Betting On Tilly’s Inc (NYSE:TLYS) 12% Yield

Tilly’s Smashes The Consensus, Shares Fall 15%

Tilly’s Inc (NYSE:TLYS) is another mall-based retailer outperforming its expectations. The company reported 3Q earnings this week and smashed through the consensus producing not only sequential growth but positive earnings for the 2nd time since the 2nd quarter shut-downs. Because the company has already exceeded the full-year consensus targets I would expect to see it moving higher but it’s not. The news has shares down 15% begging the question, is it a good time to get in?

Tilly’s is also an interesting stock because there is a very large dividend to be considered. Before I move on, I want to be clear that this opportunity is highly speculative but could be worth 10% in yield and double-digit gains for share prices. This company is not a regular dividend payer but has paid a special distribution every year for the last four. It’s due in February and, if paid at the “regular” rate of $1.00, would yield close to 12% after today’s drop in share prices.

Tilly’s Leans Hard On eCommerce

Tilly’s has proven its ability to transcend the mall via eCommerce but there are still questions to be answered. For one, how long can it sustain business via eCommerce when many of the brands it represents have an eCommerce portal of their own? For another, are its core brands enough to keep the public interested? That said, the company’s revenue accelerated from the 2nd quarter to the 3rd and outpaced the consensus by 700 basis points. The $140.28 million is up 37% from the prior quarter due to increased store opening and strength in digital. On a YOY basis, sales are still down about 10%.

The company’s digital sales are still strong but slowing from the prior quarter. The $19.3 million reported is up 42.4% from last year but down from the 2nd quarter’s near 130%. eCommerce accounted for 38% of revenue in the quarter so the slowdown is important. If revenue from these channels continues to slow the YOY comps will be harder to match as shut-downs grip parts of the nation again. Particularly in California where this company has a large presence.

Moving down to the bottom line, the GAAP earnings came in at $0.07 or $0.07 above the consensus on revenue strength and improved margins. Margins improved 70 basis points on higher realized selling prices offset by higher costs related to the e-channels. Regarding the balance sheet, the company’s cash position deteriorated a little over the course of the year but not by much. The total fell to $138.6 million from $143 million last December including about $4.4 million in deferred payments. As for debt, there is a modest amount but none outstanding.

Momentum Carries Into Q4 For Tilly's

The company did not give any guidance for the 4th quarter but did provide an update on operations. The quarter-to-date comps are tracking a mere 0.6% below last year’s levels with eCommerce supporting sales. Comps at stores are down -14% and partially offset by a higher conversion rate, people who go to the stores are spending, while eCommerce is up 42% from last year and in-line with the 3Q results. The company expects net sales to track below last year’s level but there is a chance YOY growth could emerge.

"The third quarter finished strong following a weak start in August resulting from delays in back-to-school timing this year, and this positive momentum carried into the early stages of the fourth quarter," commented Ed Thomas, President and Chief Executive Officer.

The Technical Outlook: Tilly’s Is Testing Support

Shares of Tilly’s have made a decent rebound from the March lows but still have not reclaimed the pre-COVID levels. That’s not surprising given the fact revenue is down for the year and not expected to rebound fully until next year. Most recently, price action entered a pocket of volatility after testing resistance at the $9.00 and that was amplified by the 3Q results. The 3Q results are good, they just aren’t great so what we have is more likely a reset of prices than a full-blow reversal. If support can hold at the $8 level a move back up to $9 and possibly higher is likely. If not then a move back to $7.00 is likely. In either event, if Tilly’s decides to pay the dividend in February this stock is going higher.