Tilly’s, Inc. Form 10-K Summary
Reporting period: The filing is for fiscal year 2013, ended February 1, 2014, consisting of 52 weeks. The requested “2012 Q4” does not match the filing period; the filing includes unaudited fourth-quarter fiscal 2013 results and comparative fiscal 2012 information. Tilly’s operates specialty retail stores and an e-commerce business focused on action-sports-inspired apparel, footwear and accessories for teens and young adults.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $495.8 million | $467.3 million | +6% |
| Gross profit | $152.3 million | $150.2 million | +1% |
| Gross margin | 30.7% | 32.1% | Down 1.4 percentage points |
| Operating income | $29.7 million | $31.4 million | Down 5% |
| Operating margin | 6.0% | 6.7% | Down 0.7 percentage points |
| Net income | $18.1 million | $23.9 million | Down 24% |
| Net margin | 3.7% | 5.1% | Down 1.4 percentage points |
| Diluted EPS | $0.65 | $0.92 | Down $0.27 |
| Cash flow from operations | $43.8 million | $41.7 million | +5% |
| Capital expenditures | $42.7 million | $33.3 million | +28% |
- Comparable store sales declined 1.9%, versus a 2.2% increase in fiscal 2012.
- E-commerce revenue, including shipping and handling fees, increased 9% to $57.8 million and represented approximately 12% of net sales.
- Store count increased to 195 from 168 after 28 openings and one closure. The company operated in 32 states.
- Cash, cash equivalents and marketable securities totaled $60.4 million at year-end, including $25.4 million of cash and $34.9 million of marketable securities.
- Working capital was $80.7 million, compared with $73.9 million in the prior year.
- Total long-term debt was $3.3 million, consisting solely of a capital lease obligation. The $25 million revolving credit facility was undrawn at year-end.
- Total assets were $232.4 million and stockholders’ equity was $140.9 million at February 1, 2014.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by the addition of 27 net stores, while comparable store sales declined and reduced sales by approximately $8.6 million.
- Gross margin contracted because occupancy costs increased as a percentage of sales following substantial store expansion. Product margins improved modestly due to higher initial markups.
- SG&A increased 3% to $122.6 million, although SG&A declined to 24.7% of sales from 25.4%. The prior year included a $7.6 million one-time stock-based compensation charge associated with the IPO.
- Fiscal 2013 operating income included a $1.8 million impairment charge related to four stores. No impairment charge was recorded in fiscal 2012.
- Income tax expense increased to $11.6 million from $7.4 million. The company was taxed as a C corporation for the full fiscal 2013 year following its 2012 conversion from S corporation status.
- Net income and EPS declined despite higher sales, reflecting lower comparable sales, lower gross margin, higher operating costs and increased corporate taxation.
- Operating cash flow improved, but capital investment increased substantially to support new stores, information systems and the planned e-commerce fulfillment center.
Cash Flow, Liquidity and Commitments
- Operating activities generated $43.8 million; investing activities used $37.5 million; financing activities provided $1.8 million.
- Fiscal 2013 capital spending included $24.7 million for new stores, remodels and store improvements. Management expected fiscal 2014 capital expenditures of $24 million to $28 million.
- Management expected to fund operations and expansion from cash on hand, marketable securities and operating cash flow, with the revolving facility available if needed.
- The revolving facility was amended on March 17, 2014, after year-end. It remains a $25 million secured facility maturing May 31, 2017, with new leverage and loss-related covenants.
- Contractual obligations totaled $409.8 million, including $311.5 million of operating lease obligations, $94.7 million of purchase obligations and $3.6 million of capital lease payments.
- Fiscal 2013 operating rent expense was $43.4 million, and common area maintenance expense was $17.4 million. Several headquarters and warehouse leases are with entities owned by company co-founders.
Outlook, Commentary, Risks and Unusual Items
- Management planned at least 18 net new stores in fiscal 2014, including approximately 30% in a new outlet format, and continued to target a long-term footprint exceeding 500 stores.
- The company expected its new automated e-commerce fulfillment center to become operational in the second quarter of fiscal 2014. Approximately $13 million had been invested by year-end, with an additional $3 million expected to complete the project.
- Management identified e-commerce growth, store expansion, scale efficiencies and process improvements as key drivers of future sales and margin expansion.
- Major risks include continued comparable-store-sales declines, fashion and inventory misjudgments, markdown pressure, intense competition, consumer spending weakness, store-opening execution, supply-chain disruptions, dependence on foreign manufacturing, labor and transportation cost increases, information-system failures and cybersecurity incidents.
- The company is concentrated geographically, with 82 stores in California, 18 in Arizona, six in Nevada and 19 in Florida, exposing results to regional economic and weather events.
- Reported markdowns increased to $35.7 million, or 7.2% of sales, from $32.2 million, or 6.9%, in fiscal 2012.
- Two putative California class actions were disclosed: one concerning customer credit-card identification information and another concerning wage-and-hour practices. Damages were unspecified, and management stated that it could not predict the outcomes.
- The Shaked and Levine family entities controlled approximately 94% of total voting power through Class B shares, creating significant governance and minority-stockholder risks.
- The company does not expect to pay cash dividends for the foreseeable future.
Most Important Facts for Investors to Verify
- Confirm the intended reporting period, because the filing covers fiscal 2013 ended February 1, 2014 rather than 2012 Q4.
- Assess whether comparable-store-sales trends and gross-margin pressure improved after the filing date.
- Verify execution, cost savings and sales impact from the new e-commerce fulfillment center.
- Review store-level performance and the potential for additional impairment charges.
- Evaluate liquidity after planned capital expenditures, store openings and substantial lease commitments.
- Review the amended revolving-credit covenants and confirm continued compliance.
- Monitor the disclosed class actions, related-party leases and concentrated founder voting control.