Tilly's, Inc. Announces Second Quarter Operating Results

Introduces Fiscal 2022 Third Quarter Outlook

IRVINE, Calif.--(BUSINESS WIRE)--Tilly’s, Inc. (NYSE: TLYS, the "Company") today announced financial results for the second quarter of fiscal 2022 ended July 30, 2022.

"We believe our second quarter operating results were negatively affected by the impact on our customers of the highest inflationary environment in 40 years, which we expect will also adversely impact our third quarter results," commented Ed Thomas, President and Chief Executive Officer. "At its peak, the back-to-school season produced an improved comparative trend in late July and early August. However, this trend has since declined and we believe the remainder of the third quarter will be challenging as we anniversary last year's early holiday shopping patterns, though this may give us an opportunity to have a better performance trend in the fourth quarter if the holiday season follows more traditional patterns."

Operating Results Overview

For greater context relating to the following comparisons, it should be noted that the Company's operating results for the comparative periods last year were fueled by unprecedented pent-up consumer demand and the impact of stimulus payments resulting from the pandemic, producing Company-record results for net sales, gross margin, operating income and earnings per share for the second quarter and first half of fiscal 2021.

Fiscal 2022 Second Quarter Operating Results Overview

The following comparisons refer to the Company's operating results for the second quarter of fiscal 2022 ended July 30, 2022 versus the second quarter of fiscal 2021 ended July 31, 2021.

• Total net sales were $168.3 million, a decrease of $33.6 million or 16.7%, compared to $202.0 million last year. Total comparable net sales, including both physical stores and e-commerce ("e-com"), decreased by 16.4%.
  • Net sales from physical stores were $137.1 million, a decrease of $27.5 million or 16.7%, compared to $164.6 million last year with a comparable store net sales decrease of 16.5%. Net sales from physical stores represented 81.5% of total net sales both this year and last year. The Company ended the second quarter with 242 total stores compared to 244 total stores at the end of the second quarter last year.
  • Net sales from e-com were $31.2 million, a decrease of $6.1 million or 16.4%, compared to $37.3 million last year. E-com net sales represented 18.5% of total net sales both this year and last year.
• Gross profit, including buying, distribution, and occupancy expenses, was $52.0 million, or 30.9% of net sales, compared to $74.7 million, or 37.0% of net sales, last year. Buying, distribution and occupancy costs deleveraged by 330 basis points collectively despite being reduced by $0.9 million due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 280 basis points primarily due to an increased and more normalized markdown rate compared to last year when full price selling was at record levels.
• Selling, general and administrative ("SG&A") expenses were $46.8 million, or 27.8% of net sales, compared to $48.3 million, or 23.9% of net sales, last year. The $1.5 million reduction in SG&A dollars was primarily attributable to the absence of any corporate bonus accrual this year compared to $2.8 million included in last year's SG&A and a $0.7 million reduction in e-com marketing expenses. Partially offsetting these expense reductions were less significant increases in each of store payroll and related benefits, technology services, e-com fulfillment, and insurance expenses. Store payroll hours were managed to a lower average number of hours per store compared to last year, but this was more than offset by wage rate increases.
• Operating income was $5.2 million, or 3.1% of net sales, compared to $26.4 million, or 13.1% of net sales, last year.
• Income tax expense was $1.5 million, or 28.4% of pre-tax income, compared to $5.9 million, or 22.5% of pre-tax income, last year. The increase in the effective income tax rate was primarily due to discrete tax impacts related to stock-based compensation.
• Net income was $3.8 million, or $0.13 per diluted share, compared to $20.4 million, or $0.66 per diluted share, last year. Weighted average diluted shares were 30.2 million this year compared to 31.1 million last year.

Fiscal 2022 First Half Operating Results Overview

The following comparisons refer to the Company's operating results for the first half of fiscal 2022 ended July 30, 2022 versus the first half of fiscal 2021 ended July 31, 2021.

• Total net sales were $314.1 million, a decrease of $51.0 million or 14.0%, compared to $365.1 million last year. Total comparable net sales, including both physical stores and e-com, decreased by 14.9%.
  • Net sales from physical stores were $254.6 million, a decrease of $37.7 million or 12.9%, compared to $292.3 million last year with a comparable store net sales decrease of 14.1%. Net sales from stores represented 81.1% of total net sales compared to 80.1% of total net sales last year.
  • Net sales from e-com were $59.5 million, a decrease of $13.3 million or 18.3%, compared to $72.8 million last year. E-com net sales represented 18.9% of total net sales compared to 19.9% of total net sales last year.
• Gross profit including buying, distribution, and occupancy expenses, was $95.8 million, or 30.5% of net sales, compared to $129.6 million, or 35.5% of net sales, last year. Buying, distribution and occupancy costs deleveraged by 270 basis points collectively despite being reduced by $1.9 million due to carrying these costs against a significantly lower level of net sales this year. Product margins declined by 230 basis points primarily due to an increased and more normalized markdown rate compared to last year when full price selling was at record levels.
• SG&A expenses were $89.5 million, or 28.5% of net sales, compared to $88.3 million, or 24.2% of net sales, last year. Of the $1.3 million increase in SG&A dollars, $2.5 million was attributable to higher store payroll and related benefits. Additionally, $1.6 million was attributable to a credit from the reversal of a disputed California sales tax assessment in last year's first quarter. Other expense increases included $0.6 million from technology services and $0.5 million from higher insurance premiums. Partially offsetting these increases was the absence of any corporate bonus accrual this year compared to $4.3 million included in last year's SG&A.
• Operating income was $6.3 million, or 2.0% of net sales, compared to $41.3 million, or 11.3% of net sales, last year.
• Income tax expense was $1.8 million, or 28.2% of pre-tax income, compared to $9.7 million, or 23.7% of pre-tax income, last year. The increase in the effective income tax rate was primarily due to discrete tax impacts related to stock-based compensation.
• Net income was $4.6 million, or $0.15 per diluted share, compared to $31.4 million, or $1.02 per diluted share, last year. Weighted average diluted shares were 30.6 million this year compared to 30.8 million last year.

Balance Sheet and Liquidity

As of July 30, 2022, the Company had $116.4 million of cash and marketable securities and no debt outstanding. This compared to $148.5 million at the end of the second quarter last year, and no debt outstanding. Since the end of last year's second quarter, the Company paid aggregate cash dividends to stockholders of $30.9 million in December 2021 and repurchased 987,427 shares of its common stock for a total of $9.0 million pursuant to its previously announced stock repurchase program. The Company is authorized to repurchase up to an additional 1,012,573 shares by mid-March 2023 at its discretion based on market characteristics.

The Company ended the second quarter with inventories at cost up 4.1% per square foot, a significant improvement from being up 12.7% at the end of the first quarter, as the Company continues to contend with inconsistent product flows as a result of ongoing supply chain challenges. Unit inventories were down 1.1% per square foot relative to last year.

Total capital expenditures for the first half were $6.9 million compared to $8.5 million last year, the decrease being primarily due to earlier new store openings last year. For fiscal 2022 as a whole, the Company expects its total capital expenditures to be in the range of $22 million to $24 million, inclusive of 11 new store openings.

Fiscal 2022 Third Quarter Outlook

Total comparable net sales through August 30, 2022, including both physical stores and e-com, decreased by 10.6% relative to the comparable period last year. Based on this result, current and historical trends, and anticipating a significant decline in the post back-to-school period of the quarter, the Company currently estimates that its fiscal 2022 third quarter net sales will be in the range of approximately $165 million to $170 million with a comparable net sales decrease of 18% to 21%, SG&A expenses to be in the range of approximately $46 million to $47 million, operating income to be in the range of approximately $1.9 million to $4.6 million, and earnings per diluted share to be in the range of $0.05 to $0.11. The Company expects its estimated income tax rate to be approximately 27% and estimated weighted average diluted shares to be approximately 30.2 million. This compares to a Company quarterly record of $206.1 million in net sales and record earnings per diluted share of $0.66 for the third quarter of last year. The Company expects to have 247 total stores open at the end of the third quarter, a net increase of 4 from 243 total stores at the end of last year's third quarter.

The current business environment remains subject to many unpredictable risks and uncertainties including with respect to, among others, the current inflationary environment, continuing supply chain difficulties, labor challenges, the COVID-19 pandemic, geopolitical concerns, and how consumer behavior may change relative to any of these factors as well as last year's historic anomalies of pent-up demand coming out of pandemic-related restrictions and federal stimulus payments. As a result, the Company's estimates concerning its projected business performance may change at any time and there can be no guarantee that the Company's current estimates will be accurate.

Conference Call Information

A conference call to discuss these financial results is scheduled for today, September 1, 2022, at 4:30 p.m. ET (1:30 p.m. PT). Investors and analysts interested in participating in the call are invited to dial [phone] (domestic) or [phone] (international). The conference call will also be available to interested parties through a live webcast at www.tillys.com. Please visit the website and select the “Investor Relations” link at least 15 minutes prior to the start of the call to register and download any necessary software. A telephone replay of the call will be available until September 8, 2022, by dialing [phone] (domestic) or [phone] (international) and entering the conference identification number: 13731711.

About Tillys

Tillys is a leading, destination specialty retailer of casual apparel, footwear, accessories and hardgoods for young men, young women, boys and girls with an extensive selection of iconic global, emerging, and proprietary brands rooted in an active, outdoor and social lifestyle. Tillys is headquartered in Irvine, California and currently operates 243 total stores across 33 states, as well as its website, www.tillys.com.

Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding the overall effect of the novel coronavirus (COVID-19) pandemic, including its impacts on us, our operations, or our future financial condition or operating results, our current operating expectations in light of historical results, expectations regarding customer traffic, our supply chain, and inflation, our ability to properly manage our inventory levels, and any other statements about our future cash position, financial flexibility, expectations, plans, intentions, beliefs or prospects expressed by management are forward-looking statements. These forward-looking statements are based on management’s 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, the effects of the COVID-19 pandemic (including any surges in the number of cases related thereto, or other weather, epidemics, pandemics, or other public health issues), supply chain difficulties, and inflation on our business and operations, and our ability to respond thereto, 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, attract talented employees, realize anticipated, enhance awareness of our brand and brand image, general consumer spending patterns and levels, the markets generally, our ability to satisfy our financial obligations, including under our credit facility and our leases, 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 SEC’s 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.

Tilly’s, Inc.
Consolidated Balance Sheets
(In thousands, except par value)
(unaudited)
	July 30, 2022		January 29, 2022			July 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	85,510	$	42,201		$	81,894
Marketable securities		30,874		97,027			66,644
Receivables		14,635		6,705			13,143
Merchandise inventories		89,295		65,645			86,853
Prepaid expenses and other current assets		13,775		16,400			7,506
Total current assets		234,089		227,978			256,040
Operating lease assets		221,114		216,508			216,046
Property and equipment, net		49,178		47,530			51,172
Deferred tax assets		11,526		11,446			10,487
Other assets		1,581		1,361			1,418
TOTAL ASSETS	$	517,488	$	504,823		$	535,163
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	47,942	$	28,144		$	59,053
Accrued expenses		23,506		19,073			23,898
Deferred revenue		14,312		17,096			13,040
Accrued compensation and benefits		7,445		17,056			16,567
Current portion of operating lease liabilities		51,007		51,504			50,916
Current portion of operating lease liabilities, related party		2,705		2,533			2,106
Other liabilities		727		761			948
Total current liabilities		147,644		136,167			166,528
Long-term liabilities:
Noncurrent portion of operating lease liabilities		173,916		171,965			185,179
Noncurrent portion of operating lease liabilities, related party		23,842		21,000			10,839
Other liabilities		518		978			1,385
Total long-term liabilities		198,276		193,943			197,403
Total liabilities		345,920		330,110			363,931
Stockholders’ equity:
Common stock (Class A)		23		24			24
Common stock (Class B)		7		7			7
Preferred stock		—		—			—
Additional paid-in capital		168,120		166,929			165,407
Retained earnings		3,372		7,754			5,782
Accumulated other comprehensive income (loss)		46		(1	)		12
Total stockholders’ equity		171,568		174,713			171,232
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	517,488	$	504,823		$	535,163

Tilly’s, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 30, 2022		July 31, 2021			July 30, 2022		July 31, 2021
Net sales	$	168,308	$	201,952		$	314,083	$	365,109
Cost of goods sold (includes buying, distribution, and occupancy costs)		115,424		126,523			216,524		234,139
Rent expense, related party		902		702			1,762		1,404
Total cost of goods sold (includes buying, distribution, and occupancy costs)		116,326		127,225			218,286		235,543
Gross profit		51,982		74,727			95,797		129,566
Selling, general and administrative expenses		46,697		48,167			89,271		87,998
Rent expense, related party		133		133			266		267
Total selling, general and administrative expenses		46,830		48,300			89,537		88,265
Operating income		5,152		26,427			6,260		41,301
Other income (expense), net		183		(102	)		187		(218	)
Income before income taxes		5,335		26,325			6,447		41,083
Income tax expense		1,516		5,927			1,815		9,726
Net income	$	3,819	$	20,398		$	4,632	$	31,357
Basic earnings per share of Class A and Class B common stock	$	0.13	$	0.67		$	0.15	$	1.04
Diluted earnings per share of Class A and Class B common stock	$	0.13	$	0.66		$	0.15	$	1.02
Weighted average basic shares outstanding		30,021		30,500			30,392		30,189
Weighted average diluted shares outstanding		30,186		31,113			30,619		30,837

Tilly’s, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
	Twenty-Six Weeks Ended
	July 30, 2022			July 31, 2021
Cash flows from operating activities
Net income	$	4,632		$	31,357
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		7,003			8,809
Insurance proceeds from casualty loss		—			117
Stock-based compensation expense		1,151			896
Impairment of assets		13			136
Loss on disposal of assets		77			62
Gain on sales and maturities of marketable securities		(94	)		(74	)
Deferred income taxes		(79	)		1,462
Changes in operating assets and liabilities:
Receivables		(5,203	)		(2,997	)
Merchandise inventories		(23,650	)		(31,272	)
Prepaid expenses and other assets		2,609			(1,483	)
Accounts payable		19,773			34,077
Accrued expenses		2,624			(5,859	)
Accrued compensation and benefits		(9,611	)		6,668
Operating lease liabilities		(3,082	)		(3,481	)
Deferred revenue		(2,784	)		(452	)
Other liabilities		(494	)		(524	)
Net cash (used in) provided by operating activities		(7,115	)		37,442
Cash flows from investing activities
Purchases of property and equipment		(6,894	)		(8,511	)
Proceeds from sale of property and equipment		—			10
Insurance proceeds from casualty loss		—			29
Purchases of marketable securities		(29,947	)		(66,625	)
Proceeds from maturities of marketable securities		96,240			65,000
Net cash provided by (used in) investing activities		59,399			(10,097	)
Cash flows from financing activities
Dividends paid		—			(30,710	)
Proceeds from exercise of stock options		40			9,075
Share repurchases related to share repurchase program		(9,015	)		—
Net cash used in financing activities		(8,975	)		(21,635	)
Increase in cash and cash equivalents		43,309			5,710
Cash and cash equivalents, beginning of period		42,201			76,184
Cash and cash equivalents, end of period	$	85,510		$	81,894

Tilly's, Inc.
Store Count and Square Footage
	Store Count at Beginning of Quarter	New Stores Opened During Quarter	Stores Permanently Closed During Quarter	Store Count at End of Quarter	Total Gross Square Footage End of Quarter (in thousands)
2021 Q1	238	2	2	238	1,753
2021 Q2	238	6	—	244	1,788
2021 Q3	244	—	1	243	1,781
2021 Q4	243	1	3	241	1,764
2022 Q1	241	—	—	241	1,764
2022 Q2	241	2	1	242	1,767