Tilly's Q3 2025 Earnings Call Transcript

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December 5, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Tilly's Third Quarter 20 24 Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Gar Jackson, Investor Relations. Please go ahead, sir.

Speaker 1

Good afternoon, and welcome to the Tilly's fiscal 2024 Q3 earnings call. Michael Henry, Executive Vice President, Chief Financial Officer, will discuss the company's business and operating results and then he and Hesi Shekad, Co Founder, Executive Chairman, President and Chief Executive Officer, will host a Q and A session with analysts. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at tilly's.com. From the same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of this call for the next 30 days. Certain forward looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, December 5, 2024, and actual results may differ materially from current expectations based on various factors affecting Tilly's business.

Speaker 1

Accordingly, you should not place undue reliance on these forward looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward looking statements, please see the disclaimer regarding forward looking statements that is included in our fiscal 2024 Q3 earnings release, which is furnished to the SEC today on Form 8 ks as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to 1 hour, and I will include a Q and A session after our prepared remarks. I now turn the call over to Mike.

Speaker 2

Thanks Garth. Good afternoon everyone and thank you for joining us today. While we still have work to do to generate consistent sales growth and return to profitability, there were some positive highlights to share about our Q3 performance. Fiscal August produced our 1st month of comparable net sales growth since February 2022. Our 3rd quarter comparable net sales, while a decline of 3.4% was the best quarterly comp we have produced since the end of fiscal 2021.

Speaker 2

Our ecom net sales for the comparable 13 week period ended November 4, 2023 increased by 4.9%, which was our best quarterly ecom comp sales result since the end of fiscal 2021. Our store traffic increased for the 2nd consecutive quarter relative to last year, although comp sales in stores remain negative. We believe our renewed marketing efforts via social media and our recently launched brand campaign are beginning to take root when considering our improved store traffic for the last two quarters. We also just launched a new marketing sponsorship with the Los Angeles Chargers collaborating with them on community outreach events aimed at mental health awareness and support for young people, which ties in with our long standing support of the Tilly's Life Center and its mission with respect to young people's mental health. During the quarter, we continued to invest in our business by upgrading the quality of our search engine for our website and relaunching our mobile app with significantly improved speed.

Speaker 2

We are also in the process of implementing a new price optimization tool that is intended to help us drive improved pricing decisions and merchandise management efficiency in the future, which we currently expect to launch in early 2025. So although our overall business results are not yet where they need to be, we are making every effort to try to turn things around and believe we are beginning to make some progress, albeit not as quickly as we would like. Turning to the specifics regarding our fiscal 2024 Q3 operating results compared to fiscal 2023's Q3 results. Net sales were $143,400,000 a decrease of 13.8 percent, primarily due to the previously discussed impact the 53rd week in last year's retail calendar, which resulted in an $18,400,000 net sales shift out of the Q3 and into the Q2 compared to last year. Net sales from physical stores decreased by 16% and represented 77.6 percent of total net sales compared to 79.6% last year.

Speaker 2

E comm net sales decreased by 5.4% and represented 22.4% of total net sales compared to 20.4% last year. Comparable net sales for the 13 week period ended November 2, 2024, including both physical stores and e comm compared to the 13 week period ended November 4, 2023 last year decreased by 3.4% with a decrease in comparable net sales in stores of 5.6% and an increase in e comm net sales of 4.9%. We ended the 3rd quarter with 2 46 total stores compared to 249 total stores at the end of the Q3 last year. Gross margin including buying, distribution and occupancy expenses was 25.9% of net sales compared to 29.3% of net sales last year. Buying, distribution and occupancy costs deleveraged by 3 20 basis points despite being $700,000 below last year in the aggregate due to carrying these costs against a lower level of net sales this year.

Speaker 2

Product margins were within 10 basis points of last year's Q3. Increased markdowns and related inventory aging reserves were almost fully offset by improved initial markups. Total SG and A expenses were relatively flat at $51,300,000 or 35 0.7 percent of net sales compared to $51,200,000 or 30.8 percent of net sales last year. SG and A deleverage as a percentage of net sales due to carrying these expenses against a lower level of net sales this year. Primary SG and A variances compared to last year's Q3 were attributable to lower total store payroll and related benefits of $900,000 and lower non cash store asset impairment charges of $600,000 largely offset by increased econ fulfillment expenses of $1,100,000 Pretax loss was $12,900,000 or 9% of net sales compared to last year's pretax loss of $1,200,000 or 0.7 percent of net sales.

Speaker 2

Income tax benefit was $5,000 a near zero tax rate compared to a benefit of $300,000 or 28 percent of pretax loss last year. The lower income tax rate this year was primarily due to the continuing impact of a full non cash valuation allowance on our deferred tax assets. Net loss was $12,900,000 or $0.43 per share compared to last year's net loss of $800,000 or $0.03 per share. Turning to our balance sheet. We ended the 3rd quarter with total cash and marketable securities of $52,000,000 and no debt.

Speaker 2

Net inventories were up 11.8% compared to the end of the Q3 last year, due foremost to our decision to pull forward certain inventory receipts into the latter half of October to help smooth out weekly receipt flows to improve operating efficiencies in our stores' distribution center and help ensure timely delivery to stores for Black Friday weekend. Total year to date capital expenditures for the 1st 3 quarters were $6,700,000 compared to $10,500,000 last year. Turning to the Q4 of fiscal 2024, we're off to a disappointing start in terms of net sales, although it meaningfully improved product margins compared to last year. Comparable net sales through December 3, 2024 decreased by 15.3% relative to the comparable period ended December 5, 2023, due in part to the timing shift of Thanksgiving and Black Friday weekend this year. On a shifted basis, lining up the timing of last year's Thanksgiving holiday and Cyber Monday to this year's, comparable net sales through December 3, 4 decreased by 9.6% relative to the comparable period ended November 28, 2023.

Speaker 2

Based on current and historical trends, we currently expect the following for our fiscal 2024 Q4 operating results. Total net sales to be in the range of approximately $149,000,000 to $156,000,000 translating to a comparable net sales decline in the range of 9% to 5%, respectively. We currently expect to generate product margin improvements of approximately 200 basis points relative to last year's Q4. SG and A to be approximately $52,000,000 before factoring in any potential non cash store asset impairment charges, which may arise. Pre tax loss and net loss to be in the range of approximately $13,000,000 to $9,500,000 respectively, with a near zero effective income tax rate due to the continuing impact of the previously disclosed full non cash valuation allowance on our deferred tax assets.

Speaker 2

Loss per share to be in the range of $0.43 to $0.32 respectively, based on estimated weighted average shares of approximately 30,000,000 We recently opened 3 new stores in November and currently expect to close at least 10 predominantly underperforming stores near the end of the Q4, which would bring our total store count to 239 at the end of the fiscal year, a net decrease of 9 from the end of fiscal 2023. In closing, we continue to challenge every aspect of our business in search of improvements in the near term, while also thinking strategically about where we need to be over the longer term. We look forward to continuing to share details of our efforts. Operator, we'll now go to our Q and A session.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Jeff Van Sinderen with B. Riley. Please go ahead.

Speaker 3

Hi, everyone. And Mike, I know Hedi was named as permanent CEO. Just wondering, is he on the call as well today or did he have something else?

Speaker 4

Of course, I am.

Speaker 2

Of course.

Speaker 3

Okay. I wasn't sure. Yes. Couple of tough questions that I have, so if you can kind of bear with me, but I think your merch margin, I think you said they were down, I don't know, 10 bps or something like that, so pretty much flattish to last year. And I realize there's moving pieces there where you're getting better IMU.

Speaker 3

But it sounds like you're largely holding price overall, your merchandise margins will be up in Q4, but we're also looking at comps kind of a slow start here to Q4, Black Friday weekend not great. And it looks like comps will decelerate sequentially. So maybe you could just help us understand a little bit more around what's happening with, merch margins, the kind of the puts and takes around IMU versus discounting? And then I guess just as you think about this, and I've realized there's a lot of questions I missed, but as you think about it, just considering that you are deleveraging, maybe give us if you can give us a sense of how you envision being able to begin to leverage the fixed expenses you have?

Speaker 4

I'll take some of it and then Mike can answer the rest. So look, we made a major change. As you know, we changed our CMO just recently. That was after a period that we realized that a lot of our challenges are in the merchandise. We appointed a person that is very familiar with the company, and we should see results of those changes in the next 6 months.

Speaker 4

On the IMU, we have a certain goal of IMU that we're trying to achieve and actually we're pretty much close to getting there. Q4 will be the first one. But at the same time, we're getting hit with the markdowns, as you understand, by selling less, and that takes away some of the successes on the gross margins. Overall, it's a tough thing to solve, but I believe we have the road map to get there, and I think we can do it. It's just a matter of time.

Speaker 4

Again, those things take a little time.

Speaker 2

Yes. And then Jeff, I'll follow on there with a little bit more specifics. So you might recall last year in Q4 over Black Friday weekend, we did something we had never done before, which was a percent off the entire store type of promotion for Black Friday weekend. And what we found is that all that really did was erode our margin last year. So, having finished fiscal November, our product margins are actually up over 400 basis points so far in the quarter, specifically because of going up against that event that we chose not to repeat this year.

Speaker 2

Now to part of your other question with comps starting off negative, expecting them to be in negative single digits for the quarter, we have factored in what we believe will be appropriate amounts of markdowns and reserves and what have you that might be required. And that's why our outlook range, we said we'd have approximately 200 basis points of product margin improvement when all is said and done, assuming this range of comps. To leverage overall largely fixed costs, we have to have sales increases. There's no two ways about it. Every year we keep absorbing more and more minimum wage increases.

Speaker 2

We're fighting every single week to be as sharp on planning store payroll and keep a very close eye on it. Store payroll and related benefits is almost half of our SG and A. A lot of our cost structure is relatively fixed. So we have to get top line turned around to ultimately get to a place where we can consistently deliver leverage on those largely fixed costs. We're also looking at all manner of expense reductions and cuts that we can make heading into next year.

Speaker 2

And that is a very active conversation that Hesi and I are having with every single one of our department heads. And we're renegotiating every single contract you can think of, taking every opportunity to reduce occupancy costs as it relates to leases. But ultimately, we've got to have some cooperation from the top line to get to where we need to go.

Speaker 3

Right, right. And appreciate there were a lot of questions in there. So thank you for answering that. And then just one follow-up, if you can maybe touch on inventory, I think you set up 11.8%, if you could just help us understand that, realize there's some timing shift there.

Speaker 2

Sure. That was a very conscious decision, as we were talking in the middle of Q3 and thinking about, we have a lot of temporary labor in our distribution centers. And when we looked at our receipt flows realizing at one point our November week 1 was inordinately high and our latter part of October was very light. We just said why do that to ourselves just because it's quarter end? That doesn't make any sense.

Speaker 2

We need to do the right thing for the business, so that we can keep a more consistent level of temporary labor in the distribution center, not have to let a bunch of people go and then immediately turn around and bring a bunch of people back. And also with what what was going on as it relates to ports and potential flows of merchandise, we wanted to make sure we had everything in house and able to get out there for Black Friday weekend in as efficient manner as we could. So that was a conscious decision. I can tell you halfway through November after the 1st 2 weeks, our unit inventory was up less than 2%. So that was a very temporary timing blip in that regard.

Speaker 2

Obviously, if we continue to negative comp, we'll have to continue to do what we need to do to keep inventory under control. The interesting thing I'll share because we're seeing a little bit of signs of life. With this changing in the Thanksgiving timing, it's really mind numbing at the moment trying to see what's going on in the business. When looking just on the fiscal dates, our comps are more highly negative as we noted in our prepared remarks. Just in the last two days when looking at a shifted basis based on the number of days after Thanksgiving, our store comps have actually turned positive the last 2 days in a mid to high single digit.

Speaker 2

So it's kind of interesting. We think we are starting to see some better traction and it's why our outlook range is in a better position overall than where our current existing comps are whether you look at them at shifted or unshifted.

Speaker 3

Okay, great. Thanks for taking my questions. I'll take the rest offline.

Operator

The next question will come from Matt Koranda with Roth Capital. Please go ahead.

Speaker 5

Hey, guys. Thank you. Maybe just can you clarify the language in the release around the Thanksgiving holiday that you guys said, the minus 10% figure that you gave? Is that just comparing sort of the Black Friday, Cyber Monday period year over year? Or is that a time shifted monthly calendar, I wasn't clear on that?

Speaker 2

That was a quarter to date comparison. So we gave 2 different numbers. There's the fiscal comparison, which is just based on like number of fiscal weeks through fiscal November. But because last year's Thanksgiving was a week earlier than this year and this year's Thanksgiving was as late as it possibly can be on November 28. When you look at our comps on a shifted basis and line up the timing of Thanksgiving and Black Friday, Cyber Monday, it tells a little bit different story and a little bit better story than what the raw comparison just based on the fiscal weeks is.

Speaker 5

Yes, got you. But it's still a full month, it's just the time shifted period? Yes. Okay, got it. That's clear.

Speaker 5

And then just curious if you could maybe speak to the cadence of what you're seeing. I mean, you already alluded, Mike, to at least a couple of days of positive comps in just the last couple of days. But maybe just the cadence during the month and what did you see around kind of the heavier, more typical holiday periods And in between, if you could kind of cover a little bit more like of the cadence of how it played out?

Speaker 2

Yes. So the early part of November was tough. We've seen mention of that from a few others out in the marketplace. We experienced the same sort of thing that the first half of November in particular was tough. And then of course as you get into week 3 where last year's Thanksgiving and Black Friday weekend existed, our week 3 comps were highly negative.

Speaker 2

And then the last week with getting into this year's Black Friday, we were up almost 30%. So wild swings when you look at week to week and because of the timing shift of Thanksgiving. So that's why we gave both versions of a fiscal comp as well as a shifted comp relative to Thanksgiving, so we can kind of understand what's really happening because there's such wild shifts from week to week that don't make sense. And that's where again looking at that shifted basis, we're cautiously optimistic that we're starting to see a little bit better business having seen that our store comps have turned positive when looking at that shifted timing for the last couple

Speaker 3

of days.

Speaker 5

And can you remind us like maybe just refresh us on the comparisons that were up against from December January of last year? If I recall correctly, it was relatively negative and maybe deteriorated in the Q4 last year. Are there easier comparisons as we get into December, January?

Speaker 2

It was actually fairly consistent from month to month throughout the quarter last year. We were minus 9, minus 8, minus 9 cadence as you go November, December, January.

Speaker 5

Okay. Got it. All right. Yes, that is consistent. Okay.

Speaker 5

And then maybe just on the I wanted to clarify the product margin improvement that we're counting on the 200 basis points that we're guiding to for the Q4. It sounded like you said I thought I caught you saying 400 bps of improvement in December just given the lack of storewide promotion that we saw this year. Is that right? And then maybe just does that assume then that we see some additional erosion for the rest of the quarter in the gross margin and product margin side of things?

Speaker 2

That was fiscal November where compared to last year's fiscal November, we saw a little over 400 basis points of improvement in product margin. And again, that was very directly attributable to last year's 30% off the entire store promo that we did that we just did not see deliver the kind of margin dollar productivity that we would have expected or sales increase that we would have expected. So we did not repeat that this year and that definitely has shown some benefits of not going that deep across the entire store through Black Friday weekend. And then because our outlook range is suggesting a minus 5 to minus 9 comp range, we're contemplating our best estimates at what we think will be required as we go through the remainder of the holiday season and on through January, which is typically a clearance month to help get our inventory as much in line as we can as we go through the quarter. Best thinking at this time, depending on which end of the outlook range we're in, it could be a little better than 200 basis points improvement for the bottom end that might be pardon me, if we're at the bottom end, it might be closer to 200, possibly even slightly beneath the 200, but very close to 200 basis points.

Speaker 5

Okay. And then maybe if you could talk about promotional strategies that we should be looking for. It looked like we're kind of back to the typical BOGO stuff that you guys do, but maybe just what do you have at your disposal? What tools are in the toolkit? Especially if inventory remains a little bit elevated like what should we be looking for on the promotional front?

Speaker 2

You'll see the typical kind of behavior from us in holidays. We have targeted planned promotions through the season and for the biggest days of the season. I'm not going to give away those things in any specific detail in this open forum, but suffice it to say we have specific plans in place. We have certain funded promotions in place at different times. But with the overarching goal of we need to be more profitable and more productive in terms of gross margin dollars and that's what we're focused on, especially given that we're mostly were last year.

Speaker 2

Remember last year's Q4 was lowest product margins we've ever produced. So we should be able to show some improvement this year considering we're going up against what was our weakest performance that we've probably ever produced.

Speaker 5

Okay. All right, understood. Maybe just last one. On the SG and A guide, it just seems like we do come in a touch ahead of where you've been guiding or at least in the Q3 you did. It sounds like it was just more of a distribution kind of the temporary labor cost issue.

Speaker 5

Is there anything else moving that line or surprising you to the upside on the SG and A front? And then what levers do we have at our disposal to sort of improve the labor cost efficiency at the distribution center?

Speaker 2

Nothing surprising. Just as with store payroll that I mentioned earlier, our teams work very closely together to plan our temp labor needs based on the volumes that are expected inflow and outflow out of our distribution centers. So there's not anything that I would say is unexpected about what we've seen or what we're expecting.

Speaker 5

Okay. I'll take the rest offline. Thanks.

Operator

This concludes our question and answer

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