Tillys Inc (TLYS) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Tilly's Incorporated second-quarter fiscal 2012 results conference. As a reminder, today's presentation is being recorded. At this time, I would like to turn the conference over to Anne Rakunas of ICR. You may now begin.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Tilly's second-quarter 2012 earnings results. On today's call are Daniel Griesemer, President and CEO, and Bill Langsdorf, Senior Vice President and CFO. A copy of today's press release is available in the investor relations 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 second-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 second-quarter earnings results. On today's call, I will be providing you with an overview of our second-quarter performance, and highlighting why we believe we are well-positioned to achieve our long-term goals. Bill will then review our financial results in more detail and provide our outlook for the third quarter, as well as our outlook for the full year 2012. I will provide a few closing comments, and then we will open up the call for your questions.

Our second-quarter performance built on the momentum from the spring season. In a few moments, Bill will review our one-time items that we incurred in the quarter. However, to summarize, we posted net sales growth of 20% to $105 million, grew our comparable store sales by 5.1%, and increased our adjusted net income by 49%. Through prudent fiscal and inventory management, we expanded our adjusted operating margins, even as we opened 10 new stores during the quarter. We are very pleased with these results, which demonstrate our focus on sustainable long-term quality growth.

We believe our success this quarter, and over our 30-year history illustrates the relevance the Tilly's brand and our unique business model, as well is the disciplined execution of our management team. Looking ahead, our goals are to achieve annual comparable store sales growth of between 4% and 5%, and net income growth in the high teens. We plan to capitalize on the significant opportunities we see to expand the Tilly's action sports-inspired lifestyle brand, through the following four growth drivers. By expanding our store base, by driving comparable store sales increases, by growing our e-commerce business, and by increasing our operating margins.

Now, I would like to talk a bit about each of these growth drivers as it relates to our second quarter performance. As I mentioned during the quarter, we opened 10 new stores, as planned, including our first stores in Chicago, Seattle, Minneapolis, Atlanta, and a number of other markets. As a group, the new stores opened in the first quarter and in the second quarter are performing well above our expectations, which continues to prove the broad relevance of the Tilly's concept and brands, as well as the success of our rigorous site selection and new store opening processes.

In line with our new store strategy, we have lengthened and enhanced the training period of our store managers and associates, implemented a more comprehensive marketing approach, and customized our merchandise strategy. Our long-term goals are to grow annual square footage in the mid-teens, and be in over 500 locations over the next 10 years, targeting high productivity malls and key power, neighborhood and outlet centers. While mindful of our long-term targets, we are also prepared to be nimble in responding to great real estate opportunities when appropriate.

Given the desirability of having Tilly's as a tenant, we continue to be presented with great locations that meet or exceed our stringent site selection requirements. As a result, we now plan to open 28 net new stores in 2012, compared to the 25 net new stores we discussed on our prior quarter's call.

Turning back to our second-quarter results, we drove consistent comparable store sales growth in the quarter by increasing our brand awareness in new markets, while continuing to benefit from maturing stores that have opened in recent years. By flowing in merchandise to our stores five days a week, we continue to offer our customers new, on-trend and relative merchandise across a broad assortment of brands and categories. This also allows us to quickly identify and satisfy emerging fashion trends. We drove traffic to our stores by staying connected to our young dynamic multitasking customer as we engaged them through our catalogs, e-mails, in-store events and contests, social media and grassroots community programs, and traditional media.

E-commerce sales grew 22% to represent over 9% of net sales during the second quarter, and e-commerce growth continues to outpace growth in our overall business. Growth was driven by our successful catalog, which we are delivering to a growing proprietary database of over 1.9 million customers, our online marketing efforts, and our expanded product offering that includes e-commerce exclusive merchandise.

We continue to expect e-commerce to grow to represent approximately 15% of net sales over time. And finally, we achieved a 70 basis point increase in our adjusted operating margin in the second quarter, which contributed to our 49% increase in adjusted net income. This was the result of solid comparable store sales growth, and the strong performance of our new stores opened during the year, combined with good inventory and expense control as we absorb the incremental public company costs, as well as the expenses associated with opening 10 new stores during the quarter.

I would now 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 second-quarter results, and then provide our outlook for the third quarter, as well as our updated outlook for the full year 2012. In my discussion I will be referring to various metrics on a non-GAAP or adjusted basis, and you can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release.

Now, moving on. For the second quarter, net sales increased 20.4% to $105.1 million, driven by a 5.1% comparable store sales increase, and 24 net new stores opened since the second quarter of 2011. Our comp increase was broadly based across the major product categories of the business. Our e-commerce sales, which are included in our comparable store sales grew 22%, and represented 9.3% of our sales in the second quarter of 2012. Comps in the quarter were driven by an increase in the average transaction value, with a number of transactions similar to last year.

Gross profit increased 21.1% to $31.1 million, or 29.6% of net sales, and represented a 10 basis point increase over last year. Sales leverage of more than 40 basis points in buying, distribution and occupancy costs offset a 30 basis point reduction in our merchandise margin rate. The lower merchandise margin rate in the second quarter of this year reflects the unusually-low markdown rates in last year's second quarter.

On a GAAP basis, selling, general and administrative expenses totaled $34.5 million, or 32.8% of net sales. SG&A costs include a one-time charge of $7.6 million to recognize life-to-date non-cash compensation expense for stock options. This charge was triggered by the consummation of the Company's initial public offering in the second quarter. This SG&A cost compares to $22.2 million or 25.4% of net sales in last year's second quarter. On an adjusted basis, SG&A costs rose from $22.8 million last year to $26.8 million this year. This reflects a 60 basis point reduction in SG&A as a percentage of sales, even as we continued to grow and invest in our business, and incur incremental public company operating costs.

This improvement in our SG&A rate reflects a combination of leverage, as well as our stringent operating expense control. Adjusted SG&A excludes the one-time charge for stock-based compensation from this year's quarter, but includes the ongoing non-cash stock-based compensation charge in this year's second quarter and a similar amount in last year's second quarter. Solid sales growth and lower SG&A costs as a percentage of sales led to the 70 basis point expansion in our operating margin on adjusted basis and drove a 45% increase in operating income to $4.3 million or 4.1% of net sales from nearly $3 million or 3.4% of net sales in the second quarter of last year.

On a GAAP basis, our income tax provision was a benefit of $2.1 million, compared to an expense of $40,000 in the second quarter of last year. As discussed on our first-quarter earnings call, our tax provision in the second quarter was expected to reflect a catch up charge of $1.9 million, applying an expected estimated 33% to 2012 effective tax rate to first-quarter pre-tax income, which has been taxed at a minimal S corporation rate until the Company's conversion from a S corporation to C corporation filing status early in the second quarter.

Our blended full year effective tax rate is now estimated to be about 33.6% for fiscal 2012, and we are required to apply this rate to first-quarter income and charge this catch-up to the tax provision in the second quarter, resulting in an actual charge of nearly $2 million. We also recorded a one-time net tax provision benefit of $3 million, reflecting the conversion of the relatively small S corporation deferred tax assets to the higher value of that deferred tax asset at the much higher ongoing C corporation tax rate. The net of these two charges in the second quarter was a one-time benefit to the tax provision of $1 million.

Our GAAP net loss for the second quarter was $1.2 million or $0.04 per share, based on the weighted average share count of 27.3 million shares. Which includes the non-cash charge to SG&A, as well as the one-time net tax provision benefit. This compares to net income in the second quarter of 2011 of $3.5 million or $0.17 per diluted share, based on a weighted average diluted share count of 20.5 million shares.

On an adjusted basis, net income for the quarter increased 49.3% to $2.6 million, or $0.09 per weighted average diluted share, compared to an adjusted net income of $1.7 million or $0.09 per weighted average diluted share in the second quarter of 2011. These adjusted results exclude the $7.6 million SG&A charge incurred current year's quarter, they assume an expected long-term effective tax rate of 40% for both this year and last year periods, and they add back the charge for ongoing non-cash compensation expense for stock options of $0.6 million before tax to the second quarter of 2011, which equals the charge for ongoing non-cash compensation expense in the second quarter of 2012.

Turning to the balance sheet, we maintained our strong financial position, with cash and marketable securities of $47.7 million, no debt, and no borrowings outstanding under our revolving credit facility at the end of the quarter. Capital expenditures during the quarter totaled nearly $9 million, compared to $5.7 million in the second 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 third quarter.

Quarter-end inventory rose 21% to $54.7 million, compared to $45.2 million at the end of the second quarter last year, and reflects an increase in retail store count from 131 stores at July 30, 2011 to 155 stores at July 28, 2012. Inventory on a per square foot basis increased 1% compared to the second quarter of last year.

Now I would like to turn to our outlook for the third quarter and the full year 2012. As a reminder, as a result of our conversion from a S corporation to a C corporation filing status early in the second quarter, we anticipate an effective tax rate of about 33.6% in both the third and the fourth quarters of 2012, reflecting an expected full-year effective tax rate of about 33.6% for fiscal 2012.

So moving on, for the third quarter, we expect comparable store sales growth in the range of 4% to 5%, on top of an 8.5% comp sales increase in the third quarter of 2011. SG&A is expected to include ongoing non-cash stock-based compensation expense of about $650,000 before tax, as well as ongoing public company costs of between $300,000 and $400,000.

Adjusted net income in the third quarter is expected to be the range of $7.9 million to $8.4 million, or $0.28 to $0.30 per diluted share. This assumes a 40% tax rate, which is consistent with our first and second quarter adjusted disclosure, as well as the effective tax rate expected after this year.

It also assumes an ongoing non-cash stock-based compensation charge in last year's third quarter similar to the expected charge in this year's third quarter, and it assumes a diluted share count of 28.2 million shares compared to 20.5 million diluted shares in the third quarter of last year. On a GAAP basis, and using the anticipated effective tax rate of 33.6%, our GAAP net income for the third quarter is expected to be the range of $8.8 million to $9.3 million, or $0.31 to $0.33 per diluted share.

Moving on to the full year, we have revised our outlook upward to reflect the better-than-anticipated results that we achieved in the second quarter. For fiscal year 2012, the company's retail calendar includes a 53rd week compared to a 52-week year in fiscal year 2011. We continue to 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 pre-tax income of approximately $750,000, which is included in our annual outlook. Adjusted net income for fiscal 2012 is expected to be in the range of $0.88 to $0.94 per diluted share.

This revised outlook excludes the one-time charge in recognition of life-to-date stock- based compensation, as well as the one-time tax benefit stemming from the S corporation to C corporation conversion that we recorded in the second quarter. It includes ongoing non-cash stock-based compensation expense in SG&A for the last three quarters of 2012, totaling between $1.9 million and $2 million before tax, which was not charged in the prior year.

It also includes an estimated $1.1 million of incremental public company costs for the year before tax, it assumes a 40% adjusted effective tax rate for the full year, and assumes a diluted share count of 26.1 million shares for the full year this year, compared to 20.5 million diluted shares last fiscal year. On a GAAP basis, net income for fiscal 2012 is expected to be in the range of $0.90 to $0.96 per diluted share.

We continue to expect capital expenditures for fiscal year 2012 to be the range of $35 million to $40 million, with approximately $25 million related to the opening of 29 new stores, less one store closure, as well as for remodels of existing stores. The balance is related to expenditures on material handling equipment and systems with the Company's new e-commerce distribution center, expected to open in 2013, as well as for IT and other infrastructure improvements.

Overall, this is another strong quarter. Our business was solid and continued to generate positive operating cash flows, providing the resources to further our growth objectives.

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

Thanks, Bill.

In summary, this was a great quarter for us, and I think our results really reflects the relevance of the Tilly's brand and our disciplined execution of our unique business model. We feel very good about our business and the opportunities ahead of us, and we're confident in our ability to deliver our guidance, while recognizing that we still have a lot of business to do in the second half of the year. We believe we have the people, infrastructure and financial resources in place to successfully execute our key growth initiatives, and achieve our goals, and that we are well-positioned for continued success in the second half of 2012, and over the long term.

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

Thank you Mr. Griesemer.

(Operator Instructions)

And we'll go first to Stephanie Wissink with Piper Jaffray.

Congratulations on another good quarter. Two questions from me, I know I'm limited to one, but I'm going to try to sneak two in. But first is just on the inventory discipline. Clearly, your stores look fantastic from a depth of inventory. I'm just curious are you thinking about 1% per square foot lift relative to your comp guidance of 4% to 5%. In the second part of that question is just your ability to chase into key styles and trends that you're seeing in the market. Thank you.

Okay great, yes. One of the things that we have been good at for a long time is inventory discipline, keeping our inventory current and fresh and full of the most relevant product that our customer wants. Our dynamic business model is built around flowing newness into our stores almost on a daily basis, and addressing the opportunities that we have by reordering and getting back into and expanding key trending fashion trends and categories.

So your two questions are around what are some of the differentiating factors and unique aspects of the Tilly's business model. We are committed to maintaining a healthy relationship between inventory and our forward-looking sales plans, and so you should look for that to continue in-line with basically sales growth.

And the lead times, and our ability to chase the business is what has differentiated us for years. We have strong relationships with our brands. Many of these brands, most of these brand partners are located within a 30 minute drive. We are constantly flowing newness, testing things both in our stores and online, allowing us to identify the trends that we can go back and maximize with their brand partners or fully exploit with our proprietary products. So your two questions are spot on. Some of the success recipes that we have for the whole business model.

All right, thanks. Best of luck.

Our next question comes from Jeff Van Sinderen from B. Riley.

I just have a couple questions if I could squeeze them in. First one is, maybe you could give us a little more color on what you're seeing for back-to-school trends? Where the strengths and weaknesses lie in each gender, perhaps? Comps there, and that sort of thing would be helpful.

So, we are not really commenting on third-quarter performance and the majority of the back-to-school season does happen in August and in early September. The performance for the second quarter was broad-based. It was across geographies, across product categories, across gender. We had some slight softness in the Boys and Girls business, but that is such a small part of the business, it is not meaningful. We have a very balanced business, the strength of the business is across all categories, and that gives us good confidence as we approach the all-important back-to-school and then holiday season.

Okay, and then maybe could just talk a little bit more about -- I know you have really tended to try not to be promotional. Maybe you could just talk about how you are feeling about the promotional backdrop? How you are running your promotions? I guess, how you were running them in Q2, any color you could give us on how you are running for back-to-school or do you want to go there? And anything you can say about your promotional plans for the holiday this year versus last year.

Okay. There is a lot in there. What I can say is that historically, the Tilly's business has been much less promotional that many of our peers and our competitors. We have a broad range of competition, and we see our competitors doing a lot of things, as we have communicated in the fourth quarter and in the first quarter, we really did not get involved in a lot of what we saw going on. The same can be said for the second quarter.

Promotions that were executed were planned. The promotions that we are running as part of our back-to-school business and our holiday business are planned, and anniversary events from last year. It's really about the combination of having the right product from this broad offering of brands, the hottest and newest styles across all those product categories that is more important. And then appropriately-planned promotions around certain categories or items or price points. Our plans are to continue that way, and I am real pleased about the long-term sustainable nature of that activity.

Great. Thanks very much, and continued success.

Our next question comes from Dave King, with ROTH Capital.

You may have touched on this already, forgive me if you did, I jumped on late. But can you talk about maybe what drove that comp for the quarter, what the biggest parts of it, how AUR trended, transactions, et cetera?

Hello David, it's Bill. Generally, the transaction counts on a comp basis was similar to last year. So, what drove it was average transaction size.

Okay.

What we did note was that it was broadly based across geographies. It was broadly based across our major product categories. And so, it was not one particular small area of the business that was especially an outlier versus others.

Okay, that's helpful. And one other quick just follow-up. Your e-commerce business in general, just remains really strong. That is kind of how I would characterize it. And you just comment maybe a little bit about what you might be doing versus maybe some of your closer competitors that we should be aware that set you apart? Maybe just talk about where you are so successful there? That would be helpful.

Okay so I will of course be a little reluctant to share much of the secrets. Right? But I think the big thing to take away is that the strength of the e-com business really confirms the strength and relevance of the Tilly's brand, and the product offering, and the opportunity that we have before us nationally. We are very active with our online partners and affiliates and online activity.

We have unique product that we offer online, including exclusive online product, a broader assortment of brands and offerings within those brands. So it is about a curated mix of the most relevant product targeted towards this action sports-inspired customer. And we see a large percentage of our Business coming from markets where we don't have stores, and then we see the e-com business grow in those markets once we put a store. So it is -- the combination is accretive. It is just, I think it's really a testament to the strength of the brand and the unique business model.

All right. Thanks so much, and congratulations on a strong quarter.

And from Bank of America, our next question comes from Lorraine Hutchinson.

I just wanted to follow-up on the gross margin commentary. You mentioned that merchandise margins were down based on a very low markdown rate last year. As we look into the back half, how are your merchandise margin comparisons versus your planned level of promotional or markdown activity?

Last year's merch margins in the back half were more normalized. It was, we saw in the quarter last year, the second quarter was the 15% comp, we were chasing goods more than we were in the back half of last year.

So you would expect that to normalize in the back half? The merch margin year-over-year change?

Yes, it should be more normal yes.

Okay. And then as we think about the SG&A growth rate in the back half but then also in the coming years, how should we think about investment spending versus trying to get some leverage on your sales growth?

I will take the first part of that and feel free to add anything else, Bill that you wish. I think what we are committed to, as we have in our 30-year history demonstrated, our willingness to invest in the long-term aspects of the business, do what is right for the business for the long-term, and balancing what is right to return to business performance, and return to the shareholders. So we are going to continue to do what is right for the long-term.

Our investment in our e-commerce facility is evidence of that, of moving next year into this very efficient facility that will be able to service that business for a very long time. And we will prudently make those decisions as they present themselves. But other than the e-commerce facility, there is ongoing refreshment of the systems, and keeping our stores current and updated, where appropriate. The other than that, no other major things planned at this time. So, as we increase or exceed our efficiency plans, in some of those or exceed our comp targets, should that happen, it would be reasonable to expect flow through of some of that into the bottom line.

Great, thank you.

(Operator Instructions)

And we'll go next to Richard Jaffe with Stifel Nicolaus.

A couple of quick questions. I have been noticing more private label product in the stores. I am wondering if that is a change, or if I'm just picking it up more than usual? That is private label versus some of the national brands. And then, if we could drill down a little bit on the new stores and your expectations for new stores, I know you said they exceeded expectations, but trying to understand what hurdles you have put on your expectations? Thanks.

Okay. On the private label, not sure where that is coming from. There has been no meaningful change in our offering, or our mix. We are seeing that the contribution, relatively flat to the last few years. So no meaningful change, I think maybe it is a function of back-to-school and a little bit of emphasis on maybe denim that might be leading to that. I am not really sure where that is coming from, but it is not based in the metrics and the offering that we have there, to the customer.

On the new store hurdles, what we are referring to is that we build a new store model that was a long-term investment model that we put forth for the new stores, that was a combination of new stores in new markets and new stores in established markets. A combination of malls and off-malls. Large and small, and a variety of market types, major and secondary, and wherever the opportunities take us. And what we are seeing is that across the board, we are exceeding that model in all aspects. So, it is in both malls and in off-malls, we are exceeding the we have built into that plan. And major markets and in secondary and new markets and in the established markets. So, it just continues to reinforce the long-term relevance and opportunity that we have here for the Tilly's concept.

Just to follow-up on that for a second. If you look at the chain-wide average sales per square foot by my calculation, it is about $350. If you were to compare that to new stores, would you say that they are comparable to that? Well above that? Well below it? And on the return on invested capital or return on sales for the first year, comparable to a new store five years ago? Or better or worse?

So, Richard, the new stores, certainly in their first year which would be their immature year obviously, are on a lower sales per square foot basis, than the chain as a whole, of course. What you may remember last year, our chain as a whole, the average store was about $2.7 million in sales, but our new store economic model would have a new store opening up at about $2.2 million in sales.

So, what we are saying is we are very pleased, because we are exceeding that new store economic model. But we are certainly not at Company-wide averages yet for those new stores. They still need to mature over a three- to five-year period. And so, we are real comfortable with where they are producing, both in new markets as well as in existing markets, exceeding our models for both types of markets.

Yes, that is helpful, thank you. And in terms of return, obviously above expectation would be above that expected return?

Yes, you are correct. So, that new store economic model, assuming a $2.2 million average first-year sales in a certain investment amount, gave us about year and a half of cash flow payback. And so, we are exceeding those numbers, certainly of the year and a half. So it is a shorter period than that.

And any thoughts on new store openings for next year, 2013?

We have got a lot of stores in the pipeline, in one form or another whether it is executed leases, or whether it is leases in final drafting, or still negotiating. So, we are comfortable with our projection of mid-teens net square footage growth for next year. And as far as the timing of those, probably using this year's quarterly timing, at this point, we would be applying it to next year to spread out those store openings. It is probably a good number to use right now per quarter. And as we get closer, we may have more detailed guidance on the timing by quarter.

And just one more, one last question. The Trukfit brand has gotten a lot of press. I am wondering if that is something you guys will be featuring in stores?

We have that, yes. That is a brand we carry.

I have seen in one store and online and I'm wondering if it is going to be an all store buy? Is it important to you guys? Or just one of many?

It is one of the many. You are hitting upon a key aspect, that it is broad-based across multiple lifestyles and multiple looks and feels. Constantly flowing in newness and testing new brands, and so I am pleased that you saw it and we're continuing to go forward with it.

It's not seeing it, it is wearing it. Thanks very much.

At this time there are no further questions in the queue. Mr. Griesemer, I will turn the call back to you for any additional or closing remarks.

Okay, great, thank you. And thanks again for joining us. We look forward to seeing many of you at the Goldman Sachs Retailing conference on September 5 and discussing our third-quarter results with you all in late November. Thanks, and have a good evening.

Ladies and gentleman, that does conclude today's presentation. We thank you for your participation.