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

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)?

Simple actually.  Just increase your gross margin from 31.5% to $32.8% while reducing your SG&A expense 3.5% from $37.3 to $36.0 million.  It also doesn’t hurt to have $100 million in cash, no long-term debt and have decreased your inventory by 4.3%.

1.0% of the increase in the gross margin was the result of lower costs.  0.3% came from “…more efficient inventory management.”  $400,000 of the reduction in SG&A resulted from lower payroll and benefits.  $900,000 was from a “Decrease in marketing in spend.”  Meanwhile CEO Ed Thomas tells us in the conference call says, “Turning to marketing, as we discussed on prior calls, we have reinvigorated our marketing efforts towards driving store traffic.”  I’m curious to know what the reduction in marketing spend came out of.

Wall Street rewarded the results with an increase in the stock price.  Tilly’s stock has been moving up since their prior earnings announcement on August 23rd.  I’m hopeful this is an indication public companies are starting to be judged more on their bottom line than their top, which I consider appropriate in our current environment.

Here’s how the company describes itself.  “Tillys is a leading destination specialty retailer of casual apparel, footwear and accessories for young men, young women, boys and girls with an extensive selection of iconic global, emerging, and proprietary brands rooted in an active and social lifestyle. Tillys is headquartered in Irvine, California and we operated 220 stores in 31 states as of October 28, 2017. 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.”

Let’s look at a couple of key words and phrases here.  The first is “destination.”  As Tillys sees itself positioned, you make a specific decision to go to one of their stores.  You can see this in the list of where their stores are located.  They are willing to be in different types of locations and, as I’ve said before, the list suggests they are probably really good at managing their real estate portfolio.  It’s an important skill to have right now.  CEO Thomas says they’ve got 120 “lease decisions” over the next two years and expect to get some more cost out of those locations.

Their description of their brand selection and products isn’t much different from what other retailers describe.  They better be damn good at brand/product selection if they are going to be a destination retailer.  They don’t tell us anything about that process.  How do they determine what “…the latest most relevant merchandise…” is?

Tilly’s ecommerce business rose from $18.4 to $19 million and was $12.4% of total revenue.  Apparently, it would have increased more except for, as Ed Thomas tells us, “…certain transitionary issues associated with the launch of our new Demandware website platform…”

Interestingly, there are some styles they carry only online.  No numbers on how much that represents.  I’m curious because I’m wondering how having exclusively online brands syncs with being a destination retailer.

Tillys expects to “…to open two new stores and close three existing stores during the fourth quarter of fiscal 2017. We will continue to focus our efforts on improving our existing stores, and expanding our online/digital capabilities through omni-channel initiatives designed to provide a seamless shopping experience for our customers, whether in-store or online.”

“During fiscal 2018, we plan to open 10 to 15 new stores as well as a limited number of RSQ-branded “pop-up” stores. We will leverage existing markets where we believe our brand recognition can be enhanced with new stores that are planned to drive additional improvement to our operating income.”

I love the idea of pop up stores as a way to surprise your customers.  It’s easy to find attractively priced short-term space to pop up in right now.  It’s also possible that pop ups might be a test for locations where permanent stores could be opened.  They acknowledge that in the conference call.

RSQ is a Tilly’s private label product.  Here it is on their web site.

And here it is on Amazon.  The logo’s a little different, but it sure looks like the same brand.  If it isn’t, somebody should be having words with somebody else.  It’s also carried in their stores.

The last piece of information from the 10Q I’ll give you is that Tillys is defending three lawsuits for alleged violations of California’s wage and hour laws.  They’ve got another one for allegedly violating the Telephone Consumer Protection Act.  Wouldn’t normally mention it, but they’ve reserved $7.5 million against them.

A good quarter for Tillys.  What they are doing however- expense control, new systems, inventory management, caution in opening new stores, omnichannel focus is what their competitors are doing.  Nothing wrong with any of that, though it hardly distinguishes the brand.  But if they can make money and maintain a strong balance sheet during further retail consolidation and, someday, a recession, they’ll be fine.