Tilly’s: A Solid Quarter. What Did They Do Right?

/0 Comments/in , , /by

In its 10Q and conference call, Tilly’s is kind of tentative in explaining what they are doing right.  Let’s go through the numbers and review a few conference call comments to see if we can tease out an explanation.

Revenue for the quarter ended November 2 rose 5.4% from $146.8 million in the prior year’s quarter (PYQ) to $154.8 million in this year’s.  E-commerce revenues were 16.9% of the PYQ’s revenues ($21.2 million) and 17.2% ($22.7 million) in this year’s quarter.  Revenue from proprietary brands were 25% of total revenues in the current quarter, the same percent as in the PYQ.  Below is a table showing revenue by category for 13 and 39 weeks.

Comparable store sales rose 3.1% compared to 4.3% in the PYQ.  That includes e-commerce sales, which means we don’t have an important metric of how their brick and mortar is performing. 

The gross margin rose from 29.7% to 30.5%.  They had a 0.8% improvement in the merchandise margin.

SG&A expense rose 6.9% to $39.5 million.  The most significant increase was $1.0 million for e-commerce marketing and fulfillment. 

Pretax income was up 17.7% from $7.32 million in the PYQ to $8.62 In this year’s quarter.  Just to give you some perspective, pretax income for the first nine months of the fiscal year went from $22.0 to $22.3 million, an increase of 1.4%.

The balance sheet remains solid with lots of cash and no long-term debt.  Equity declined from $183 million a year ago to $181 million, but this has to do with accounting for operating leases- something they didn’t have to do a year ago.  They note that the $5.2 million increase in cash provided by operating activities was “…primarily due to lower inventory.”  That’s a good thing.

Tilly’s starts its narrative by describing 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. Tillys is headquartered in Irvine, California and operated 232 stores, including one RSQ-branded pop-up store, in 33 states as of November 2, 2019. Our stores are located in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations. 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.”

Really nothing insightful or distinctive there.  They seem to put stores almost anywhere, and I’ve always thought them as being particularly focused on their real estate- perhaps a source of competitive advantage.  You can see that in the way they talk about the retail market and their brick and mortar strategy.

In describing the industry they say, “The retail industry has experienced a general downward trend in customer traffic to physical stores for an extended period of time. Conversely, online shopping has generally increased and resulted in sustained online sales growth. We believe these market trends will continue.”

Then they go on, “We continue to believe we have a meaningful number of opportunities to open profitable, new stores in the future. We believe we are under-represented nationally in terms of the number of stores in key population centers relative to many of our larger teen specialty apparel competitors who have a much greater number of stores than we do. We expect to finish fiscal 2019 ending February 1, 2020 with 14 new store openings. In fiscal 2020 ending January 30, 2021, we anticipate opening up to 15 additional new stores. We will continue to focus new store openings within existing markets and certain new markets where we believe our brand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.”

They tell us they aren’t committed to closing any stores in in 2020.  “Yet some may likely occur as we work our way through our continuous lease renewal negotiations.”  Once again, there’s that real estate focus, though all retailers are looking for better lease deals these days.

They acknowledge the e-commerce trend, then, but are focused on new brick and mortar.  Perhaps it’s because Tilly’s is so good at picking real estate.  Partly, it’s because they only have 232 stores.  They think new stores can enhance their brand recognition.  There are hints of an undescribed strategy here, though I can’t figure out what they are doing that might give them better brand recognition than their competitors.

Towards the end of the conference call CFO Michael Henry talk about the relationship between brick and mortar and e-commerce in a way that gives some insight into their strategic thinking.  “SG&A leverage,” he says, “is going to have a lot to do with how sales are balanced between stores and e-commerce.” He explains that growing e-commerce sales generates a lot of costs (they mentioned $1 million in the quarter we’re discussing here) while improving comparable brick and mortar sales generate a real opportunity to leverage SG&A expense.  That is, higher sales in a store don’t mean you have to pay more rent and other expenses.  Remember brick and mortar is still around 85% of their business.

They’ve got to have improvement in both e-commerce and brick and mortar, CFO Henry explains, “Because as you’ve seen in recent quarters when it’s only e-comm those are more expensive sales for us because of the shipping fulfillment and all the marketing affiliate costs that go along with the e-comm business.”  Did you hear that?  E-commerce sales are more expensive than brick and mortar I think he said.

So, what is Tilly’s doing right?  First, they seem to be pretty good at managing their real estate and picking locations.  Second, they believe they have some room to expand brick and mortar because they don’t have that many stores yet.  Third they recognize, hopefully like all other retailers, the interaction between online and brick and mortar.  E-commerce is critical for brand positioning and customer interaction- omnichannel and all that stuff.  But it’s especially valuable if helps to improve brick and mortar comparable store sales and you can spread some of both e-commerce and brick and mortar SG&A across the store base, improving the bottom line.

Tilly’s isn’t the only big retailer in our space that understands this.  We’ll figure out which ones don’t when they go away.

Popups, Extra Week, Higher Costs; Tilly’s Quarter

/0 Comments/in , /by

Tilly’s sales for the quarter ended October 28th were down 3.9%, or $6 million, to $146.8 million from last year’s quarter.  However, the decline was due to “…the calendar shift impact of the 53rd week in fiscal 2017’s retail calendar, which caused a portion of the high sales volume back-to-school season to shift into the second quarter this year versus the third quarter last year, reducing last year’s comparable net sales base for the third quarter by approximately $14 million. This calendar shift impact was partially offset by higher comparable store sales and net sales from seven net new stores totaling approximately $8 million.”

Keep that $14 million in mind as you think about the quarter over quarter comparison.  That decline for the quarter was partly offset by seven new stores and higher comparable store sales (4.3%-  includes e-commerce) totaling $8 million.

Read more

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

/0 Comments/in , /by

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 53rd 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.

Sales Go Nowhere, But Profits Rise- A Poster Child? Tilly’s Quarter Ended October 28th

/2 Comments/in , /by

How, when you increase your sales less than half of one percent (compared to the prior year’s quarter) from $152.1 to $152.8 million, do you manage to increase your net income 36.5% from $6.42 to $8.76 million even though tax expense rose by $1.38 million while operating with five less stores (220 total)?

Read more

More of the Same: Tilly’s April 29th Quarter

/0 Comments/in , /by

These quarterly reports from retailers are getting kind of repetitive.  It’s not just Tilly’s; they are all controlling inventory, slowing store openings (or closing stores), negotiating with landlords, trying to reduce operating expenses, doing omnichannel things and being generally grateful for anything that improves traffic and generates some incremental sales.

Tilly’s conference call printed out to just seven pages, with questions from three analysts.  It’s just remarkable how Wall Street is losing interest in retail.  Someday, this will translate into a huge buying opportunity in retail in general- kind of like Mexico right after Trump got elected.

Read more

Tilly’s Has a Great Quarter, But I’m Not Sure They Completely Know Why

/0 Comments/in , /by

You can’t fault the numbers.  Sales grew 7.4% for the quarter ended October 29th compared to the same quarter last year.  That got them to $152.1 million in revenue for the quarter.  Comparable store sales rose 4.4%, accounting for $6 million of the revenue increase.  “Store comps were up low-single digits and e-commerce continued to grow at a double-digit rate.”  The rest of the increase ($4.4 million) came from five stores opened since the end of last year’s quarter.

Their gross profit margin, at 31.5%, didn’t change.  A 1.1% decline in product gross margin due to higher markdowns was offset by a reduction in expenses.

This is a good time to remind you how retailers calculate cost of goods sold to arrive at their gross profit margin.  Here’s how Tilly’s does it.

Read more

What All Retailers Are Doing: A Short Note on Tilly’s July 30 Quarter

/0 Comments/in , /by

Tilly’s has the same issues all retailers are facing, and their response isn’t really different.  But at least they grew their sales and net income a bit.

Revenue in the quarter ended July 30 rose 4.9% to $136.4 million from $130.0 million in last year’s quarter that ended August 1, 2015.  They also managed to increase their gross profit margin from 28.1% to 28.5%.  Product margin fell by 0.3% due to higher markdowns.  The increase in gross margin was due to a 0.7% “Decrease in distribution, buying and occupancy costs as a percentage of net sales primarily due to a lease assignment and certain other favorable lease negotiations.”

It sounds like the gross margin would not have risen without the lease assignment.  It was a one-time occurrence and was worth about $300,000.    I would be interested to hear what the gross margin on just brick and mortar was.

And while SG & A expenses rose a bit to $36.6 million, they fell as a percentage of revenue from 27.3% to 26.8%.  Net income rose from $560,000 to $1.43 million.

Comparable store sales rose 0.9% compared to a 0.5% increase in last year’s quarter.  That includes ecommerce sales.  In fact, brick and mortar comparable store sales were “slightly” negative and ecommerce grew at a double digit rate.  That makes sense as average net sales in each brick and mortar store fell from $540,000 to $533,000 and average net sales per square foot was down a bit from $71 to $70.

At the end of the quarter Tilly’s was operating 225 stores, up from 216 at the end of last year’s quarter.  CEO Ed Thomas notes in the conference call, “Regarding real estate, for the time being we remain focused on improving the performance of our existing stores rather than opening a significant number of new stores. We believe that remaining cautious about new store growth is prudent in the current retail environment. We are carefully evaluating each store opportunity with the objective of improving company profitability.”

Here’s another comment he made:

“We continue to bring in new brands with limited distribution and work with our existing branded partners to emphasize uniqueness to Tilly’s, which we know our customers expect from us. We continue to evaluate micro merchandising and product allocation practices in certain underperforming stores with the goal of improving our operating performance in these locations.”

That sounds a lot like what other retailers are saying.  It particularly reminds me of the Zumiez’s results I just reviewed.

In fact, a lot of what Tilly’s said reminded me of what other retailers are saying, and that’s a pretty good stopping point.  Caution in store openings, negotiations with landlords for better deals, growth of ecommerce, searching for distinctive brands, and careful inventory management are things all retailers are dealing with as they watch retail consolidation work its way through the economy.

Fun Times at Other Industry Retailers

/0 Comments/in , , , , /by

At almost the same time Abercrombie & Fitch (owner of Hollister), Tilly’s, The Buckle, and Genesco (owner of the Journeys chain) released, in early June, 10-Qs for their quarters that ended April 30th.

I was going to do my usual thing and review each one separately.  But I was busy, too much time passed and honestly, there’s so much sameness to what our industry’s retailers are saying that I wasn’t sure anybody would want to read four separate reports.  Hell, I didn’t even want to.

So what I’ve done is gone through the 10-Qs and collected a few observations and some summary data.  It is, I think, enough.

Read more

Tilly’s Offers Us Some Thoughts on Retail Stores.

/0 Comments/in , /by

It used to be way easier to grow a retail chain. You found a good location, made a deal with the landlord, made improvements, and brought in some inventory and some experienced management to train the new group of employees. If you did this mostly right, a year later (maybe sooner) you had a cash flow positive store.

Tilly’s says a couple of things about why it’s not that easy any longer. After we take a brief look at the quarter that ended October 31, we’ll talk about what they say.

Read more

Net Income Down 17% But It’s All Part of the Plan? Tilly’s Quarter

/0 Comments/in , /by

In the quarter ended November 1, Tilly’s grew its sales 6.1% to $131.3 million compared to the same quarter last year. But net income fell 17% from $6.15 million in last year’s quarter to $5.11 million.

Meanwhile, in the conference call, President and CEO Daniel Griesemer’s first statement about the result is as follows:

“We’re pleased with the meaningful progress we are making on our initiatives to increase sales and profitability as our third quarter results exceeded expectations.”

I actually just went back and checked to make sure I was looking at the right conference call transcript and financial statement. I am. I know there’s a certain promotional aspect to conference calls- that you want to put your best foot forward and all that stuff. But don’t you need to oh, I don’t know, mention in passing that your profit fell when revenues and the gross margin were up?

Perhaps not if you’re Tilly’s. After all, when they took the company public it was done in such a way that the founders and owners still controlled the voting shares. Well, as I said when they went public, I admire them for going public but maintaining control, though I can’t figure out why people bought the stock under those circumstances.

I’m the first one to champion the idea that one quarter doesn’t matter in the scheme of things. But hey people at Tilly’s, you’re really making me dig to try and explain why in this case. They do, by the way, give me some possible reasons to think that. I’ll get to those.

The gross margin rose from 30.6% to 30.9%, due to an increase in product margin. SG & A expense rose from 15.5% from $27.7 to $32 million. As a percentage of revenue, they rose from 22.4% to 24.4%.

Selling expense as a percentage of sales rose from 15.4% to 17.3%. 1% of that increase was because “…store and field payroll, payroll benefits and related personnel costs increased at a higher rate than net sales primarily due to the addition of new stores…” There was a 0.9% increase “…related to increased marketing costs, supplies and other store support costs, primarily due to higher catalog and other marketing spend compared to last year.”

General and administrative expenses rose just 0.1% from 7.0% to 7.1%.

Operating income was down from $10.2 to $8.6 million, or by 15.7% “…primarily due to a decline in our comparable store sales and increased costs related to new stores growing at a faster rate than sales. Our comparable store sales decreased 1.2% for the thirteen weeks ended November 1, 2014, which followed a 1.9% decrease for the full fiscal year 2013 and compares to a 2.4% decrease in the third quarter of fiscal year 2013.”

Average sales per store during the quarter fell from $592,000 last year to $571,000. For three quarters, it was down from $1.777 to $1.623 million. They ended the quarter with 207 stores.  They had 99 stores at the beginning of fiscal 2009.

Tilly’s stores are located “…in malls, lifestyle centers, ‘power’ centers, community centers, outlet centers and street-front locations.” This feels like store location is strongly driven by how good a deal they can make on real estate. That may serve them well in coming years.

The balance sheet remains strong, with a solid current ratio and no long term debt. Cash flow from operations for the nine months was $21.1 million compared to $27.3 million in last year’s nine months.

CEO Dan Griesemer tells us in the conference call they are working to increase market share and improve profitability through “…increased product differentiation and innovation, a greater emphasis on our digital platform and evolving our real estate strategy.” Any retailer might say that. In fact, they mostly do. Tilly’s goes on to give us a little more information.

“In keeping with our history of offering our customer the most relevant assortment of action sports inspired merchandise, we introduce more products and brands that are new, unique or exclusive to Tilly’s. Our new brands, brand extensions, exclusives and collaborations continue to perform well and strengthen our confidence in this product strategy. We introduced new brand expansion including GoPro, Stance, Sector 9 and Full Tilt Dream. We delivered a number of exclusive products including collections from Hurley and LRG. We also introduced several new or exclusive collaborations including offerings from Volcom, Adidas and Vans.”

I don’t see how that differentiates them from what other retailers are doing, but having the right brands at the right time is obviously important. I also hate brands doing SMUs, but that just seems to be where we are in the market. If a brand does an SMU for Tilly’s just whose brand is it?

With regards to ecommerce, “…we launched a new state of the art responsive design e-commerce platform for desktop and mobile…The new platform offer significantly improved look and feel, navigation and performance and offers a much more compelling user experience… Given what we know about their shopping habit, we are now able to tailor our product, marketing and promotional activities based on user preferences as we believe will lead to improved sales and profitability.”

“We believe our new state of the art e-commerce platform dedicated e-commerce fulfillment center and omnichannel capabilities now put at significantly ahead of our peer set and position us well to take advantage of the extraordinary e-commerce opportunity we see ahead of us.”

Important, obviously, but what everybody else is trying to do. Is Tilly’s going to do it better? Don’t know.

In real estate, CEO Griesemer notes, “… our new stores opened this year are performing well and in line with the new store economic model and more stringent site selection process we outlined earlier in the year.” I don’t know what the specifics of that process are.

In the fourth quarter, Tilly’s “…expect to incur incremental marketing expenses in the fourth quarter based upon the continued strength in customer response to our marketing efforts to date.” Isn’t it wonderful to have a balance sheet and cash flow that allows you to do it!

In what was a pretty short conference call, a couple of analysts ask for some metrics around specific issues and were given none. It’s not like that never happens in a conference call, but I’m wondering if that doesn’t reflect the founder’s control of the voting stock.

Tilly’s has a strong balance sheet. Store growth has been pretty rapid, and may explain some of the higher expenses and lower profitability. I conjecture that real estate is a core competence for them and that may be particularly important over the next few years. Their other initiatives don’t seem different from other retailers. We’ll see if they can perform them better.

The stock opened at $18.80 the day Tilly’s went public on May 4, 2012. As I write this (December 15, 2014), it’s at $8.94. But it closed at $6.98 the day before earnings were announced, so I guess people liked what they heard.

You know, it took me a lot of work and reading between the lines to be able to conjecture on what might be going on here. Tilly’s is making money, and there are some possible reasons why the decline in profitability might make sense if you take a longer term perspective. But Tilly’s doesn’t do a very good job explaining that.

I wish they would, because then I wouldn’t be sitting here wondering what’s going on. I’m confused and don’t know what to think.