Tilly’s, Inc. Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended August 3, 2019, compared with August 4, 2018. The supplied metadata labels the period “2018 Q2,” but the filing is for the second quarter of fiscal 2019. Results are unaudited and presented under U.S. GAAP.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear and accessories for young men, women, boys and girls. As of August 3, 2019, it operated 229 stores in 33 states, including 227 full-size stores and two RSQ-branded pop-up stores, and sold merchandise through its e-commerce platform.
Financial Results and Key Metrics
| Metric | Q2 FY2019 | Q2 FY2018 | First Half FY2019 | First Half FY2018 |
|---|---|---|---|---|
| Net sales | $161.7 million | $157.4 million | $292.0 million | $281.0 million |
| Gross profit | $51.7 million | $50.1 million | $87.4 million | $85.1 million |
| Gross margin | 32.0% | 31.8% | 29.9% | 30.3% |
| Operating income | $12.1 million | $12.5 million | $12.3 million | $13.8 million |
| Operating margin | 7.5% | 7.9% | 4.2% | 4.9% |
| Net income | $9.3 million | $9.7 million | $10.0 million | $10.9 million |
| Diluted EPS | $0.31 | $0.33 | $0.33 | $0.37 |
- Q2 net sales increased 2.8%; first-half sales increased 3.9%.
- Q2 comparable store sales increased 0.6%, versus 4.4% in the prior-year quarter. First-half comparable sales increased 1.4%, versus 2.4% previously.
- E-commerce revenue increased 15.7% in Q2 and 21.7% for the first half, representing 14.1% and 14.5% of sales, respectively.
- Q2 gross margin improved 20 basis points, while first-half gross margin declined 40 basis points due primarily to higher markdowns and e-commerce shipping costs.
- SG&A increased to $39.6 million in Q2 and $75.1 million for the first half, reflecting higher e-commerce marketing and fulfillment costs, minimum-wage and merit increases, and other cost pressures.
- Net cash provided by operating activities was $14.1 million for the first half, down from $22.0 million in the prior-year period.
- Capital expenditures were $4.8 million for the first half, compared with $6.7 million previously. Dividends paid totaled $29.5 million, compared with $29.1 million.
Balance Sheet, Debt and Liquidity
- At August 3, 2019, cash and cash equivalents were $62.4 million and marketable securities were $62.4 million, providing approximately $124.8 million of cash and short-term investments.
- Merchandise inventories were $72.6 million, compared with $74.8 million at August 4, 2018.
- The company had no outstanding borrowings under its $25.0 million revolving credit facility, which matures June 26, 2020. It was in compliance with all covenants.
- The credit facility is secured by substantially all company assets and includes a $15.0 million letter-of-credit sub-feature. A $1.1 million standby letter of credit supported workers’ compensation insurance.
- Operating lease assets totaled $256.0 million and operating lease liabilities totaled $287.6 million following adoption of ASC 842. Total minimum operating lease payments were $326.9 million.
- Working capital was $83.2 million at August 3, 2019, compared with $119.9 million at February 2, 2019; the decrease was primarily related to the adoption of the new lease standard and normal changes in current assets and liabilities.
Material Changes, Outlook and Unusual Items
- The company adopted ASC 842, Leases, on February 3, 2019, recognizing substantial operating lease assets and liabilities without recasting prior periods.
- Management expected to open up to 13 new full-size stores in fiscal 2019 and forecast fiscal-year capital expenditures of no more than $20 million.
- Management estimated that minimum-wage increases, merit increases, new systems costs and lease-accounting effects would increase annualized operating costs by approximately $6 million. Comparable store sales would need to increase approximately 3%, absent mitigating actions, to absorb these costs without operating-expense deleverage.
- Management expected to fund operations over the next 12 months with cash, marketable securities and operating cash flow, without borrowing under the revolving facility.
- Q2 and first-half comparisons were affected by a $1.5 million favorable reduction in legal reserves recorded in Q2 FY2018. Management estimated the prior-year item increased prior-year after-tax income by $1.1 million, or $0.04 per diluted share.
- The company launched an enhanced loyalty program during Q2, including instant award redemption and extending award expiration from 45 to 365 days.
- Two California wage-and-hour matters remained pending. The company stated that it could not predict the outcomes or reasonably estimate potential losses.
- The company identified no material changes to previously disclosed risk factors or market risks. Disclosure controls and procedures were assessed as effective at a reasonable assurance level.
Investor Verification Items
- Verify the period designation: the filing covers Q2 and the first half of fiscal 2019, not fiscal 2018.
- Assess whether e-commerce growth can offset weak physical-store comparable sales and increasing fulfillment and marketing costs.
- Monitor markdowns, inventory levels, gross-margin trends and the ability to absorb anticipated $6 million of annualized cost increases.
- Review the effect of ASC 842 on lease liabilities, leverage-related covenant calculations and future occupancy costs.
- Confirm continued compliance with the revolving credit facility’s liquidity, profitability and leverage covenants.
- Track the status and potential financial exposure of the pending California wage-and-hour litigation.
- Reconcile cash generation against recurring special dividends, planned store expansion and capital expenditures.