Tilly’s, Inc. Form 10-Q Summary
Business Context and Reporting Period
This filing covers the three and six months ended August 4, 2018, representing fiscal 2018 second-quarter and year-to-date results. The requested “2017 Q2” period appears inconsistent with the filing; July 29, 2017 is presented as the comparable prior-year period. Tilly’s operated 226 stores in 31 states and an e-commerce platform as of August 4, 2018.
Key Financial Metrics
| Metric | Three Months Ended August 4, 2018 | Six Months Ended August 4, 2018 |
|---|---|---|
| Net sales | $157.4 million | $281.0 million |
| Gross profit / margin | $50.1 million / 31.8% | $85.1 million / 30.3% |
| SG&A / percentage of sales | $37.6 million / 23.9% | $71.3 million / 25.4% |
| Operating income / margin | $12.5 million / 7.9% | $13.8 million / 4.9% |
| Net income / diluted EPS | $9.7 million / $0.33 | $10.9 million / $0.37 |
| Operating cash flow | Not separately provided | $22.0 million |
At August 4, 2018, cash and cash equivalents were $45.6 million and marketable securities were $78.6 million. Total current assets were $219.3 million against current liabilities of $92.8 million, producing working capital of approximately $126.5 million. The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. Total liabilities were $126.2 million, including deferred rent; the filing does not identify material funded debt outstanding.
Year-to-date investing cash flow was negative $1.8 million, including $6.7 million of capital expenditures, purchases of marketable securities of $79.8 million, and maturities of marketable securities of $84.7 million. Financing cash flow was negative $27.7 million, primarily due to $29.1 million of dividends. Cash declined by $7.6 million during the first half.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 13.4% to $157.4 million; first-half sales increased 8.2% to $281.0 million.
- Comparable store sales, including e-commerce, increased 4.4% in the quarter and 2.4% for the first half. Store traffic improved, while merchandise strength was partially offset by weakness in boys’ merchandise in the quarter and accessories in the first half.
- E-commerce revenue increased to $19.7 million in the quarter from $16.9 million and to $34.8 million for the first half from $33.1 million. E-commerce represented 12.5% of quarterly sales and 12.4% of first-half sales.
- Gross margin expanded 230 basis points in the quarter and 190 basis points for the first half, primarily from leveraging occupancy costs over higher sales; product margins were approximately flat.
- SG&A declined 10.7% in the quarter and 5.5% for the first half. The comparison benefited materially from a $6.2 million legal loss provision recorded in the second quarter of fiscal 2017 and a $1.5 million reduction to that accrual in the current quarter.
- Operating results also benefited from the shift of back-to-school sales associated with the prior year’s 53rd fiscal week. Management attributed approximately $12.3 million of the quarterly sales increase and $15.2 million of the first-half increase to this calendar effect.
- The company adopted ASC 606 on February 4, 2018 using the modified retrospective method. Opening retained earnings increased by approximately $1.4 million. Current-period reported sales were higher by approximately $0.9 million in the quarter and $1.5 million for the first half versus amounts under the prior standard.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects to open seven new full-size stores and close five full-size stores during the second half of fiscal 2018.
- Management expects the fiscal 2018 effective income tax rate to be approximately 27%, reflecting the Tax Cuts and Jobs Act.
- The retail industry continues to face declining physical-store traffic and increasing online shopping. Management reported improved store traffic for seven consecutive quarters but cautioned that the improvement may not continue.
- A court-approved TCPA settlement requires discount coupons to be issued to approximately 612,000 existing customers in early September 2018. Each coupon provides a one-time 50% discount on a purchase of up to $1,000 and expires after one year. The company cannot estimate coupon usage or its effect on sales, margins, operating income, or earnings; the potential impact could be material and adverse.
- The company recorded approximately $4.7 million of loss provisions for matters where losses were probable and reasonably estimable. The TCPA settlement accrual was reduced by $1.5 million after final approval. A separate California wage-and-hour appeal remained pending, with oral arguments scheduled for November 2018.
- Two stores were impaired during the first half, resulting in $0.8 million of non-cash impairment charges. The quarter included approximately $0.6 million of impairment charges.
- The company expects to adopt the new lease standard, ASC 842, in the first quarter of fiscal 2019. Because operations are conducted primarily in leased facilities, adoption is expected to affect the financial statements, although the filing does not provide a quantified impact.
Important Facts for Investors to Verify
- Confirm the intended reporting period, because the filing is for fiscal 2018 second quarter ended August 4, 2018, not 2017 Q2.
- Assess the sustainability of sales and traffic gains after removing the favorable 53rd-week calendar comparison.
- Monitor the actual redemption and margin impact of the 612,000 legal-settlement coupons.
- Reconcile reported results for ASC 606 effects, particularly gift-card breakage and e-commerce shipment-point recognition.
- Evaluate inventory of $74.8 million, receivables of $11.2 million, and the effect of seasonal back-to-school sales on working capital and cash flow.
- Review future lease liabilities and balance-sheet effects when ASC 842 is adopted.
- Track the pending wage-and-hour appeal and any additional litigation exposure beyond recorded provisions.