Tilly’s, Inc. Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended July 29, 2023, compared with July 30, 2022. The provided metadata identifies “2022 Q2,” but the filing is for the second quarter of fiscal 2023.
Business Context
Tilly’s is a specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, women, boys and girls. As of July 29, 2023, it operated 246 stores in 33 states, versus 242 stores a year earlier, and sold merchandise through its e-commerce platform.
Financial Performance and Position
| Metric | Q2 FY2023 | Q2 FY2022 | First Half FY2023 | First Half FY2022 |
|---|---|---|---|---|
| Net sales | $160.0 million | $168.3 million | $283.6 million | $314.1 million |
| Gross profit | $44.3 million | $52.0 million | $70.3 million | $95.8 million |
| Gross margin | 27.7% | 30.9% | 24.8% | 30.5% |
| Operating income (loss) | $(2.7) million | $5.2 million | $(19.9) million | $6.3 million |
| Net income (loss) | $(1.1) million | $3.8 million | $(13.1) million | $4.6 million |
| Diluted EPS | $(0.04) | $0.13 | $(0.44) | $0.15 |
- Sales channels: Q2 physical-store sales declined 5.3% to $129.8 million; e-commerce sales declined 3.4% to $30.2 million. E-commerce represented 18.9% of Q2 sales and 19.7% of first-half sales.
- Comparable sales: Total comparable net sales declined 8.5% in Q2 and 12.7% in the first half. In Q2, comparable-store traffic declined 9% and transaction volume declined 11%, partly offset by a 2% increase in average transaction value.
- Margins: Q2 gross margin decreased 320 basis points, while first-half gross margin decreased 570 basis points. Product margins were pressured by increased markdowns and inventory valuation reserves; occupancy and other buying, distribution and occupancy costs also deleveraged.
- Operating expenses: Q2 SG&A increased to $47.0 million, or 29.4% of sales, from $46.8 million, or 27.8%. First-half SG&A increased to $90.2 million, or 31.8% of sales.
- Cash flow: First-half operating cash flow was negative $3.9 million, compared with negative $7.1 million in the prior-year period. Capital expenditures were $6.3 million.
- Cash and investments: At July 29, 2023, cash and cash equivalents were $54.6 million and marketable securities were $49.7 million, for total cash and marketable securities of $104.3 million.
- Working capital: Working capital was $74.9 million, down from $94.1 million at January 28, 2023. Merchandise inventories were $91.3 million, compared with $62.1 million at fiscal year-end.
- Debt and liquidity: The company had no outstanding borrowings under its new asset-backed revolving facility and was eligible to borrow up to $63.0 million. A $2.025 million standby letter of credit was outstanding. Total operating lease liabilities were approximately $251.4 million, including related-party lease liabilities.
Material Changes Versus the Prior Comparable Period
- Sales declined 5.0% in Q2 and 9.7% in the first half, reflecting weaker consumer spending that management attributed primarily to persistent inflation and reduced consumer confidence.
- The company shifted from operating income to an operating loss in both periods, driven by lower sales, lower product margins, additional occupancy costs from four net new stores and higher impairment charges.
- Q2 included approximately $0.8 million of higher non-cash store impairment charges and $0.4 million of higher corporate payroll costs, partly offset by $1.0 million of savings in other SG&A.
- First-half store impairment charges were $1.0 million, compared with less than $0.1 million in the prior-year period. Eleven stores were impaired out of 28 tested.
- Other income increased to $1.2 million in Q2 and $2.3 million in the first half, primarily because of higher returns on marketable securities.
- The company entered into a new $65.0 million secured asset-backed revolving facility on April 27, 2023, replacing its prior credit agreement. The facility matures April 27, 2026 and includes a potential $12.5 million accordion increase.
- No share repurchases occurred in the first half of fiscal 2023. The prior repurchase authorization expired March 14, 2023, and the new credit agreement restricts repurchases and cash dividends before April 27, 2024.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open seven new stores during fiscal 2023 and forecast total capital expenditures of approximately $15 million to $17 million, including store openings and distribution and information-technology upgrades.
- Management stated that cash on hand, marketable securities, operating cash flow and credit-facility availability are expected to fund operations, store growth and planned capital expenditures for the next 12 months.
- Management highlighted continued risks from inflation, weaker consumer confidence, declining traffic, labor and minimum-wage increases, product and transportation costs, markdowns, inventory levels, competition, supply-chain disruption, seasonality, weather and lease obligations.
- Minimum-wage increases were estimated to cost approximately $3 million more in fiscal 2023 than in fiscal 2022. Average store hourly pay in the first half was 7% higher than the prior year and 26% higher than the comparable pre-pandemic period.
- The company recorded non-cash impairment charges based on projected store cash flows and estimated fair values. The filing states that no pending legal proceedings were expected to have a material adverse effect individually or in the aggregate.
- Disclosure controls and procedures were assessed as effective at the reasonable assurance level, with no material changes to internal control over financial reporting during the first half.
Important Facts for Investors to Verify
- Confirm that the intended period is Q2 fiscal 2023, not Q2 fiscal 2022, because the filing covers the thirteen weeks ended July 29, 2023.
- Monitor whether comparable-sales declines, lower traffic and transaction volume persist into the back-to-school and holiday periods.
- Evaluate inventory growth, markdown levels and reserves, which were significant contributors to the gross-margin decline.
- Assess store productivity and the performance of newly opened stores relative to their occupancy and labor costs.
- Review liquidity after planned capital expenditures and lease payments, including compliance with the secured credit facility’s availability covenant.
- Consider the effect of the credit agreement’s restrictions on future share repurchases and dividends.
- Review the company’s assumptions supporting store impairment testing and the potential for additional non-cash impairment charges.