Tilly’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the thirteen and thirty-nine weeks ended November 2, 2013, compared with October 27, 2012. Although the request metadata identifies “2012 Q3,” the filing itself reports fiscal 2013 third-quarter results. Tilly’s operated 189 specialty retail stores in 32 states and an e-commerce business as of November 2, 2013.
Key Financial Metrics
| Metric | 13 Weeks Ended Nov. 2, 2013 | 13 Weeks Ended Oct. 27, 2012 | 39 Weeks Ended Nov. 2, 2013 | 39 Weeks Ended Oct. 27, 2012 |
|---|---|---|---|---|
| Net sales | $123.8 million | $124.9 million | $355.9 million | $326.5 million |
| Gross profit | $38.2 million | $41.8 million | $108.5 million | $103.4 million |
| Gross margin | 30.9% | 33.5% | 30.5% | 31.7% |
| Operating income | $10.2 million | $13.9 million | $21.3 million | $16.6 million |
| Operating margin | 8.2% | 11.1% | 6.0% | 5.1% |
| Net income | $6.1 million | $9.3 million | $12.7 million | $14.1 million |
| Diluted EPS | $0.22 | $0.33 | $0.45 | $0.55 |
- Comparable-store sales declined 2.4% in the quarter and 0.7% year to date.
- E-commerce revenue, including shipping fees, increased 3% to $13.3 million in the quarter and 15% to $38.7 million year to date.
- Net cash provided by operating activities was $27.3 million year to date, versus $26.6 million in the prior comparable period.
- Capital expenditures were $36.0 million year to date, including $20.3 million for new stores, remodels and other store improvements.
- Cash and cash equivalents were $20.7 million and marketable securities were $29.9 million at November 2, 2013.
- Total assets were $232.1 million; total liabilities were $97.3 million; and stockholders’ equity was $134.8 million.
- The company had no borrowings under its $25.0 million revolving credit facility and was in compliance with all covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 0.9%, primarily because comparable-store sales fell and store traffic weakened. Management also noted that a typically strong back-to-school selling week shifted from the third quarter into the second quarter.
- Year-to-date sales increased 9%, principally from the addition of stores, despite negative comparable-store sales.
- Quarterly gross margin fell 260 basis points to 30.9%, primarily because occupancy costs increased as a percentage of sales following store expansion.
- Year-to-date gross margin declined 120 basis points to 30.5% for the same general reason, partially offset by improved product margins and lower markdown rates.
- Quarterly operating income fell 27%, while year-to-date operating income increased 28%. The year-to-date comparison benefited from a $7.6 million one-time stock-based compensation charge recorded in the prior-year period in connection with the IPO.
- Year-to-date net income declined 9%, and diluted EPS declined to $0.45 from $0.55. The comparison was affected by the prior-year company tax-status transition and an unusually low prior-year effective tax rate.
- Year-to-date inventory increased to $56.4 million from $46.6 million at fiscal year-end, reflecting holiday-season purchases and new-store growth.
Liquidity, Outlook, Risks and Unusual Items
- Management expects cash on hand, marketable securities, operating cash flow and, if needed, the revolving credit facility to fund working capital and anticipated capital expenditures for at least the next 12 months.
- The company added 21 net stores during fiscal 2013 through the reporting date and planned six additional net stores by year-end. Management targeted approximately 15% annual net store growth thereafter, funded primarily through cash on hand and operating cash flow.
- Key operating risks include changing fashion trends, consumer preferences, promotional pressure, declining consumer spending, product-cost inflation, difficulty securing attractive store locations and challenges managing rapid growth.
- The company’s business is seasonal, with the third and fourth quarters historically producing stronger sales and operating results.
- The $25.0 million credit facility matures May 3, 2014, is secured by substantially all company assets and includes financial and nonfinancial covenants. No borrowings or letters of credit were outstanding at November 2, 2013.
- Pending legal matters included putative class actions concerning credit-card customer information and California wage-and-hour practices. The company stated that outcomes could not be predicted and that claimed damages were unspecified in the wage-and-hour matter.
- A separate gift-card litigation matter was settled in October 2013 for a payment to the plaintiff; the filing does not provide the settlement amount.
- Related-party leases with entities owned by company founders remained in place. The company stated that independent market analyses supported the reasonableness of lease terms.
- Management evaluated disclosure controls as effective at the reasonable assurance level and reported no material change in internal control over financial reporting.
Investor Verification Items
- Verify the correct reporting period: the filing is for the quarter ended November 2, 2013, not 2012 Q3.
- Assess whether continued store expansion can offset negative comparable-store sales and rising occupancy costs.
- Review inventory levels, holiday-season sell-through and markdown activity, given the year-to-date inventory increase.
- Separate recurring operating performance from prior-year one-time IPO-related stock compensation and tax effects.
- Confirm the status, renewal or refinancing of the $25.0 million revolving credit facility before its May 2014 maturity.
- Monitor the unresolved class-action proceedings and the financial impact, if any, of the gift-card settlement.
- Evaluate liquidity after planned capital expenditures and additional store openings.