TILLY's, INC. annual report, FY2013

Tilly’s, Inc. Form 10-K Summary

Reporting period: The filing is for fiscal year 2013, ended February 1, 2014, consisting of 52 weeks. The requested “2012 Q4” does not match the filing period; the filing includes unaudited fourth-quarter fiscal 2013 results and comparative fiscal 2012 information. Tilly’s operates specialty retail stores and an e-commerce business focused on action-sports-inspired apparel, footwear and accessories for teens and young adults.

Key Financial Metrics

MetricFiscal 2013Fiscal 2012Change
Net sales$495.8 million$467.3 million+6%
Gross profit$152.3 million$150.2 million+1%
Gross margin30.7%32.1%Down 1.4 percentage points
Operating income$29.7 million$31.4 millionDown 5%
Operating margin6.0%6.7%Down 0.7 percentage points
Net income$18.1 million$23.9 millionDown 24%
Net margin3.7%5.1%Down 1.4 percentage points
Diluted EPS$0.65$0.92Down $0.27
Cash flow from operations$43.8 million$41.7 million+5%
Capital expenditures$42.7 million$33.3 million+28%
  • Comparable store sales declined 1.9%, versus a 2.2% increase in fiscal 2012.
  • E-commerce revenue, including shipping and handling fees, increased 9% to $57.8 million and represented approximately 12% of net sales.
  • Store count increased to 195 from 168 after 28 openings and one closure. The company operated in 32 states.
  • Cash, cash equivalents and marketable securities totaled $60.4 million at year-end, including $25.4 million of cash and $34.9 million of marketable securities.
  • Working capital was $80.7 million, compared with $73.9 million in the prior year.
  • Total long-term debt was $3.3 million, consisting solely of a capital lease obligation. The $25 million revolving credit facility was undrawn at year-end.
  • Total assets were $232.4 million and stockholders’ equity was $140.9 million at February 1, 2014.

Material Changes Versus the Prior Comparable Period

  • Sales growth was driven primarily by the addition of 27 net stores, while comparable store sales declined and reduced sales by approximately $8.6 million.
  • Gross margin contracted because occupancy costs increased as a percentage of sales following substantial store expansion. Product margins improved modestly due to higher initial markups.
  • SG&A increased 3% to $122.6 million, although SG&A declined to 24.7% of sales from 25.4%. The prior year included a $7.6 million one-time stock-based compensation charge associated with the IPO.
  • Fiscal 2013 operating income included a $1.8 million impairment charge related to four stores. No impairment charge was recorded in fiscal 2012.
  • Income tax expense increased to $11.6 million from $7.4 million. The company was taxed as a C corporation for the full fiscal 2013 year following its 2012 conversion from S corporation status.
  • Net income and EPS declined despite higher sales, reflecting lower comparable sales, lower gross margin, higher operating costs and increased corporate taxation.
  • Operating cash flow improved, but capital investment increased substantially to support new stores, information systems and the planned e-commerce fulfillment center.

Cash Flow, Liquidity and Commitments

  • Operating activities generated $43.8 million; investing activities used $37.5 million; financing activities provided $1.8 million.
  • Fiscal 2013 capital spending included $24.7 million for new stores, remodels and store improvements. Management expected fiscal 2014 capital expenditures of $24 million to $28 million.
  • Management expected to fund operations and expansion from cash on hand, marketable securities and operating cash flow, with the revolving facility available if needed.
  • The revolving facility was amended on March 17, 2014, after year-end. It remains a $25 million secured facility maturing May 31, 2017, with new leverage and loss-related covenants.
  • Contractual obligations totaled $409.8 million, including $311.5 million of operating lease obligations, $94.7 million of purchase obligations and $3.6 million of capital lease payments.
  • Fiscal 2013 operating rent expense was $43.4 million, and common area maintenance expense was $17.4 million. Several headquarters and warehouse leases are with entities owned by company co-founders.

Outlook, Commentary, Risks and Unusual Items

  • Management planned at least 18 net new stores in fiscal 2014, including approximately 30% in a new outlet format, and continued to target a long-term footprint exceeding 500 stores.
  • The company expected its new automated e-commerce fulfillment center to become operational in the second quarter of fiscal 2014. Approximately $13 million had been invested by year-end, with an additional $3 million expected to complete the project.
  • Management identified e-commerce growth, store expansion, scale efficiencies and process improvements as key drivers of future sales and margin expansion.
  • Major risks include continued comparable-store-sales declines, fashion and inventory misjudgments, markdown pressure, intense competition, consumer spending weakness, store-opening execution, supply-chain disruptions, dependence on foreign manufacturing, labor and transportation cost increases, information-system failures and cybersecurity incidents.
  • The company is concentrated geographically, with 82 stores in California, 18 in Arizona, six in Nevada and 19 in Florida, exposing results to regional economic and weather events.
  • Reported markdowns increased to $35.7 million, or 7.2% of sales, from $32.2 million, or 6.9%, in fiscal 2012.
  • Two putative California class actions were disclosed: one concerning customer credit-card identification information and another concerning wage-and-hour practices. Damages were unspecified, and management stated that it could not predict the outcomes.
  • The Shaked and Levine family entities controlled approximately 94% of total voting power through Class B shares, creating significant governance and minority-stockholder risks.
  • The company does not expect to pay cash dividends for the foreseeable future.

Most Important Facts for Investors to Verify

  • Confirm the intended reporting period, because the filing covers fiscal 2013 ended February 1, 2014 rather than 2012 Q4.
  • Assess whether comparable-store-sales trends and gross-margin pressure improved after the filing date.
  • Verify execution, cost savings and sales impact from the new e-commerce fulfillment center.
  • Review store-level performance and the potential for additional impairment charges.
  • Evaluate liquidity after planned capital expenditures, store openings and substantial lease commitments.
  • Review the amended revolving-credit covenants and confirm continued compliance.
  • Monitor the disclosed class actions, related-party leases and concentrated founder voting control.