TILLY’S, INC. Form 10-Q Summary
Reporting period: Thirteen weeks ended May 3, 2014, compared with thirteen weeks ended May 4, 2013. The filing is for fiscal 2014 Q1, not 2013 Q1 as indicated in the request metadata. Financial statements are unaudited.
Business Context
Tilly’s operates specialty retail stores selling casual apparel, footwear and accessories to teens and young adults, with e-commerce sales through Tillys.com. The company operated 198 stores in 32 states at May 3, 2014, up from 175 stores a year earlier and 195 stores at February 1, 2014. Three stores were opened during the quarter.
Financial and Operating Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $111.1 million | $109.1 million | Up 1.8% |
| Gross profit | $31.3 million | $31.8 million | Down 2.0% |
| Gross margin | 28.2% | 29.1% | Down 90 bps |
| SG&A expense | $30.3 million | $27.9 million | Up 8.0% |
| Operating income | $1.1 million | $3.9 million | Down 72% |
| Operating margin | 1.0% | 3.6% | Down 260 bps |
| Net income | $0.6 million | $2.3 million | Down 74% |
| Diluted EPS | $0.02 | $0.08 | Down 75% |
| Comparable store sales | Down 6.8% | Up 1.1% | Declined 7.9 percentage points |
| E-commerce revenue | $12.7 million | $12.6 million | Up 1% |
Cash flow and liquidity: Operating cash flow was $0.1 million, down from $2.9 million. Capital expenditures were $7.9 million, primarily for stores and the e-commerce fulfillment center. Investing activities provided $2.1 million, including $15.0 million of marketable-securities maturities and $5.0 million of purchases. Cash and cash equivalents increased to $27.4 million from $25.4 million at fiscal year-end. Marketable securities were $25.0 million, providing approximately $52.4 million of cash and marketable securities combined.
Debt and credit: The company had no borrowings under its $25.0 million secured revolving credit facility, which matures May 31, 2017. The facility permits up to $15.0 million of standby and commercial letters of credit. Tilly’s was in compliance with all covenants. Capital lease obligations totaled $3.1 million, including current and long-term portions.
Balance sheet: Merchandise inventories increased to $52.9 million from $46.3 million at February 1, 2014. Total assets were $236.3 million and total stockholders’ equity was $142.2 million at May 3, 2014.
Material Changes Versus Prior Comparable Period
- Sales growth was generated by new stores, including $9.6 million of sales from stores not open in the prior-year quarter, while comparable store sales fell 6.8%.
- Gross margin contracted because negative comparable sales reduced occupancy-cost leverage, partly offset by approximately 60 basis points of product-margin improvement.
- SG&A increased $2.4 million, primarily from higher store and regional payroll, personnel costs, marketing, credit-card processing and supplies. Newer stores had immature sales volumes, increasing expense deleverage.
- Operating income and net income declined materially despite modest sales growth.
- Inventory investment increased substantially, contributing to the sharp reduction in operating cash flow.
- The company reclassified $0.4 million of prior-period stock-based compensation from SG&A to cost of goods sold. Management concluded the correction was immaterial and it did not affect prior-period net income or comprehensive income.
Guidance, Outlook, Risks and Unusual Items
- Management planned to add at least 15 stores during fiscal 2014 and expected to fund expansion with cash on hand and operating cash flow. No formal revenue or earnings guidance was provided in the filing.
- Management stated that cash, marketable securities, operating cash flow and available revolver capacity should be sufficient for working capital and anticipated capital expenditures over the next 12 months, while noting that future financing could be required if these sources are insufficient.
- Key risks include fashion and customer-preference changes, competition, promotional pressure, weak consumer spending, inflation or higher product costs, difficulty securing desirable locations, and challenges managing rapid store growth.
- The business is seasonal, with the third and fourth quarters historically producing stronger sales and operating results. First-quarter results are therefore not necessarily indicative of full-year performance.
- Two putative California class actions remained outstanding: one involving customer credit-card identification information and another involving wage-and-hour, meal- and rest-break allegations. Damages were unspecified, and management could not estimate potential losses.
- The company granted options to purchase 812,500 Class A shares at a $12.31 exercise price. Total unrecognized stock-based compensation was $8.8 million at May 3, 2014.
- The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Items
- Verify the filing period and comparable-period dates, because the source filing is for Q1 FY2014 rather than Q1 FY2013.
- Assess whether the 6.8% comparable-store sales decline reflects a temporary issue or continuing weakness, particularly in guys’, footwear and accessories categories.
- Monitor inventory growth, markdown activity, gross-margin recovery and operating cash conversion as new stores mature.
- Evaluate the economics and funding requirements of the planned 15 or more additional stores and the e-commerce fulfillment-center investment.
- Review the revolving-credit covenants, related-party leases with founder-owned entities and the potential exposure from pending litigation.