Tilly’s, Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the three and nine months ended October 28, 2017, representing fiscal 2017 third quarter and year-to-date results. The request metadata identifies “2016 Q3,” but the filing itself clearly reports fiscal 2017 and compares against October 29, 2016. Tilly’s operated 220 stores in 31 states and also sold merchandise through its e-commerce platform.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $152.8 million | $152.1 million | $412.6 million | $408.7 million |
| Gross profit | $50.1 million | $48.0 million | $123.9 million | $119.4 million |
| Gross margin | 32.8% | 31.5% | 30.0% | 29.2% |
| Operating income | $14.1 million | $10.7 million | $12.5 million | $8.9 million |
| Operating margin | 9.2% | 7.0% | 3.0% | 2.2% |
| Net income | $8.8 million | $6.4 million | $8.0 million | $5.1 million |
| Diluted EPS | $0.30 | $0.22 | $0.28 | $0.18 |
- Comparable store sales increased 1.5% in both the quarter and first nine months. E-commerce revenue increased to $19.0 million, or 12.4% of sales, in the quarter and to $52.1 million, or 12.6% of sales, year to date.
- SG&A declined 3.5% in the quarter to $36.0 million, while year-to-date SG&A increased 0.8% to $111.4 million. The year-to-date increase included higher legal provisions and information-technology implementation costs, partly offset by lower marketing, impairment, and corporate payroll costs.
- Net cash provided by operating activities was $17.7 million for the first nine months, compared with $19.6 million in the prior-year period. Capital expenditures were $9.7 million.
- Net cash used in investing activities was $37.2 million, primarily reflecting $112.6 million of marketable-security purchases, partly offset by $85.1 million of maturities.
- Net cash used in financing activities was $20.6 million, including a $20.1 million special dividend of $0.70 per share paid in February 2017.
- Cash and cash equivalents were $38.9 million at October 28, 2017, and marketable securities were $83.0 million. Working capital was $118.1 million, compared with $129.8 million at January 28, 2017.
- The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants. The facility matures June 26, 2020 and is secured by substantially all company assets.
Material changes versus the prior comparable period
- Quarterly sales rose 0.5%, while gross profit increased 4.4% as gross margin expanded 130 basis points. Management attributed the improvement primarily to lower buying, distribution, and occupancy costs and lower markdowns from more efficient inventory management.
- Quarterly operating income increased 32.3%, and net income increased approximately 36%. Year-to-date operating income increased approximately 40%, while net income increased approximately 57%.
- The effective tax rate declined to 39.6% from 40.4% in the quarter and to 40.1% from 44.5% year to date, primarily because of fewer discrete items related to equity awards.
- Inventory increased to $62.2 million from $65.0 million at the prior-year quarter-end, but increased from $47.8 million at fiscal year-end. Cash and cash equivalents declined year over year, while marketable securities increased.
- The company recorded approximately $0.4 million of store-asset impairment charges in the quarter and $0.8 million year to date, relating to four stores during the nine-month period.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to open two stores and close three stores in the fourth quarter of fiscal 2017. For fiscal 2018, management planned to open 10 to 15 stores and a limited number of RSQ-branded pop-up stores.
- Management expects to fund operations through cash, marketable securities, and operating cash flow without drawing on the revolving credit facility over the next twelve months.
- Management identified continuing retail-industry pressure from declining physical-store traffic and increasing online shopping. Recent traffic improvement may not continue. The company is focusing on existing-store productivity and omni-channel capabilities.
- Loss provisions of approximately $7.5 million had been established for matters where losses were probable and estimable. A California wage-and-hour putative class action was filed in October 2017, and a TCPA class action had an agreement in principle to settle, subject to court approval and final documentation.
- The company accrued $1.4 million for its remaining maximum exposure under a vendor-related copyright settlement guarantee, while retaining rights of offset and a security interest in the vendor’s intellectual property.
- The company adopted ASU 2016-09, resulting in a $0.2 million decrease to retained earnings and a $0.2 million increase to additional paid-in capital, with no effect on reported operating results. It expected the forthcoming revenue standard to change the timing of gift-card breakage recognition but not materially affect results. The new lease standard is expected to materially affect the balance sheet because the company operates primarily from leased facilities.
- The filing states that there were no material changes to previously disclosed risk factors or market risks. Disclosure controls and internal controls were evaluated as effective at a reasonable-assurance level.
Important facts for investors to verify
- Confirm the applicable period: the filing is for fiscal 2017 third quarter, not 2016 third quarter.
- Assess whether gross-margin improvement and lower markdowns are sustainable, particularly during the holiday season.
- Monitor inventory growth relative to sales, store closures and openings, and the potential for additional impairment charges.
- Review the effect of the special dividend and ongoing cash generation on liquidity and covenant compliance.
- Track the California wage-and-hour case, TCPA settlement approval, vendor settlement guarantee, and the adequacy of recorded legal provisions.
- Evaluate the operational and balance-sheet effects of adopting the revenue and lease accounting standards.