million | $17.2 million |
At August 2, 2014, cash and cash equivalents were $32.4 million, marketable securities were $25.0 million, and total current assets were $150.2 million. Total liabilities were $116.4 million, including $2.9 million of capital lease obligations. The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with its covenants. Total stockholders’ equity was $144.7 million.
Capital expenditures were $14.6 million during the first 26 weeks, primarily for stores and a new e-commerce fulfillment center. Cash increased by $7.0 million from the beginning of the fiscal year to $32.4 million at quarter-end.
Material changes versus the prior comparable period
- Second-quarter comparable store sales declined 7.1%, compared with a 0.5% decline in the prior-year quarter. First-half comparable store sales declined 6.9%, compared with a 0.2% increase in the prior-year period.
- Reported sales were broadly flat in the quarter and increased 0.9% for the first half because new-store sales offset comparable-store declines. New stores contributed $8.8 million in the quarter and $18.5 million in the first half.
- Gross margin declined 260 basis points in the quarter and 180 basis points in the first half, primarily because occupancy costs grew faster than sales. Second-quarter product margin also declined approximately 40 basis points.
- SG&A increased 5% in the quarter and 7% in the first half, driven principally by store, regional, and e-commerce fulfillment payroll and other costs associated with store growth.
- Operating income fell 68% in the quarter and 69% in the first half. Net income fell 70% and 71%, respectively.
- Operating cash flow declined to $11.7 million from $17.2 million, reflecting lower earnings and increased inventory purchases, partly offset by higher accounts payable and accrued expenses.
- Inventory increased to $70.4 million from $46.3 million at February 1, 2014, reflecting purchases for the back-to-school season and new stores.
Guidance, outlook, risks, contingencies, and unusual items
- Management planned at least ten additional net store openings by the end of fiscal 2014, following eight net openings through August 2. Expansion was expected to be funded with cash on hand and operating cash flow.
- Management expected cash, marketable securities, operating cash flow, and available revolver capacity to fund working capital and anticipated capital expenditures for at least the next 12 months. No formal earnings guidance was provided in the filing.
- Key operating risks include weak consumer spending, fashion and customer-preference changes, promotional pressure, product-cost inflation, execution of store growth, availability of suitable locations, and higher occupancy and payroll costs.
- The company disclosed three putative class or representative actions involving customer information and California wage-and-hour matters. Damages were unspecified, outcomes could not be predicted, and no clear loss amount was provided.
- The company corrected an immaterial prior-period income-statement classification error, moving $0.3 million and $0.7 million of 2013 stock-based compensation from SG&A to cost of goods sold for the quarter and first half, respectively. Net income was unaffected.
- The effective tax rate increased to 45.7% for the quarter and 45.5% for the first half, partly due to write-offs of deferred tax assets related to forfeited vested stock options.
- The company granted approximately 822,500 stock options during the first half and recorded $1.9 million of stock-based compensation expense. Unrecognized stock-based compensation was $8.8 million at quarter-end.
- Related-party leases with entities owned by company co-founders remained in place. The filing states that independent market analyses supported the reasonableness of the lease terms.
Important facts for investors to verify
- Whether the sharp comparable-store sales declines continue into the back-to-school and holiday periods.
- Whether new-store growth can offset declining mature-store productivity without further compressing gross and operating margins.
- Inventory levels, markdown activity, product margins, and occupancy costs in subsequent quarters.
- The sustainability of operating cash flow given continued expansion and elevated inventory requirements.
- The status and potential financial exposure of the disclosed California litigation.
- Compliance with the revolving-credit facility’s loss and leverage covenants if operating performance weakens.
- Whether management’s planned store openings and e-commerce fulfillment investments generate the expected sales and operating leverage.