“A Destination Retailer.” Tilly’s August 4 Quarter

In its 10-Q Tilly’s describes itself as “…a leading destination 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.”

We all know what a destination retailer is; a store that customers go out of their way to shop in.  I think Tilly’s has to be a destination retailer because of where they locate their stores; “…in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.”  If you are a destination retailer, you can be a bit more agnostic about locations.  You can put them where it makes  sense from a cost of operation perspective.  As they put it in a recent 8-K filing, “We have a flexible real estate strategy across real estate venues and geographies.”

Tilly’s “…operated 226 stores, including three RSQ-branded pop-up stores, in 31 states as of August 4, 2018 …Customers may also shop online, where we feature the same assortment of products as carried in our brick-and-mortar stores, supplemented by additional online-only styles. Our goal is to serve as a destination for the latest, most relevant merchandise and brands important to our customers.”

I want to note the use of pop-up stores.  These are not just tents which are there for a day or a week.  They average 2,600 square feet.  Tilly’s standard stores average 7.600 square feet.

I expect these are short term (months?) leases from owners happy to have somebody paying them some money.  I expect to see more of this- not just from Tilly’s.

The question is how you become a destination retailer if you carry many to most of the same brands your competitors carry.  Look at the brands they carry here.

From the same 8-K mentioned above, here’s how Tilly’s describes their efforts to differentiate their stores and be a destination retailer.

“We believe our experiential marketing efforts in our stores foster an environment that is vibrant, stimulating and authentic, serving as an extension to our customers’ individuality and passion for an active, connected lifestyle. We accomplish this by blending the most relevant brands and styles with music videos, product-related visuals and a dedicated team of passionate store associates. We continuously think of fun, creative ways to drive consumers to our stores, including augmented and virtual reality experiences, various social events, and partnerships with some of our vendors, all of which are posted on various social media platforms, further driving brand awareness. Additionally, in order to improve the look and feel of our stores, we have remodeled or refreshed nearly 90% of our stores in the last three years.”

Decide for yourself whether Tilly’s is a destination retailer.  The point I want to make is that being a destination retailer combined with skill and agility in managing your store portfolio is a very positive combination, as each of those characteristics enables the other.

Tilly’s had some problems during its fiscal 2012 through 2015 years.  Things started to improve after they brought in Ed Thomas as CEO in October of 2015.  If you read in that 8-K what they believe their strength are, you won’t find much different from what other successful brands and retailers are doing.  The question, as usual, is whether you have the balance sheet and management team to do these “things of importance” better than the competition.

Tilly’s has a solid balance sheet, allowing them to think long term, react to bumps in the road, and deal, or even prosper, in an economic downturn which, I guess, will eventually happen.  In the first six months of their fiscal year, cash generated from operations was $22.0 million, up from $2.87 million in the first six months of last fiscal year.

Revenues for the quarter ended August 4, 2018 were $157.4 million, up 13.4% from $138.8 million in the same quarter last year.  E-commerce revenues rose from $16.6 to $19.7 million, or by 18.7% and represented 12.5% of total revenues, up from 12.1% in last year’s quarter.  Comparable store sales, including e-commerce, were up 4.4% compared to an increase of 2.1% in last year’s quarter.

Of the $18.6 million increase in revenue, $12.3 million was the result of the quarter having a 53^rd week.  It happens every few years.

The gross profit margin rose from 29.5% to 31.8%.  Product margins were flat.

SG&A expense as a percent of revenue fell from 30.4% to 23.9%.  In dollars it declined from $42.2 to $37.6 million.  This was the result of a reduction in legal expense of $7.6 million compared to last year’s quarter.

Operating income improved dramatically from a loss of $1.2 million to a profit of $12.5 million.  However, “Of this $15.4 million improvement in year-over-year operating income, approximately $7.6 million was attributable to the aggregate year-over-year impact of the legal matter noted above, approximately $5.2 million was attributable to the retail calendar shift impact noted earlier, and approximately $2.6 million was attributable to increased comparable store net sales results.”

Net income improved from a loss of $596,000 to a profit of $9.7 million, but don’t forget the impact of the factors mentioned in the paragraph above.

Tilly’s is doing a lot of what I think are the right things. We’ll see if they can continue to do them better than some of their competition.