Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen weeks ended April 30, 2022, compared with the thirteen weeks ended May 1, 2021. The request metadata identifies “2021 Q1,” but the filing is for the first quarter of fiscal 2022. Fiscal 2022 ends January 28, 2023. The financial statements are unaudited.
Business Context
Tilly’s operates a specialty retail business selling casual apparel, footwear, accessories and hardgoods through stores and e-commerce. As of April 30, 2022, it operated 241 stores in 33 states, compared with 238 stores a year earlier. E-commerce sales represented 19.4% of total net sales, compared with 21.7% in the prior-year quarter.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $145.8 million | $163.2 million | Down 10.7% |
| Gross profit | $43.8 million | $54.8 million | Down 20.1% |
| Gross margin | 30.1% | 33.6% | Down 350 basis points |
| SG&A, including related-party rent | $42.7 million | $40.0 million | Up $2.7 million |
| SG&A as a percentage of sales | 29.3% | 24.5% | Up 480 basis points |
| Operating income | $1.1 million | $14.9 million | Down 92.5% |
| Operating margin | 0.8% | 9.1% | Down 830 basis points |
| Net income | $0.8 million | $11.0 million | Down 92.6% |
| Diluted EPS | $0.03 | $0.36 | Down $0.33 |
| Cash flow from operating activities | $(17.6) million | $19.3 million | Down $36.8 million |
| Capital expenditures | $2.6 million | $5.5 million | Down $2.9 million |
Balance Sheet, Liquidity and Debt
- Cash and cash equivalents were $60.0 million at April 30, 2022, compared with $42.2 million at January 29, 2022 and $81.0 million at May 1, 2021.
- Marketable securities were $51.0 million, resulting in cash and marketable securities of approximately $110.9 million.
- Merchandise inventories were $74.1 million, up from $65.6 million at fiscal year-end and $65.3 million a year earlier.
- Working capital was $85.9 million, compared with $91.8 million at January 29, 2022.
- The company had no outstanding borrowings under its new $25.0 million senior secured revolving credit facility at April 30, 2022 and was in compliance with its covenants. The facility matures January 20, 2024 and is secured by substantially all company assets.
- Operating lease liabilities totaled $248.4 million on a present-value basis, including $22.8 million related to related-party leases.
- Net cash increased $17.8 million during the quarter, primarily because $51.0 million of marketable securities matured. This more than offset the operating cash outflow and $8.2 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Comparable store net sales declined 13.0%, versus a 7.5% increase in the prior-year quarter.
- Physical-store sales decreased 8.0% to $117.5 million, while e-commerce sales decreased 20.3% to $28.3 million.
- Management attributed the sales decline primarily to the prior-year benefit from pent-up demand following pandemic restrictions and federal stimulus payments, as well as the inflationary environment in fiscal 2022.
- Gross margin contracted because product margins declined 160 basis points as markdowns normalized from unusually strong full-price selling in the prior year. Buying, distribution and occupancy costs also deleveraged by 190 basis points.
- Store payroll and related benefits increased, with average store payroll hours costing 6.5% more than in the prior-year quarter. SG&A also benefited from a $1.6 million reversal of a disputed California sales tax assessment in the prior-year period, while current-year bonus expense declined by $1.6 million.
- Share repurchases totaled $8.2 million for 892,033 Class A shares during the quarter. The company repurchased an additional 95,394 shares for $0.8 million in May 2022.
- The mix of proprietary-branded merchandise increased to 32% of sales from 29%, while third-party branded merchandise declined to 68% from 71%.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2022 operating results to remain well below fiscal 2021 levels in each quarter, reflecting the lapping of pandemic-related demand and stimulus benefits.
- The company plans to open approximately 9 to 12 stores during fiscal 2022, primarily in California, Texas and the Northeast, subject to acceptable lease economics.
- Fiscal 2022 capital expenditures are expected to be approximately $23 million to $25 million, including new stores, website and mobile-app upgrades, distribution efficiencies and information technology investments.
- Key risks include COVID-19 developments, inflation, reduced consumer spending, supply-chain and port disruptions, delayed or excess inventory, labor shortages and wage inflation, competition, store traffic, fashion trends and dependence on foreign suppliers and third-party transportation providers.
- As of April 30, 2022, the company had $74.1 million of inventory, increasing exposure to markdowns if deliveries, demand or seasonal selling patterns do not align with plans.
- The company recorded a non-cash impairment charge of approximately $13,000 for one store. It also recorded a $0.5 million reduction in its loyalty-program liability from a change in award expiration policy.
- A California wage-and-hour matter was settled in April 2022 using an amount accrued in the fourth quarter of fiscal 2021; the case was dismissed with prejudice on May 11, 2022. Another wage-and-hour PAGA matter remained pending, with management stating that a loss was not probable or estimable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the filing period: the document covers Q1 fiscal 2022, not Q1 fiscal 2021.
- Assess whether the 13.0% comparable-sales decline, lower e-commerce sales and margin contraction persist beyond the first quarter.
- Evaluate inventory levels, inbound supply-chain timing and potential markdown exposure.
- Review the effect of inflation and wage increases on gross margin and SG&A leverage.
- Reconcile liquidity using cash, marketable securities, operating cash flow, planned capital expenditures and share repurchases.
- Monitor compliance with the secured credit facility’s leverage and fixed-charge coverage covenants, particularly if operating performance weakens.
- Review the timing, economics and execution risk of the planned 9 to 12 new stores and $23 million to $25 million capital program.
- Consider the substantial operating lease commitments and related-party leases when assessing fixed obligations and store-level economics.