Tilly’s, Inc. (TLYS) Q2 2024 Earnings Call Transcript

Tilly’s, Inc. (NYSE:TLYS) Q2 2024 Earnings Conference Call September 5, 2024 4:30 PM ET

Company Participants

Gar Jackson – Investor Relations
Michael Henry – Executive Vice President and Chief Financial Officer
Hezy Shaked – Executive Chairman and Interim President and Chief Executive Officer

Conference Call Participants

Bruce Geller – Geller Ventures

Operator

Good day, and welcome to the Tilly’s, Inc. Second Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.

Gar Jackson

Good afternoon, and welcome to the Tilly’s fiscal 2024 second quarter earnings call. Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company’s business and operating results. Then he and Hezy Shaked, Executive Chairman and Interim President and Chief Executive Officer, will host a Q&A session with analysts. For a copy of Tilly’s earnings press release, please visit the Investor Relations section of the company’s website at tillys.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days.

Certain forward-looking statements will be made during this call that reflect Tilly’s judgment and analysis only as of today, September 5, 2024, and actual results may differ materially from current expectations based on various factors affecting Tilly’s business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2024 second quarter earnings release, which is furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer. Today’s call will be limited to one hour and will include a Q&A Session after our prepared remarks.

I now turn the call over to Mike.

Michael Henry

Thanks, Gar. Good afternoon, and thanks to all for joining us today.

Our second quarter net sales were in the middle of our outlook range provided during our first quarter earnings call in early June, and our breakeven earnings per share beat our outlook range. Although our comparable net sales remained negative, this was our best quarterly comp sales result since the end of fiscal 2021.

While the macroeconomic environment remains challenging for our core customer demographic of teens, young adults and young families, we also believe certain merchandising decisions on our part limited us from performing better in the second quarter. We have been working to correct those issues going forward.

While sales growth has been elusive for us, we are encouraged by our ability to have produced improved product margins for each of the first two quarters of fiscal 2024 relative to last year’s results, which we believe suggests that our revised pricing strategies and assortment adjustments are beginning to gain traction.

As we continue to challenge ourselves to find ways to drive better sales results, we have refocused our marketing efforts with the primary goal of giving consumers a reason to care about and choose Tilly’s. We have established a new brand marketing strategy to redefine our purpose to our target customer. Our team has implemented this strategy across our social media content, curating a roster of micro influencers to help grow our following, and expanding our brand reach into new online media platforms.

Additionally, in late July, we launched our first-ever brand campaign with the tagline of Discover Your Style. Through this campaign, we are emphasizing the importance of personal style as a driving force towards confidence and mental wellness. In Tilly’s 42 years of existence, we have always cared deeply about the communities we serve. We have continuously supported the Tilly’s Life Center Foundation, whose focus is teen mental health and well-being, since its inception 12 years ago.

We are now acting on an opportunity to begin a direct conversation with our customers to express who we are and what we are about, which is something we’ve never really done in the past. Our campaign is rooted in the core values of confidence, self-expression, California Shine and positivity, which we believe can help us build connection and trust with our consumer community in new and different ways than solely providing products that we think they want.

We are proud of what this campaign says about us and our demonstrated commitment to our customers’ well-being. The full impact of this campaign won’t be known for some time, and it will continue to evolve, but we’ve been excited to see the positive response to the campaign across all of our digital platforms since launch. We are hopeful that this campaign can be the beginning of creating stronger consumer affinity and following for Tilly’s, and together with our other initiatives, lead to better results over time.

Turning to our operating results for the second quarter of fiscal 2024 compared to last year’s second quarter. Net sales were $162.9 million, an increase of 1.8%, primarily due to the impact of the 53rd week in last year’s retail calendar, which resulted in a timing shift of back to school sales volume, pulling a large sales week into the end of the second quarter this year from what was in the start of the third quarter last year.

Net sales from physical stores increased by 2% and represented 81.3% of total net sales compared to 81.1% last year. E-com net sales increased by 1.3% and represented 18.7% of total net sales compared to 18.9% last year. Comparable net sales for the 13-week period ended August 3, 2024, including both physical stores and e-com, compared to the 13-week period ended August 5, 2023, last year, decreased by 7.8%. We ended the second quarter with 247 total stores compared to 246 total stores at the end of the second quarter last year.

Gross margin, including buying, distribution and occupancy expenses, improved by 300 basis points to 30.7% of net sales from 27.7% of net sales last year. Product margins improved by 270 basis points due to a combination of improved initial markups and lower total markdowns. Buying, distribution and occupancy costs improved by 30 basis points, primarily due to carrying these costs against a higher level of net sales this year.

Total SG&A expenses were $50.8 million or 31.2% of net sales, compared to $47 million or 29.4% of net sales last year. Primary SG&A increases were from store payroll and related benefits of $1.5 million, digital marketing expenses of $0.7 million, Software as a Service expense of $0.6 million, and corporate payroll and related benefits of $0.5 million.

Pre-tax loss was $73,000 or breakeven as a percentage of net sales compared to last year’s pre-tax loss of $1.5 million or 0.9% of net sales. Income tax benefit was $4,000 or 6.2% of pre-tax loss, compared to a benefit of $0.3 million or 23.2% of pre-tax loss last year.

The lower income tax rate this year was attributable to immaterial state tax benefits arising in the quarter with near breakeven pre-tax results. Net loss was $69,000 or breakeven on a per share basis compared to last year’s net loss of $1.1 million or $0.04 per share.

Turning to our balance sheet. We ended the second quarter with total cash and marketable securities of approximately $77 million and no borrowings under our asset-backed credit facility. We ended the second quarter with net inventories up 4.1%, amid the peak in the back-to-school season. Total capital expenditures for the first half were $4.6 million.

Turning to the third quarter of fiscal 2024. Comparable net sales for fiscal August increased by 1%, which was our first positive monthly comp since February 2022. While that result is encouraging, it should be noted that for each of the past three fiscal years, fiscal August has produced our best comp sales performance in the third quarter followed by a significant slowing in our business relative to August during each of September and October. We expect a similar trend pattern this year.

Now as we have discussed during each of our past two earnings calls, the impact of the 53rd week in last year’s retail calendar created a timing shift of back-to-school sales volume into the end of the second quarter this year from what was at the start of the third quarter last year. As a result of this timing shift, total net sales for the comparable third quarter this year start with an $18.4 million deficit versus last year before considering comparable net sales changes.

Based on these factors and other current and historical trends, we currently expect the following for our fiscal 2024 third quarter operating results. Total net sales to be in the range of approximately $140 million to $146 million, translating to a comparable net sales decline in the range of 6% to 2%, respectively. SG&A to be approximately $49 million before factoring in any potential non-cash store asset impairment charges which may arise. Pretax loss and net loss to be in the range of approximately $11.6 million to $8.7 million, respectively, with a near zero effective income tax rate due to the continuing impact of a full non-cash valuation allowance on our deferred tax assets. Loss per share to be in the range of $0.39 to $0.29, respectively, based on estimated weighted average shares of approximately 30 million.

We expect to have 246 total stores open at the end of the third quarter, a net decrease of three from the end of last year’s third quarter. During the fourth quarter, we currently expect to open two new stores and close five unprofitable stores. The number of store closures may likely grow in connection with some natural lease expirations occurring at the end of the fiscal year and depending on the outcome of pending lease rooted in maximizing profitability going forward.

In closing, as we said before, we continue to believe it will be challenging for us to improve our sales results in the current consumer environment, but we will continue to challenge ourselves to adapt and improve. We are bringing in new product collaborations, such as our recently launched partnership with NASCAR, as an example. We are introducing several new brands over the back half of the fiscal year, aiming to create new customer interest and sales opportunities.

We’ll continue to work at connecting more deeply with our customers in authentic ways and invest in the opportunities that we see to improve our business. Our goal remains to return to generating net sales growth, profitability and shareholder value, which will take time with the headwinds we are currently facing, but we are making every effort to get there as soon as we reasonably can.

Operator, we’ll now go to our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Bruce Geller with Geller Ventures. Please go ahead.

Bruce Geller

Hey, good afternoon. Looking back at this company pre-COVID, it was a very consistent company, fairly profitable, strong cash flow generation. And there were times where you went through a rough patch like the one you have recently, but you always came out of it strong and got back to normalized levels. That doesn’t seem to have happened this time around. So can you please describe what has changed structurally in the business that is preventing this from happening?

Hezy Shaked

I’ll take this call. This is Hezy. Several things. Number one, if you look at the record of the last three years or so, it was declining sales year after year, besides 2021, which was a weird year for everybody. A lot of it – and we are based in Orange County, California. A lot of it had to do with the pandemic and the changes in behavior of employees, et cetera. We addressed all that stuff since I came in, but there’s a lot of work to do in order to get it back on track to where we were.

Bruce Geller

But it seems like something more structural has changed, because you guys don’t seem to be able to break out of the funk that you’ve been able to do so historically. And you’re also talking about a very difficult consumer environment, which it is. However, there are plenty of comparable consumer apparel retailers that are doing just fine right now. So it seems like, again, there’s something more structural, which is what I’m really trying to gain a grasp of.

Hezy Shaked

Yes. I can say that it’s something specific I can tell you. I can tell you that many decisions we’ve made in the past didn’t work out. Now we have to change them. It’s including systems, et cetera. But it’s not one thing that is broken. There was a lot of things that we had to address, and we are. And like any situation that happened before, it takes time to turn it around.

Michael Henry

Yes, the two things I’ll add for you. Pardon me, [indiscernible] coming on to. Pardon my voice. Obviously, our sales per square foot in store have dropped quite significantly since 2019, so that’s the first structural issue, which Hezy has been addressing. And other primary thing is really the cost of labor. So when you compare back to 2019, before the pandemic, our average hourly rate for store payroll is 32% higher than it was in 2019, strictly because of all the minimum wage increases that have taken place all over the country, but predominantly in California, where for several years in a row, it went up $1 per hour per year. This most recent year was $0.50, and almost half of our stores are in the state of California, so a really big hit there when you think about a 32% higher average rate for store payroll with sales that are not higher than they were in 2019. That’s a big disconnect. And we manage store payroll extremely tightly every single week, but those are the facts. The minimum wage impact is tremendous.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Henry for any closing remarks.

Michael Henry

Well, thank you all for joining us. Have a good evening. We look forward to sharing our third quarter results with you in early December. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.