Tilly’s, Inc. Form 10-Q Summary
Business context and reporting period
Tilly’s is a specialty retailer of casual apparel, footwear and accessories operating stores and an e-commerce platform. This filing covers the thirteen weeks ended May 2, 2020, compared with the thirteen weeks ended May 4, 2019. Although the request metadata identifies “2019 Q1,” the filing itself is for the first quarter of fiscal 2020. The company operated 239 stores in 33 states; all stores were closed to the public beginning March 18, 2020 because of COVID-19.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $77.3 million | $130.3 million | Down 40.7% |
| Gross profit | $1.6 million | $35.7 million | Down 95.5% |
| Gross margin | 2.1% | 27.4% | Down 25.3 percentage points |
| SG&A expense | $30.0 million | $35.5 million | Down $5.5 million |
| Operating income (loss) | $(28.4) million | $0.1 million | Material deterioration |
| Net income (loss) | $(17.4) million | $0.7 million | Material deterioration |
| Diluted EPS | $(0.59) | $0.02 | Down $0.61 |
| Net cash used in operating activities | $(19.6) million | $(2.3) million | Higher cash use |
Physical-store sales declined 57.5% to $47.0 million, while e-commerce sales increased 54.2% to $30.3 million and represented 39.3% of total sales versus 15.1% in the prior year. Product margins declined primarily because of a $4.7 million inventory valuation reserve and increased markdowns. The company recorded approximately $0.3 million of impairment charges for five stores.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $65.1 million; marketable securities were $46.0 million.
- Total current assets were $194.3 million and working capital was $50.8 million, down from $63.6 million at February 1, 2020.
- The company borrowed $23.7 million under its $25.0 million revolving credit facility, secured by substantially all assets.
- Total operating lease liabilities were approximately $294.7 million, including current and noncurrent portions. Minimum operating lease payments totaled $320.7 million before $36.6 million of interest.
- Cash flow from investing activities was $20.6 million, principally reflecting $30.1 million of marketable-security maturities, partially offset by $6.0 million of purchases and $3.5 million of capital expenditures.
- Financing cash outflow was $6.0 million after $29.7 million of dividends and $23.7 million of revolver borrowings.
Material changes versus the prior comparable period
- COVID-19 store closures caused a $53.0 million decline in quarterly sales and converted a small prior-year profit into a substantial loss.
- All 239 stores remained closed through quarter-end, while the e-commerce channel operated continuously and grew materially.
- The company furloughed approximately 91% of its workforce beginning March 27, 2020, reduced management compensation, and lowered weekly payroll cash requirements to approximately 24% of historical levels.
- Inventory receipts and future commitments were substantially reduced; inventory per square foot was reported as 10.8% higher at quarter-end because of store closures, with management later reporting a 10.5% decline by the end of May.
- The company withheld $13.3 million of contractual store lease payments for April and May while negotiating potential rent concessions. No material rent concession had been recognized as of May 2, 2020.
- The $10.6 million income-tax benefit was aided by anticipated CARES Act net-operating-loss carrybacks; a $7.2 million income-tax receivable was recorded.
Guidance, outlook, risks and unusual items
Management did not provide a conventional full-year sales or earnings forecast. It stated that cash from operations, cash and marketable securities, and available credit were expected to cover working-capital needs and anticipated capital expenditures for the next twelve months, subject to the duration and severity of COVID-19 and related assumptions.
- As of June 14, 2020, 213 stores, or 89% of the store base, had reopened with health protocols and traffic restrictions. Reopened-store comparable sales were up 4.7% cumulatively, while customer traffic was down 26%; management cautioned that these results may not predict future performance.
- Second-quarter comparable sales through June 14, 2020 were $52.0 million, down 17.8%; physical-store comparable sales declined 54.4% and e-commerce sales increased 219.0%.
- Management identified potential fiscal 2020 expense reductions of up to approximately $10 million if fully implemented.
- Planned store expansion was curtailed. Lease negotiations for six unsigned locations ceased, while commitments for nine signed locations were under discussion. Planned fiscal 2020 capital expenditures were approximately $7 million, or approximately $14 million if all nine signed stores were opened.
- The company violated its Fixed Charge Coverage Ratio and Funded Debt to EBITDAR covenants at May 2, 2020, reporting ratios of 0.8 to 1.0 and 4.7, respectively, versus required thresholds of 1.25 to 1.0 and 4.0 to 1.0. The bank provided limited waivers, and the company was negotiating broader covenant relief.
- Key risks include renewed store closures or a second COVID-19 wave, weak traffic and consumer spending, lease and rent obligations, supply-chain disruption, inventory markdowns, liquidity pressure, covenant compliance, and uncertain litigation outcomes.
- Pending matters include California wage-and-hour litigation, including one case with a pending class-certification motion. The filing does not provide a clear estimated loss range.
Most important facts for investors to verify
- Whether store reopenings remain sustainable and whether traffic, comparable sales and margins recover sufficiently to offset fixed occupancy costs.
- Progress on rent concessions, payment of withheld lease obligations, and total future lease-related cash requirements.
- Whether the lender provides permanent covenant amendments or additional waivers, and the company’s ability to refinance or repay the $23.7 million revolver borrowing.
- Actual cash generation, inventory levels, markdown exposure and e-commerce growth as stores reopen.
- The timing and amount of CARES Act tax refunds or other tax benefits beyond the $7.2 million receivable recorded at quarter-end.
- Potential liabilities from the disclosed wage-and-hour proceedings and any future COVID-19-related claims.