Tilly’s, Inc. Form 10-Q Summary
Business Context and Reporting Period
The filing covers the thirteen weeks ended April 28, 2012, compared with the thirteen weeks ended April 30, 2011. Although the request identifies “2011 Q1,” the filing is for fiscal first-quarter 2012. Tilly’s operated 145 specialty retail stores in 19 states and an e-commerce business selling casual apparel, footwear and accessories to teens and young adults.
The reported operating results are those of World of Jeans & Tops dba Tilly’s, before its May 2, 2012 reorganization into a wholly owned subsidiary of Tilly’s, Inc. and its conversion from an S corporation to a C corporation.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $96.5 million | $83.1 million | 16% |
| Gross profit | $30.4 million | $26.2 million | 16% |
| Gross margin | 31.5% | 31.5% | Flat |
| SG&A expense | $24.4 million | $21.2 million | 15% |
| Operating income | $6.0 million | $5.0 million | 21% |
| Operating margin | 6.2% | 6.0% | Up 0.2 percentage points |
| Net income | $5.9 million | $4.9 million | 22% |
| Diluted EPS | $0.29 | $0.24 | 21% |
| Pro forma net income at 40% tax rate | $3.6 million | $3.0 million | 22% |
| Pro forma diluted EPS | $0.18 | $0.14 | 29% |
Comparable store sales increased 4.3%, compared with 18.2% in the prior-year quarter. E-commerce revenue, including shipping fees, increased 31% to $10.9 million. Store count increased from 126 to 145, and total selling area increased to approximately 1.13 million square feet.
As of April 28, 2012, cash and cash equivalents were $21.7 million, merchandise inventories were $40.3 million, and total current assets were $76.0 million. Total current liabilities were $41.6 million, producing a current ratio of approximately 1.83 to 1. Total liabilities were $79.1 million and shareholders’ equity was $66.1 million.
Capital lease obligations totaled approximately $4.5 million, including $0.7 million classified as current. The filing identifies no drawn revolving-credit borrowings as of the reporting date. Net cash provided by operating activities was $3.9 million, capital expenditures were $7.5 million, and ending cash declined by $3.4 million to $21.7 million.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected $9.9 million from stores opened during fiscal 2012, a 4.3% comparable-store sales increase, and 31% e-commerce growth.
- Gross margin remained unchanged at 31.5%; lower product and buying costs offset higher occupancy costs.
- SG&A leverage improved modestly, declining to 25.3% of sales from 25.5%.
- Operating margin expanded to 6.2% from 6.0%, primarily because certain expenses grew more slowly than sales.
- Operating cash flow decreased to $3.9 million from $4.4 million, while investing cash use increased to $6.9 million from $3.0 million because of store expansion and related capital spending.
- Financing cash use declined to $0.4 million from $2.0 million, mainly because shareholder distributions decreased to $0.3 million from $1.8 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management planned at least 16 additional net stores by fiscal year-end and expected approximately 15% annual store growth for the following several years.
- Management expected to fund expansion through cash on hand, operating cash flow and IPO proceeds. It did not expect to draw on the revolving credit facility during the following 12 months.
- On May 3, 2012, the company amended its Wells Fargo facility to provide a $25.0 million revolving line maturing May 3, 2014, with interest at LIBOR plus 1.75% or the bank’s prime rate. The facility is secured by substantially all company assets and includes a $15.0 million letter-of-credit subfacility and financial covenants.
- The May 2012 IPO generated approximately $107 million of net proceeds for Tilly’s. On May 9, 2012, $84.0 million was used to repay notes issued to former World of Jeans & Tops shareholders for undistributed S-corporation taxable income. Approximately $23 million remained for working capital and other general corporate purposes.
- The S-to-C corporation conversion resulted in a one-time deferred tax benefit of approximately $3.0 million. Reported quarterly taxes were unusually low because the company was an S corporation; management presented pro forma results using a 40% effective tax rate.
- The company recognized $7.6 million of stock-based compensation expense on the IPO date for previously granted awards that became exercisable upon the IPO. Future expense will also result from $5.2 million of employee option grants and $0.3 million of restricted stock grants made in May 2012.
- Risks include fashion and consumer-preference changes, difficulty securing attractive store locations, execution of rapid growth, economic weakness, reduced consumer spending, inflation and commodity costs, promotional pressure, inventory and margin risks, and public-company compliance costs.
- A putative California class action alleges issues with gift-card redemption policies. Management believes pending litigation is unlikely to have a material effect but cannot predict the outcome or potential loss.
- The company has related-party leases for its headquarters, distribution and other facilities. The filing states that lease terms were supported by independent market analyses.
Facts Investors Should Verify
- Reconcile the pre-IPO World of Jeans & Tops financial statements with the post-reorganization consolidated reporting structure of Tilly’s, Inc.
- Adjust historical earnings for the transition to C-corporation taxation; reported net income and EPS are not directly comparable to pro forma after-tax results.
- Assess whether planned store expansion can be funded without materially increasing debt or pressuring operating cash flow.
- Monitor inventory growth, occupancy costs, comparable-store sales and gross margin as new stores mature.
- Quantify the recurring impact of IPO-related stock compensation and incremental public-company compliance costs.
- Review the $25 million secured credit facility, its covenants and the company’s liquidity after the $84 million shareholder-note repayment.
- Follow the California gift-card litigation and any related legal or regulatory developments.