Tilly’s, Inc. Announces Revised Fiscal 2018 Third Quarter Results

Tillys, Inc. (NYSE: TLYS) today announced revised financial results for the fiscal 2018 third quarter and year-to-date period ended November 3, 2018 in order to correct certain accounting entries relating to inventory under the retail method, which had accumulated over several fiscal periods, including the third quarter of fiscal 2018. This correction resulted in a $2.1 million charge to cost of goods sold, partially offset by a corresponding $0.6 million reduction in previously recorded corporate bonus accruals within selling, general and administrative expenses, resulting in a net charge of $1.5 million to operating income, and a $1.1 million reduction in net income, or $0.03 per diluted share, for the quarter and year-to-date period ended November 3, 2018.

Third Quarter Results Overview

The following comparisons refer to operating results for the third quarter of fiscal 2018 versus the third quarter of fiscal 2017 ended October 28, 2017:

  • Comparable store net sales, including e-commerce, increased 4.3%. Comparable store net sales in physical stores increased 1.3% and represented approximately 86% of total net sales. E-commerce net sales increased 26.7% and represented approximately 14% of total net sales. Comparable store net sales, including e-commerce, increased 1.5% in the third quarter last year.
  • Total net sales of $146.8 million decreased by $6.0 million, or 3.9%, from $152.8 million last year, due to the calendar shift impact of last year’s 53rd week in the retail calendar. This retail calendar shift caused a portion of the back-to-school season to shift into the second quarter this year from the third quarter last year, reducing last year’s comparable net sales base for the third quarter by approximately $14 million. This retail calendar shift impact was partially offset by an aggregate increase of approximately $8 million in comparable store net sales and net sales from seven net new stores.
  • Gross profit of $43.7 million decreased by $6.4 million, or 12.9%, from $50.1 million last year, primarily due to the calendar shift impact on net sales and the impact of the correction described above. Gross margin, or gross profit as a percentage of net sales, decreased to 29.7% from 32.8% last year. As expected, buying, distribution and occupancy costs deleveraged 190 basis points against lower total net sales primarily as a result of the retail calendar shift noted previously. Product margins declined 120 basis points primarily as a result of the correction described above.
  • Selling, general and administrative expenses (“SG&A”) were $36.9 million, or 25.1% of net sales, compared to $36.0 million, or 23.5% of net sales, last year. As expected, SG&A deleveraged 160 basis points compared to last year primarily due to the calendar shift impact on net sales described above. The $0.9 million increase in SG&A was primarily attributable to an increase in store payroll of $0.9 million due in part to minimum wage increases, expenses of $0.7 million associated with our secondary offering completed in early September 2018, and increased online marketing costs of $0.6 million associated with e-commerce net sales growth. These increases were partially offset by a legal matter accrual of $0.7 million in the prior year, and a net year-over-year reduction in corporate bonus accruals of approximately $0.4 million as a result of the correction described above.
  • Operating income was $6.7 million, or 4.6% of net sales, compared to $14.1 million, or 9.2% of net sales, last year. The $7.4 million reduction in operating income was primarily attributable to the retail calendar shift impact on net sales, in addition to the net correction described above.
  • Income tax expense was $2.0 million, or 26.9% of pre-tax income, compared to $5.7 million, or 39.6% of pre-tax income last year. The reduction in this year’s income tax rate was attributable to the change in corporate tax rates signed into law late last year.
  • Net income was $5.4 million, or $0.18 per diluted share, compared to $8.8 million, or $0.30 per diluted share, last year. The $0.12 decrease in earnings per share was attributable to the combination of the retail calendar shift impact on net sales of approximately $0.11 per diluted share, the impact of the correction described above of approximately $0.03 per diluted share, and costs associated with the secondary offering completed in early September 2018 of approximately $0.02 per diluted share. The remaining positive variance was primarily due to improved operating results driven by increased comparable store net sales. On a non-GAAP basis, excluding the impact of the secondary offering costs this year and the impact of the legal matter accrual last year, net income was $6.0 million, or $0.20 per diluted share, this year, which was at the low end of our original earnings per share outlook range of $0.20 to $0.24 per diluted share for the third quarter, compared to $9.2 million, or $0.31 per diluted share, last year.

Year-to-Date Results Overview

The following comparisons refer to operating results for the first three quarters of fiscal 2018 versus the first three quarters of fiscal 2017 ended October 28, 2017:

WANT TO BUILD A FINANCIAL EMPIRE?

Subscribe to the Global Banking & Finance Review Newsletter for FREE
Get Access to Exclusive Reports to Save Time & Money

By using this form you agree with the storage and handling of your data by this website. We Will Not Spam, Rent, or Sell Your Information.
All emails include an unsubscribe link. You may opt-out at any time. See our privacy policy.

  • Comparable store net sales, including e-commerce, increased 3.1%. Comparable store net sales in physical stores increased 2.2% and represented approximately 87% of total net sales. E-commerce net sales increased 9.2% and represented approximately 13% of total net sales. Comparable store net sales, including e-commerce, increased 1.5% in the first three quarters last year.
  • Total net sales of $427.9 million increased by $15.3 million, or 3.7%, from $412.6 million last year, primarily due to increased comparable store net sales and net sales from seven net new stores.
  • Gross profit of $128.7 million increased by $4.8 million, or 3.9%, from $123.9 million last year. Gross margin was 30.1% compared to 30.0% last year, primarily due to leveraging lower total occupancy costs on higher total net sales, offset by lower product margins primarily as a result of lower initial markups associated with increased sales penetration of third-party branded products, and the impact of the correction described above.
  • SG&A was $108.2 million, or 25.3% of net sales, compared to $111.4 million, or 27.0% of net sales, last year. Last year’s SG&A included an estimated $6.8 million in provisions related to legal matters. This year’s SG&A includes a $1.5 million reduction to such provisions as a result of the final settlement of the related legal matter in early August 2018, and $0.7 million in expenses associated with our secondary offering completed in early September 2018. The net year-over-year impact of these legal matter provisions, partially offset by our secondary offering expenses, accounted for the improvement in SG&A as a percentage of net sales. After consideration of the legal matter impacts and secondary offering costs, primary dollar increases in SG&A were attributable to an increase in store payroll of $2.1 million primarily due to minimum wage increases and higher comparable store net sales, increased online marketing costs of $1.1 million associated with e-commerce net sales growth, and increased corporate bonus provisions of $0.6 million due to improved operating results. On a non-GAAP basis, excluding the impact of legal provisions from both years and the secondary offering costs from this year, SG&A was $108.9 million, or 25.5% of net sales, compared to $104.6 million, or 25.3% of net sales, last year.
  • Operating income of $20.5 million, or 4.8% of net sales, increased by $8.0 million compared to $12.5 million, or 3.0% of net sales, last year. Of this $8.0 million improvement in year-over-year operating income, approximately $7.6 million was attributable to the net aggregate year-over-year impact of the legal matters and secondary offering expenses noted above, and approximately $0.4 million was attributable to increased comparable store net sales results and occupancy reductions. On a non-GAAP basis, excluding the impact of legal provisions from both years and the secondary offering costs from this year, operating income was $19.8 million, or 4.6% of net sales, compared to $19.4 million, or 4.7% of net sales, last year.
  • Income tax expense was $5.7 million, or 26.1% of pre-tax income, compared to $5.4 million, or 40.1% of pre-tax income, last year. The reduction in this year’s income tax rate was primarily attributable to the change in corporate tax rates signed into law late last year. On a non-GAAP basis, excluding the impact of legal provisions from both years and the secondary offering costs from this year, income tax expense was $5.4 million compared to $8.0 million last year.
  • Net income was $16.3 million, or $0.55 per diluted share, compared to $8.0 million, or $0.28 per diluted share, last year. Of the $0.27 improvement in year-over-year earnings per share, approximately $0.15 per diluted share was attributable to the aggregate legal matter and secondary offering expenses noted above, and approximately $0.12 per diluted share was due to improved operating results driven primarily by increased comparable store net sales and occupancy reductions, partially offset by the impact of the correction described above. On a non-GAAP basis, excluding the impact of the legal provisions from both years and the secondary offering costs from this year, net income was $15.9 million, or $0.53 per diluted share, compared to $12.1 million, or $0.42 per diluted share, last year.

Balance Sheet and Liquidity

As of November 3, 2018, the Company had $120.5 million of cash and marketable securities and no debt outstanding. This compares to $121.9 million of cash and marketable securities and no debt outstanding as of October 28, 2017. The Company paid special cash dividends to its stockholders of approximately $29.1 million and $20.1 million in the aggregate during February of 2018 and 2017, respectively.

Fiscal 2018 Fourth Quarter Outlook

The Company expects its fourth quarter total net sales to range from approximately $163 million to $168 million based on an assumed 2% to 5% increase in comparable store net sales. Last year’s fourth quarter included an extra week as a result of the 53rd week in last year’s retail calendar, which accounted for approximately $7.1 million in added sales for such quarter versus the comparable 13-week period this year. The Company expects fourth quarter operating income to range from approximately $8.5 million to $10.0 million, and earnings per diluted share to range from $0.22 to $0.26. This outlook assumes an anticipated effective tax rate of approximately 26% and weighted average shares of approximately 30.1 million.

Pursuant to the settlement terms of the previously noted legal matter, the Company issued non-transferable discount coupons to approximately 612,000 existing Tillys customers in early September 2018 which allows for a one-time 50% discount on a single, future purchase transaction of up to $1,000. Any unused coupons will expire on September 4, 2019. To date, less than 1% of these coupons have been redeemed, resulting in no material impact to the Company’s comparable store net sales or operating results as a whole. Although redemptions have been very low in number thus far, there can be no assurance that the impact of any future coupon redemptions during the 2018 holiday season, or during fiscal 2019, will remain immaterial. Our fourth quarter outlook does not contemplate any specific impacts from future usage of these coupons.

Preliminary Fiscal 2019 New Store, Capital Expenditure and Expense Expectations

The Company expects to open up to 15 to 20 new, full-size stores and an as-yet undetermined number of RSQ-branded pop-up shops during fiscal 2019, in each case assuming appropriate lease economics are obtained. The specific timing of any new store openings is not yet known. The Company expects total capital expenditures for fiscal 2019 not to exceed $25 million, comprised primarily of new store costs supplemented by continuing technology investments. Finally, the Company expects the impact of legislated minimum wage increases, merit increases, new systems costs, and the new lease accounting standard to result in an aggregate increase of approximately $6 million in its annualized operating costs before consideration of any comparable store net sales assumption. The Company estimates that its fiscal 2019 comparable store net sales would need to increase by approximately 3% in order to absorb these anticipated cost increases without creating any deleverage of expenses as a percentage of net sales.

Non-GAAP Financial Measures

In addition to reporting financial measures in accordance with GAAP, the Company is providing certain non-GAAP financial measures including “non-GAAP SG&A,” “non-GAAP operating income,” “non-GAAP income tax expense,” “non-GAAP net income,” and “non-GAAP income per diluted share.” These amounts are not in accordance with, or an alternative to, GAAP. The Companys management believes that these measures help provide investors with insight into the underlying comparable financial results, excluding items that may not be indicative of, or are unrelated to, the Companys core day-to-day operating results.

For a description of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see the accompanying table titled Supplemental Financial Information; Reconciliation of Select GAAP Financial Measures to Non-GAAP Financial Measures contained in this press release.

About Tillys

Tillys is a leading specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive assortment of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and currently operates 229 total stores, including four RSQ pop-up stores, across 33 states and its website, www.tillys.com.

Forward-Looking Statements

Certain statements in this press release and oral statements made from time to time by our representatives are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding our future financial and operating results, including but not limited to future comparable store net sales, future operating income, future net income, future earnings per share, future gross, operating or product margins, anticipated tax rate, future impacts of legal settlements, future inventory levels, future capital expenditures, and market share and our business and strategy, including but not limited to expected store openings and closings, expansion of brands and exclusive relationships, development and growth of our e-commerce platform and business, promotional strategy, and any other statements about our future expectations, plans, intentions, beliefs or prospects expressed by management are forward-looking statements. These forward-looking statements are based on managements current expectations and beliefs, but they involve a number of risks and uncertainties that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including, but not limited to, our ability to respond to changing customer preferences and trends, attract customer traffic at our stores and online, execute our growth and long-term strategies, expand into new markets, grow our e-commerce business, effectively manage our inventory and costs, effectively compete with other retailers, enhance awareness of our brand and brand image, general consumer spending patterns and levels, the effect of weather, and other factors that are detailed in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), including those detailed in the section titled Risk Factors and in our other filings with the SEC, which are available from the SECs website at www.sec.gov and from our website at www.tillys.com under the heading Investor Relations. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. This release should be read in conjunction with our financial statements and notes thereto contained in our Form 10-K.

Tillys, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(unaudited)

November 3, 2018February 3, 2018October 28, 2017
ASSETS
Current assets:
Cash and cash equivalents$24,751$53,202$38,912
Marketable securities95,76682,75082,961
Receivables7,6334,3523,647
Merchandise inventories71,48853,21662,242
Prepaid expenses and other current assets10,7079,5349,759
Total current assets210,345203,054197,521
Property and equipment, net78,67983,32187,576
Other assets3,6673,7367,805
Total assets$292,691$290,111$292,902
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$34,352$21,615$27,329
Accrued expenses19,89522,73131,854
Deferred revenue7,17210,8798,335
Accrued compensation and benefits8,6906,1196,005
Dividends payable29,067
Current portion of deferred rent5,4665,2205,762
Current portion of capital lease obligation155
Total current liabilities75,57595,63179,440
Long-term portion of deferred rent31,62431,34031,377
Other1,9972,7152,955
Total liabilities109,196129,686113,772
Stockholders equity:
Common stock (Class A), $0.001 par value; 100,000 shares authorized; 21,536, 14,927 and 14,357 shares issued and outstanding, respectively211514
Common stock (Class B), $0.001 par value; 35,000 shares authorized; 7,944, 14,188 and 14,488 shares issued and outstanding, respectively81415
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding
Additional paid-in capital149,141143,984140,240
Retained earnings34,11116,39838,765
Accumulated other comprehensive income2141496
Total stockholders equity183,495160,425179,130
Total liabilities and stockholders equity$292,691$290,111$292,902

Tillys, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

Three Months EndedNine Months Ended
November 3, 2018October 28, 2017November 3, 2018October 28, 2017
Net sales$146,826$152,824$427,866$412,581
Cost of goods sold (includes buying, distribution, and occupancy costs)103,170102,730299,127288,653
Gross profit43,65650,094128,739123,928
Selling, general and administrative expenses36,91935,982108,193111,384
Operating income6,73714,11220,54612,544
Other income, net5853751,457810
Income before income taxes7,32214,48722,00313,354
Income tax expense1,9675,7305,7375,354
Net income$5,355$8,757$16,266$8,000
Basic income per share of Class A and Class B common stock$0.18$0.30$0.56$0.28
Diluted income per share of Class A and Class B common stock$0.18$0.30$0.55$0.28
Weighted average basic shares outstanding29,37328,78229,22128,746
Weighted average diluted shares outstanding30,07529,03129,74628,954

Tillys, Inc.

Supplemental Financial Information

Reconciliation of Select GAAP Financial Measures to Non-GAAP Financial Measures

(In thousands, except per share data)

(unaudited)

Third Quarter EndedNine Months Ended
November 3, 2018October 28, 2017November 3, 2018October 28, 2017
Selling, general and administrative, as reported$36,919$35,982$108,193$111,384
Legal settlement(650)1,458(6,816)
Secondary offering costs(714)(714)
Non-GAAP selling, general and administrative$36,205$35,332$108,937$104,568
Operating income, as reported$6,737$14,112$20,546$12,544
Legal settlement650(1,458)6,816
Secondary offering costs714714
Non-GAAP operating income$7,451$14,762$19,802$19,360
Income tax expense, as reported$1,967$5,730$5,737$5,354
Income tax effect of legal settlement (1)255(386)2,679
Income tax effect of secondary offering costs (1)189189
Income tax effect of non-deductibility of a portion of secondary offering costs (1)(165)(165)
Non-GAAP income tax expense$1,991$5,985$5,375$8,033
Net income, as reported$5,355$8,757$16,266$8,000
Legal settlement650(1,458)6,816
Secondary offering costs714714
Less: Income tax effects (1)(24)(255)362(2,679)
Non-GAAP net income$6,045$9,152$15,884$12,137
Diluted income per share, as reported$0.18$0.30$0.55$0.28
Legal settlement, net of taxes (1)0.01(0.04)0.14
Secondary offering costs, net of taxes (1)0.020.02
Non-GAAP diluted income per share$0.20$0.31$0.53$0.42
Weighted average basic shares outstanding29,37328,78229,22128,746
Weighted average diluted shares outstanding30,07529,03129,74628,954

(1) The effective tax rate applied to the $0.7 million of secondary offering costs for the third quarter and nine months ended November 3, 2018 was 26.5%. Additionally, this year’s income tax expense includes approximately $0.2 million due to the non-deductibility of a portion of the secondary offering costs.

The effective tax rate applied for the third quarter and nine months ended October 28, 2017 was 39.3%.

Tillys, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Nine Months Ended
November 3, 2018October 28, 2017
Cash flows from operating activities
Net income$16,266$8,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization16,96617,644
Stock-based compensation expense1,6621,773
Impairment of assets786848
Loss on disposal of assets11170
Gain on marketable securities(983)(510)
Deferred income taxes(419)(1,194)
Changes in operating assets and liabilities:
Receivables(3,281)342
Merchandise inventories(18,462)(14,474)
Prepaid expenses and other assets(1,290)(777)
Accounts payable12,8599,177
Accrued expenses(6,403)4,202
Accrued compensation and benefits2,571(1,254)
Deferred rent530(4,394)
Deferred revenue(1,534)(1,868)
Net cash provided by operating activities19,27917,685
Cash flows from investing activities
Purchase of property and equipment(10,394)(9,716)
Purchases of marketable securities(116,442)(112,612)
Proceeds from marketable securities104,67885,134
Net cash used in investing activities(22,158)(37,194)
Cash flows from financing activities
Dividends paid(29,067)(20,080)
Proceeds from exercise of stock options3,606288
Taxes paid in lieu of shares issued for stock-based compensation(111)(101)
Payment of capital lease obligation(680)
Net cash used in financing activities(25,572)(20,573)
Change in cash and cash equivalents(28,451)(40,082)
Cash and cash equivalents, beginning of period53,20278,994
Cash and cash equivalents, end of period$24,751$38,912

Tilly’s, Inc.

Store Count and Square Footage

Stores

Open at

Beginning of Quarter

Stores

Opened

During Quarter

Stores

Closed

During Quarter

Stores

Open at

End of Quarter

Total Gross

Square Footage

End of Quarter

(in thousands)

2017 Q322112201,681
2017 Q4220232191,668
2018 Q1219412221,675
2018 Q222242261,698
2018 Q3226542271,693

Note: Total stores opened during fiscal 2018 includes four RSQ-branded, pop-up stores.

Investor Relations:
Michael Henry,
Chief Financial Officer
(949) 609-5599, ext. 17000
[email protected]