Tilly’s Beats Forecasts with Better Merchandise Assortment

Retailer’s net income more than doubled to $1.4 million in Q2 FY16

t1Clothing and accessories retailer Tilly’s Inc. (NYSE: TLYS) announced its Q2 FY16 and H1 FY16 financial results on August 24th, 2016.

The Irvine, California-based Company is a leading specialty retailer of West Coast-inspired apparel, footwear and accessories for young men, young women, boys, and girls. The company also provides third-party merchandise assortment in its apparel, accessory, and footwear product categories.

As of August 24th, 2016, Tilly’s operated 225 stores in 32 states. The Company also sells its products through its website, tillys.com. Read more about Tilly’s financial results below.

Q2 FY16 financial highlights

t2During Q2 FY16, Tilly’s net sales grew 5% Y-o-Y to $136.4 million. Comparable store sales, which include e-commerce sales, inched up 0.9%. Gross profit rose 6.1% to $38.8 million from $36.6 million in the year-ago quarter. Gross margin improved 40 basis points to 28.5% compared to 28.1% last year, due to a 70 basis point improvement in buying, distribution, and occupancy costs, partially offset by a 30 basis point decline in product margins from increased markdowns.

During Q2 FY16, Tilly’s occupancy costs were lower than expected due to a lease assignment and certain other lease negotiations. Selling, general, and administrative (SG&A) expenses were higher at $36.6 million versus $35.5 million last year, due to higher store payroll dollars associated with 9 net new stores and minimum wage increases, offset by expense reductions in other areas. As a percentage of net sales, total SG&A improved 50 basis points to 26.8% from 27.3% last year. This improvement was driven by more efficient marketing spending and reductions in corporate office payroll, stock compensation, and various other smaller expenses as a percentage of sales.

As a result, Q2 FY16 operating income grew to $2.2 million, or 1.6% of net sales, compared to $1.1 million, or 0.8% of net sales, last year. Tilly’s better back-to-school sales and merchandise assortment helped to more than double net income to $1.4 million, or $0.05 per diluted share, in Q2 FY16, compared to $0.6 million, or $0.02 per diluted share, in the year-ago quarter.

H1 FY16 financial highlights

For H1 FY16, Tilly’s net sales rose 2.6% Y-o-Y to $256.6 million. However, comparable store sales, which include e-commerce sales, decreased 1.4%. Gross profit decreased 1.7% to $71.4 million from $72.6 million last year. Consequently, gross margin fell to 27.8% compared to 29.0% in the year-ago period, due to a decline in product margins as a result of increased markdowns and higher occupancy costs due to the negative sales comp and adding 9 net new stores Y-o-Y.

For H1 FY16, Tilly’s SG&A expenses grew $3.7 million to $73.2 million from $69.4 million last year, due to a $2.4 million legal and non-cash store asset impairment charges. Excluding these items, SG&A expenses increased $1.4 million, primarily due to higher store payroll dollars associated with 9 net new stores and minimum wage increases, which offset expense reductions in other areas.

As a result, Tilly’s operating loss was $1.7 million, or 0.7% of net sales, compared to an operating income of $3.2 million, or 1.3% of net sales, last year. The 200 basis point decrease was primarily due to lower gross profit and higher SG&A.

Consequently, Tilly’s swung to a net loss of $1.3 million, or $0.05 per share, during H1 FY16 compared to net income of $1.8 million, or $0.06 per diluted share, in the year-ago period.

Other highlights

Balance sheet and liquidity: As of July 30, 2016, the Company had $96 million of cash and marketable securities, and no debt outstanding under its revolving credit facility compared to $77 million of cash and marketable securities and no debt, respectively, as of August 1st, 2015.

Inventory: Tilly’s ended Q2 FY16 with a 7% Y-o-Y lower inventory on a per square foot basis.

Appointment of new Chief Digital Officer: Tilly’s announced on August 15th, 2016, that Jon Kubo has been appointed as the Chief Digital Officer effective immediately. Mr. Kubo will oversee e-commerce and digital marketing as part of the Company’s digital commerce efforts and create consistency in digital consumer experiences across all interaction points.

Guidance for Q3 FY16

Tilly’s expects Q3 FY16 comparable store sales to be in the range of flat to negative 4%. Operating income is forecast to be in the range from $3.5 million to $6.5 million, and EPS to be in the range of $0.07 per share to $0.13 per share. These forecasts assume an anticipated effective tax rate of approximately 40% and weighted average diluted shares of 28.5 million.

Stock Performance

t3Tilly’s stock ended the day at $9.46, gaining 4.30%, at the close on Tuesday, September 6th, 2016, having vacillated between an intraday high of $9.64 and a low of $9.24 during the session. The stock’s trading volume was at 425,512 for the day. The Company’s market cap was at $265.73 million as of Tuesday’s close.

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