Tillys Inc (TLYS) 2012 Q1 法說會逐字稿

Good day everyone and welcome to the Tilly's Inc. Fiscal First Quarter 2012 Conference Call. Today's conference is being recorded. At this time I'd like to turn this call over to Ms. Anne Rakunas of ICR. Please go ahead ma'am.

Thank you, good afternoon everyone. Thank you for joining us today to discuss Tilly's Inc. first quarter 2012 earnings results. On today's call are Daniel Griesemer, President and CEO, Bill Langsdorf, Senior Vice President and CFO, and Hezy Shaked, Co-founder, Chief Strategy Officer and Chairman.

A copy of today's press release is available in the investor relation section of Tilly's website at tillys.com. Shortly after we end this call a recording of the call will be available as a replay for 30 days in the investor relations section of the Company's website.

I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Tilly's business.

Accordingly you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter 2012 earnings release which was furnished to the SEC today on form 8-K as well as our filings with the SEC referenced in that disclaimer.

Also for today's call we have a limit of one hour so when we get to the Q&A portion, please limit yourself to one question at a time to give others the opportunity to also have their questions addressed.

And with that I will turn the call over to Daniel Griesemer, Tilly's President and Chief Executive Officer. Dan?

Thank you Anne and good afternoon everyone. Thank you for joining us on the call today to discuss Tilly's first quarter earnings results. Our first call as a publicly traded company.

I will begin the call today with an overview of our first quarter performance and then outline our long-term growth drivers. Then Bill will review our financial results in more detail and provide our outlook for the second quarter and full year 2012. I will provide a few closing comments and we will then open the call up for your questions.

We are pleased with our first quarter results as our primary goal is to generate sustainable long-term quality growth. Net sales were $96.5 million an increase of 16.1% for the quarter compared to the first quarter of last year, with comparable store sales up 4.3% following a strong comparison of up 18.2% in the first quarter of last year.

We maintained both our gross margin in a higher product cost environment as well as our strict financial discipline while we opened five new stores during the quarter. We are particularly pleased that this translated into a 21% increase in diluted earnings per share.

Our continued success is rooted in the strength of our business model that delivers a broad and deep merchandise assortment, supported by best in class systems and distribution infrastructure, and a multi-pronged marketing strategy. Passion that our customers have for our action sports inspired merchandise is rivaled only by the passion of the Tilly's associates in our stores and the disciplined execution of our management team.

With a heritage founded on offering a broader and deeper selection of brands, styles, colors, sizes and price points than our competitors, Tilly's has achieved consistent growth driven by an expanding footprint and same store sales increases. Since the beginning of 2007 we have more than doubled our store count while entering 34 new markets and this growth has been self-funded and has produced strong operating cash flows.

Our long-term goals are to achieve annual comparable store sales growth in the low to mid single digits. And net income growth in the high teens. Given the significant opportunity to expand the Tilly's customer driven lifestyle brand, we believe that we can achieve these goals by expanding our store base, driving comparable store sales increases, growing our e-commerce business, and increasing our operating margin.

Now I'd like to give you a bit of a road map on how we are going to deliver on this opportunity and achieve our goals.

The relevance of the Tilly's concept has been proven over our 30-year history. And our most recent new store performance is no exception. We opened five new stores in the first quarter in Kentucky, Oregon, South Dakota, Tennessee and Texas. And these stores as a group are performing well above our expectations.

We see an opportunity to expand our store footprint from 145 locations to over 500 locations over the next 10 years targeting high productivity malls, e-power, neighborhood and outlet centers. While our long-term annual square footage growth of mid-teens remains, the desirability of having Tilly's as a tenant is being reflected in the caliber and quality of the opportunities with which we are being presented. As a result we now expect to open at least 25 net new stores in fiscal 2012.

We believe we have the people and infrastructure in place to successfully execute our new store growth plans including a rigorous site selection process to help assure that we achieve an attractive payback period of approximately 18 months.

We also plan to drive comparable store sales growth by increasing our brand awareness in new markets while benefiting from the maturing stores we have been opening -- we have opened in recent years. Our target demographic is young, passionate about action sports inspired art, music and fashion, and exists in a multi-tasking world.

Our stores are in sync with their lifestyles and attitudes and we consistently offer them new, on trend and relative merchandise across a broad assortment of brands and categories. Our average 7800 square foot format and dynamic merchandise model allow us to regularly flow in new merchandise from the most relevant brands as well as quickly identify emerging fashion trends.

We drive traffic to our stores by connecting with and engaging our customers through our catalogs, emails, in store events and contests, social media and grass root community programs and traditional media.

We expect e-commerce to be a significant component of our growth as well, continuing to outpace growth in our overall business in the coming years. In fiscal 2011 e-commerce sales increased 33% and represented approximately 11% of total net sales. This channel is very effective at reaching customers in areas where we don't currently have stores and also helps us communicate with our customers about expanded newness in our assortments as well as upcoming events and promotions.

We expect e-commerce will grow to represent approximately 15% of net sales over time with growth driven by our successful catalog, online marketing efforts, and expanded product offering including e-commerce exclusive merchandise.

Supporting these key growth initiatives are the state of the art distribution center and information systems in which we have invested over $30 million since 2003. Our systems and distribution center provide us the infrastructure to support a national retail footprint in excess of 500 stores with minimal incremental investment.

In addition, we continue to seek ways to lower costs and improve operational efficiencies throughout the organization. We see an opportunity to expand our operating margins the upper end of the high single digits over time through scale efficiencies and continued process improvements.

Contributing to this will be the opening of a dedicated distribution center for our e-commerce business in the first half of fiscal 2013. And continued upgrades to our point of sale merchandise allocation and merchandise planning systems.

Now I would like to turn the call over to Bill Langsdorf. Bill?

Thank you Dan. Good afternoon everyone. I will begin by reviewing the details of our first quarter results and then provide our outlook for the second quarter and full year of 2012.

For the first quarter net sales increased 16.1% to $96.5 million, driven by a 4.3% comparable store sales increase and 19 net new stores open since the first quarter of 2011.

Comp growth in our new markets outpaced positive comp growth in our heritage markets. Our comp increase was broadly based upon -- across the major product categories of the business. Our e-commerce sales, which are, included in our comparable stores sales grew 31% and represented 11.3% of our sales in the first quarter of 2012 compared to 10% of our sales in the first quarter of 2011. Comps in the quarter were driven primarily by an increase in the size of the average transaction.

Gross profit increased 16.1% to $30.4 million. We achieved a 40 basis point increase in merchandise margin, which was offset by a net increase in buying, distribution and occupancy costs of 40 basis points. The result was a gross profit rate of 31.5% of net sales, similar to the prior year rate.

Selling, general, and administrative expenses totaled $24 million or 25.3% of net sales. This compares to $21.2 million or 25.5% of net sales in last year's quarter. This reflects a 20 basis point reduction in SG&A even as we continue to grow and invest in our business.

Improved efficiency on payroll and payroll related costs was partially offset by a slight increase in marketing costs as a percentage of net sales to support more grand openings and a larger spring catalog distribution than last year.

Solid sales growth and lower SG&A cost as a percentage of sales led to a 20 basis point expansion in our operating margin and drove a 21.4% increase in operating income to $6 million or 6.2% of net sales from nearly $5 million or 6.0% of net sales in the first quarter last year.

Our income tax expense was $68,000 reflecting our S Corporation status during the first quarter of the year and compares to $56,000 in the first quarter of last year. Our GAAP net income for the first quarter was $5.9 million or $0.29 per diluted share based on a weighted average diluted share count of 20.5 million shares. This compares to net income in the first quarter of 2011 of $4.9 million or $0.24 per diluted share based on a weighted average diluted share count of 20.4 million shares.

On a pro forma basis adjusting for income taxes as if the Company had been a C Corporation during both the first quarter of 2012 and the first quarter of 2011, and assumed long term effective tax rate of 40%, net income for the quarter increased 21.7% to $3.6 million or $0.18 per diluted share from $3 million or $0.14 per diluted share in the first quarter of 2011.

Turning to the balance sheet, our financial position remains strong with cash and cash equivalents of $21.7 million, no debt and no borrowings outstanding under our revolving credit facility at the end of the quarter.

Capital Expenditures during the quarter totaled $7.5 million compared to $3 million in the first quarter of 2011 and were primarily related to new stores opened during the quarter and new stores under construction during the quarter that are expected to open in the second quarter.

Quarter end inventory rose 13% to $40.3 million compared to $35.6 million at the end of the first quarter of last year and reflects an increase in retail store count from 126 stores at April 30th, 2011 to 145 at April 28th, 2012. Inventory on a per square foot basis decreased about 3% compared to the first quarter last year.

Now I'd like to turn to our outlook and we will start with a brief outline of our anticipated tax treatment as it relates to our expected results. As a result of our conversion from an S Corporation to a C Corporation filing status early in the second quarter, our blended full year effective tax rate is estimated to be about 33% for fiscal 2012.

We must apply this rate to first quarter income and charge this catch up to the tax revision in the second quarter. The result will be an estimated 55% to 60% tax rate in the second quarter followed by an estimated 33% effective tax rate in the third and fourth quarters.

We will also be recording a one-time tax provision benefit of nearly $3 million to reflect the conversion of the relatively small S Corp deferred tax asset with a higher value of that deferred tax asset at the much higher ongoing C Corp tax rate. For next year the effective tax rate is expected to be about 40% for each of the quarters in fiscal 2013, if there are no significant tax law changes.

With that said, I will move onto our outlook for the second quarter of fiscal 2012. For second quarter we expect comparable store sales growth in the range of 4% to 5% on top of a 15.2% comp sales increase in the second quarter of 2011.

SG&A is expected to include the following two items not seen in earlier quarters. First, a one-time non-cash charge to SG&A expenses of $7.6 million or $5.1 million net of tax at the estimated 33% effective tax rate to recognize [life to date] non-cash compensation expense for stock options. These stock options had a performance conditions which stipulated that they could only become exercisable upon completion of an IPO.

Second an ongoing non-cash stock based compensation expense between $600,000 and $650,000 in the second quarter before tax.

Our pro forma expectations for the second quarter are as follows using a 40% pro forma tax rate, which is consistent with our first quarter pro forma disclosure, as well as consistent with the effective tax rate expected after this year.

The following one-time impacts on GAAP net income are being excluded for these pro forma income expectations. Excluding the one-time charge to recognize life to date stock based compensation, excluding the catch up charge to the tax revisions for Q1 income that was taxed at an S Corp rate in the first quarter and excluding the one-time tax provision benefit for deferred taxes that we expect to record in the second quarter of 2012 as just described.

The result is a pro forma net income in the second quarter that is expected to be in the range of $1.8 million to $2.2 million. This represents an income range of $0.06 to $0.08 per diluted share and assumes a diluted share count of 28.2 million shares for the second quarter of this year compared to 20.4 million diluted shares in the second quarter of last year.

On a GAAP basis the addition of the charges and credits just discussed are expected to result in a GAAP net loss for the second quarter in the range of $1.6 million to $2 million. This represents a loss per share in the range of $0.06 to $0.07 per share and assumes a basic share count of 27.7 million shares for the second quarter this year, reflecting the addition of 7.6 million shares from the IPO.

Moving on to the full year. For fiscal year 2012 the Company's retail calendar includes a 53rd week compared to a 52-week year in fiscal 2011. We expect comparable store sales to grow in the range of 4% to 5% this fiscal year on a 52 week versus 52-week basis. We expect the 53rd week to contribute pretax income of approximately $750,000, which is included in our annual outlook.

Excluding the onetime charge in recognition of life to date stock based compensation and excluding the one-time S Corp to C Corp tax benefit that we expect to record in the second quarter of 2012, we expect pro forma EPS using a 40% pro forma effective tax rate for the full year to be in the range of $0.84 to $0.92 per diluted share, and assumes the diluted share count of 26.4 million for the full year this year compared to the 20.5 million diluted shares last fiscal year.

This forecast includes ongoing non-cash stock based compensation expense in SG&A for the last three quarters of 2012 totaling approximately $1.9 million before tax which was not charged in the prior year. And also includes an estimated $1.1 million of incremental public company costs for the year before tax.

The GAAP earnings per share for fiscal 2012 is expected to be in the range of $0.80 to $0.87 per diluted share.

Capital Expenditures for fiscal year 2012 are expected to be in the range of $35 million to $40 million with approximately $24 million related to the opening of at least 27 new stores, net of two closures, as well as remodels of existing stores. The balance is related to expenditures on material handling equipment and systems for the Company's new e-commerce distribution center expected to open in 2013 as well as for IT and other infrastructure improvements.

Overall this was a very good quarter for us. Our business is strong and continues to generate positive operating cash flows providing the resources to further our growth initiatives.

Now I'd like to turn the call back over to Dan for some closing remarks. Dan?

Thanks, Bill. In closing this is a very exciting time for us all here at Tilly's given the growth opportunities we see ahead of us. Our success to date is a result of the strong entrepreneurial culture and collaborative spirit that exists throughout our organization. We are passionate about what we do and are focused on maintaining sustainable long-term quality growth by remaining the destination for the latest, most relevant merchandise and brands that are important to our customers.

I'd now like to open up the call for your questions. Operator?

Thank you sir. (Operator Instructions). We will take our first question from Lorraine Hutchinson with Bank of America.

Thank you, good afternoon. I wanted to just follow up on the deleverage that you saw in the gross margin line of your fixed costs and, I guess first could you talk about what the cost pressures are and what type of comp you'd need to leverage that line item? And then second could you just talk about the back half gross margin opportunity either via leverage or merchandise margin? And if there is any potential to see that margin go up in the back half?

Hi Lorraine, it's Bill, thanks. The deleverage of about 40 basis points that we spoke to was really related to new stores in the first quarter. And as you know from an accounting standpoint we need to record rent even though we haven't opened those new stores and that occurs for the five stores compared to the one we opened in the first quarter of last year.

Plus we had a great many more in the cycle ready to open for the second quarter this year compared to last year.

So in a general sense we would expect an inflection point of about 3% to 4% comp on an annual basis to be where we start to leverage. In certain quarters it will be more or less than that. First quarter, as you know, is a lower sales volume quarter so leverage isn't quite there that may be, for instance, in the fourth quarter.

But generally, that is where we start to leverage on a normal basis if we were cycling the same number of new stores and things, each year.

On your gross margin question, you are talking about the second half of the year, could you repeat what the question was?

I was just wondering if there was any opportunity either on the fixed cost leverage side or on the merchandise margin side on the back half.

Well, on the fixed cost part of gross margin to the point we just discussed there, if we have a 4% to 5% comp, then we may see a little bit of leverage, certainly, that we didn't see in the first quarter. Because if we have more sales against which to lever against.

On the gross margin -- merchandise margin side of it, we are, certainly, modeling out consistency with last year but as we saw on the first quarter there is always an opportunity, perhaps to improve on that. But right now we are modeling out consistency.

Thank you very much.

We will take our next question from Jeff Klinefelter with Piper Jaffray..

Thank you. First, maybe just following up on that leverage question a little more generally, Bill. And I apologize if I missed this, but what comp -- talk a little bit more about your leverage point for both occupancy as well as your operating expenses for the balance of this year and on a normalized basis going forward, and maybe provide a little of thought of how we can think about the flow through for comp points beyond that leverage point? Thank you.

Sure Jeff, for both SG&A and occupancy in general it would be around the 3% to 4% range where inflection point of comp where we had start to see leverage. This year, as you know, we have got incremental public company costs that are moving that inflection point a little bit higher for our SG&A costs. So you won't see as much leverage at the 3% to 4% level as you might in future years, where it would otherwise start.

For occupancy, in the higher volume quarters you are likely to see a little bit more leverage than you certainly saw in the first quarter. So 3% to 4% for the full year is probably a good number to estimate where we start to lever. And then so for next year where we don't have the incremental public company costs and certainly we won't have the big change in stock base compensation, year-over-year next year as we do this year, you'll start to see more leverage on the SG&A line above that 3% to 4% level than you will this year.

Okay, thank you that is helpful. Also, it sounds like your comp in Q1 was largely driven by the size of the transaction. Is that both units per transaction as well as average selling prices and could you -- maybe Dan, and/or Bill, put that in the context of the current environment -- promotional environment that we are in? How -- do you see yourselves competing against some of those promotions in the mall and how is that playing into your overall comp performance?

Sure Jeff, the comp -- what we'll be talking about on a go forward basis is really what the major drivers are, rather than digging down, kind of, lower detail. Transactions were slightly positive as another point to that piece to help you understand where it come from. What we were referring to in that was the average dollar sale in the mix so that's how you think about where that comp -- what was the primary driver was for that comp.

The way we're thinking about comp in general is that we are looking for long-term sustainable patterns of growth here. We demonstrated it in the fourth quarter of last year. We demonstrated it again in the first quarter of this year. We will continue to do what is right for the long term for the business. These are sustainable levels of business that we are committing to on a go forward basis and while we recognize -- everybody knows that fourth quarter was very, very promotional. We are seeing varying degrees of promotional activity in the first quarter and continuing on into the second quarter.

We are making our decisions based on what is right for Tilly's and the Tilly's brand for the long term. So anything we are talking about for the second quarter in our guidance reflects -- is taking into consideration current trends and reflecting that and so we are running the business for the long term.

Okay and then one last thing Dan. In terms of the store performance, you now have a few stores open in the Midwest and I know you have talked a lot in the past about heritage and new stores out in the East Coast, the mid-Atlantic. And I know it's early for these, but any initial observations on Midwest store openings, performance, kind of putting in context with the overall chain?

Sure, as I said in my opening comments that we're very pleased with the performance, that they're well above expectations. As a group, I am very proud of the work that we have done to both secure and then open, in a quality way, fantastic locations in markets as diverse as Chicago and Sioux Falls, South Dakota and Lubbock, Texas. So very different animals, but the response has been consistent. It is very, very positive.

We have a lifestyle center, it is kind of a power center, in the suburbs of Chicago that is just doing extremely well. We have a mall in Sioux Falls, South Dakota and another mall in Lubbock, Texas all doing extremely well. So these are giving us -- continue to give us confidence as we saw, as we expanded outside of markets we have been in a long time and went to the East Coast and now into the Midwest, just continues to give us confidence that we can grow this business and that there is relevance for the Tilly's concept nationally.

That's great, thank you very much.

Thank you.

We will take our next question from Richard Jaffe with Stifel Nicolaus.

Thanks very much guys, a merchandising question. Just how you saw things break out in the stores in terms of categories, men's versus women's, footwear, accessories. If you could rank them or give us a sense of the outperformers versus the laggers?

The primary drivers in the business were the men's and the footwear business, the only business that was not positive and it was only slightly, like rounding error negative was the Boy's business.

Great, thank you.

Thank you.

We will take our next question from Sharon Zackfia with William Blair.

Hi, good afternoon. Just a quick question on your outlook. Obviously, very encouraging to see you do the 4.3% comp against your toughest comparison of the year. And as you know your comparisons get easier from here so just wondering is the 4% to 5% comp guidance something where it is just a good starting point, do you think there is upside to that or is there something else happening in the business where you would expect the multiple year comp trends to start to decelerate a little bit from here?

Well we do have an easier comparison as we go throughout the year but, when you look back the year prior those comparisons actually got tougher. So we are modeling this 4% to 5% as something we believe we can commit to long term. We believe it is sustainable, think that it's delivering it in a quality way. Our job here is, obviously, to try to deliver as good a result as possible, so we are going to be focused on that. But it will really be what is right for the long term.

Okay and then the trends in May. Are you seeing -- I think you said that the newer markets were outperforming heritage markets in the first quarter. Is that something that's continued into May?

Well we won't be breaking it down to that level of detail, Sharon, on an ongoing basis. What we can say is that we are confident that we've incorporated current trends into our view for the quarter.

Okay, great, thank you.

Okay, thank you.

We will take our next question from Jeff Van Sinderen with B Riley.

Good afternoon, in terms of inventory, it looks like your comp inventory is running down. Can you give us anymore on how we should think about inventory planning as we head into back-to-school versus the anticipated comp trend? In other words should we expect to see inventory per foot trending above or below what your planned comp sales rate is?

Yes. You can generally assume that we will be running the business with the kind of discipline we have executed historically. Keeping our inventory clean and current and in line with our store growth and our sales growth. So that is just kind of how we like to run the railroad here and want to keep it that way.

Okay and then among the new stores that you have opened, anything that you can say about any differences in four wall contribution in either your in-mall or off-mall stores? Any difference there, if you can just also touch on the mix of new stores that you have planned this year, off-mall versus mall?

Yes -- no real difference and we wouldn't normally get into that level of detail in our comments about the business. What you can say is that whether it is mall or off-mall, the above expectations -- well above expectations is not just at the top line it is at the bottom line. We are very pleased with the way the brand continues to have relevance across the country.

And we are modeling long term a balance between mall and off-mall. So the chain today is roughly half mall, half off-mall and our long-term targets are to have the chain reflect that. We don't manage specifically to that, it is really a function of where is the best location in the venue where we want to be, in a trade area where we know we have an opportunity. But long term you can model 50/50.

Got it. Thanks and good luck this quarter.

Okay. Thank you.

Thank you Jeff.

(Operator Instructions).

Okay --

And that does it.

Yes. I think we are good, operator. Thank you -- thanks again for joining us. We look forward to discussing our second quarter results with you in late August and seeing many of you at upcoming investor conferences this year. Have a good evening.

That does conclude today's conference, we do thank you for your participation.