Tilly’s, Inc. Form 10-Q Summary
Business context and reporting period
Tilly’s operates specialty retail stores and an e-commerce business selling casual apparel, footwear and accessories to teens and young adults. This filing covers the unaudited thirteen weeks ended May 4, 2013, compared with the thirteen weeks ended April 28, 2012. The filing metadata identifies “2012 Q1,” but the reported period is the first quarter of fiscal 2013.
The company operated 175 stores in 30 states at May 4, 2013, versus 145 stores at April 28, 2012. It opened seven net new stores during fiscal 2013 and planned to open at least 18 additional net stores during the year.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $109.1 million | $96.5 million | 13% |
| Gross profit | $32.2 million | $30.4 million | 6% |
| Gross margin | 29.5% | 31.5% | Down 2.0 percentage points |
| SG&A expense | $28.3 million | $24.4 million | 16% |
| Operating income | $3.9 million | $6.0 million | Down 35% |
| Operating margin | 3.6% | 6.2% | Down 2.6 percentage points |
| Net income | $2.3 million | $5.9 million | Down 61% |
| Diluted EPS | $0.08 | $0.29 | Down 72% |
| Net cash from operating activities | $2.9 million | $3.9 million | Down $1.0 million |
Comparable-store sales increased 1.1%, versus 4.3% in the prior-year quarter. E-commerce revenue, including shipping fees, increased 16% to $12.6 million. Average net sales per store declined to $565,000 from $605,000, and average net sales per square foot declined to $72 from $77.
At May 4, 2013, cash and cash equivalents were $18.6 million and marketable securities were $29.9 million. Total current assets were $118.7 million versus current liabilities of $46.9 million. The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all related covenants. Capital lease obligations totaled $3.8 million, including current and long-term portions.
Capital expenditures were $11.4 million, largely for stores. Maturities of marketable securities generated $10.0 million of cash, resulting in net cash used in investing activities of $1.4 million. Financing activities used $0.2 million, primarily for capital lease payments. Cash increased by $1.3 million during the quarter.
Material changes versus the prior comparable period
- Sales growth was driven primarily by $11.6 million from stores opened after the prior-year period, a 1.1% comparable-store sales increase and higher e-commerce revenue.
- Gross margin contracted because of higher markdowns and increased buying, distribution and occupancy costs relative to sales.
- SG&A grew faster than sales, reflecting store growth, newer stores with immature sales volumes, public-company costs and $0.9 million of stock-based compensation expense. No comparable stock-based compensation expense was recorded in Q1 2012.
- The company became subject to corporate income taxes after converting from an S corporation to a C corporation in May 2012. The Q1 2013 effective tax rate was 40.3%, compared with 1.1% in Q1 2012. On a pro forma 40% tax basis, Q1 2012 net income was $3.6 million, making the comparable decline in Q1 2013 net income approximately 36%.
- Total assets increased to $209.7 million from $205.4 million at February 2, 2013, while stockholders’ equity increased to $120.5 million from $117.3 million, primarily reflecting quarterly net income and stock-based compensation.
Guidance, outlook, risks and unusual items
- Management expected to fund store expansion with cash on hand and operating cash flow, targeting at least 18 additional net stores during fiscal 2013 and approximately 15% annual store growth over the following several years.
- Management stated that existing cash, operating cash flow and the available revolving facility should cover working capital and anticipated capital expenditures for the next 12 months. The company did not expect to draw on the facility during that period.
- Key risks include changing fashion trends and customer preferences, competition, consumer spending weakness, inflation or higher product costs, promotional pressure, difficulty securing desirable store locations and challenges managing rapid growth.
- The company disclosed three putative class actions involving credit-card customer information, California wage-and-hour matters and gift-card redemption policies. Damages were unspecified or not estimable, and management stated that it could not predict the outcomes or potential losses.
- The company granted options for 554,500 Class A shares during the quarter. Total unrecognized stock-based compensation was $8.1 million at May 4, 2013, with a weighted-average remaining recognition period of 3.1 years.
- Related-party leases with entities owned by company co-founders remained in place. Management stated that independent market analyses supported the reasonableness of the lease terms.
- The filing states that there were no material changes to previously disclosed market risks or risk factors, and that disclosure controls were effective at the reasonable assurance level.
Important facts for investors to verify
- Whether the planned store openings and longer-term expansion rate can generate sufficient sales leverage to offset occupancy, payroll and other fixed costs.
- Whether markdown levels and gross-margin pressure persist, particularly given the slowdown in comparable-store sales.
- The effect of the 40% corporate tax rate on future earnings and cash flows compared with the unusually low prior-year tax expense.
- Capital expenditure requirements, inventory growth and operating cash conversion as the store base expands.
- The status and potential financial exposure of the three disclosed putative class actions.
- The maturity and renewal terms of the $25.0 million revolving credit facility, which was scheduled to mature May 3, 2014, and compliance with its liquidity, profitability and leverage covenants.