Tillys Inc (TLYS) 2014 Q2 法說會逐字稿

Good day, and welcome to the Tilly's Incorporated second-quarter fiscal 2014 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anne Rakunas. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly's second-quarter 2014 earnings results. On today's call are Daniel Griesemer, President and CEO, and Jennifer Ehrhardt, CFO. A copy of today's press release is available on 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'd 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 we made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second-quarter 2014 earnings release which is furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

As for today's call, we have a limit of one hour. 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.

Thank you, Anne, and good afternoon, everyone. Thank you for joining us today. On our call, I will be providing you with an overview of our second-quarter performance and the key factors that drove our results. I will then review the advancement our 2014 strategic initiatives during the quarter. And then Jennifer will review our financial results in more detail and provide our outlook for the third quarter of fiscal 2014. I will provide a few closing comments, then we will open up the call for your questions.

Our sales and earnings for the quarter were in line with our expectations and reflect the continuation of challenging market conditions combined with the planned reduction in our clearance inventory. Despite continuing traffic headwinds, we successfully managed our inventory in season. As a result, we ended the quarter with healthy product margins, significantly less summer goods than last year, and inventory about flat on a per-square-foot basis. We also maintained our pristine balance sheet and grew our cash over the prior quarter.

As we begin the third quarter, our merchandise offering is well-positioned for the important back-to-school selling period. And although traffic headwinds continue, I am encouraged by improvements in sales trends so far in the third quarter, including strength in our regular price business.

During the second quarter, we made further progress on our 2014 growth initiatives. As we previously outlined, these include increased product differentiation and innovation, a greater emphasis on our digital platforms, and evolving our real estate strategy. We firmly believe these initiatives are laying the foundation for increased market share and improved profitability.

First, in terms of product differentiation and innovation, we continue to add action sports inspired products and brands that are new, unique or exclusive to Tilly's. Our new brands, brand extensions, exclusives and collaborations performed well and strengthened our confidence in this product strategy. We introduced several new brands including Asphalt Yacht Club, Baker, Spitfire and ICNY. We delivered a number of exclusive products including styles from Volcom, RVCA, Vans and LRG. We also introduced several new or exclusive collaborations, including offerings from Neff, Nike, Vans and most recently the Asphalt Yacht Club Nyjah Huston collection. I'm happy to share that on Sunday, Nyjah became the Street League super crown world champion, wearing one of our exclusive T-shirt styles from this collection.

We also expanded our offering of Full Tilt sport and Patrons of Peace in juniors, and Ethica boxers and accessories, and offered a dominant assortment of men's joggers and on-trend junior fashion tops, to highlight just a few.

Also, we rolled out a key back-to-school footwear initiative late in the second quarter, which was well received and helped to drive improved footwear comparable store sales. We are pleased that this initiative has continued to strengthen our footwear business so far in the third quarter.

Turning to our digital platform, during the quarter we continued the upgrade of our e-commerce and mobile platforms and are on track for a rollout this fall. We believe these upgrades will continue to strengthen our well-developed omni-channel capabilities and significantly improve our customers' experience as we connect how, when and the way they want. We believe these efforts will better position us to take advantage of the extraordinary e-commerce opportunity ahead of us.

Our Tilly's Hookup loyalty program continued a significant growth, as we expect to pass the one million-member mark in the next few weeks. The response to our program has been incredible, allowing us more ways to engage, interact and communicate with our customers.

Our new state-of-the-art e-commerce fulfillment center is fully functional, and, as expected, we have entered the fine-tuning phase of operations to maximize efficiency over the long-term consistent with our history of operational excellence. We believe our e-commerce business will be a key driver of our long-term growth, and we are well prepared to efficiently capitalize on this opportunity.

Looking at the progress related to our real estate strategy, we opened 6 new stores in the second quarter including 2 outlets, closed one store for a total of 203 stores at the end of the quarter. To date, we have opened a total of 13 stores in fiscal 2014 in both our heritage and new markets. Examples of markets where we have recently opened new stores with a strong customer response include Minneapolis, Sacramento and Chicago. A highlight of the real estate strategy has been the strong collective performance of these stores year to date under the new store economic model we announced in the first quarter. We remain on track to open at least 18 new stores in fiscal 2014 and are on target with our outlet plans as well. We are adhering to our rigorous and disciplined approach to our real estate selection process, focusing on only the best locations and deals, and are pleased that the pipeline of opportunities and the venues where our new and existing customers want to shop remains strong.

And now I would like to turn the call over to Jennifer for more detail on our financial performance in the quarter and to update you on our third-quarter fiscal 2014 outlook. Jennifer?

Thank you, Dan, and good afternoon, everyone. For the second quarter, net sales were $123.1 million compared to $123 million in the second quarter of 2013. Comparable store sales decreased by 7.1% compared to the same period in 2013, reflecting the continuation of challenging market conditions combined with the planned reduction in our clearance inventory, as Dan previously discussed. Comparable store sales reflect relative strength in juniors, kids and footwear and continued softness in men's and accessories. The improvement in footwear was driven by a key back-to-school initiative rolled out late in the second quarter. Our second-quarter comps reflect decreases in traffic and conversion, partially offset by increased average transaction value. Gross profit was $34.7 million, or 28.2% of net sales, compared to 30.8% of net sales in the second quarter of 2013. The decline was primarily due to deleverage of occupancy cost and a 40-basis-point decrease in product margin. During the quarter, we remain focused on delivering healthy product margins while ensuring we ended the quarter with significantly less summer goods than last year.

Selling, general and administrative expenses were $32.3 million, or 26.3% of net sales, compared to an SG&A rate of 24.9% in the second quarter of 2013 and primarily reflect deleverage on store payroll. Our operating margin was 1.9% compared to 5.9% in the second quarter of 2013, reflecting the previously discussed deleverage of occupancy and store payroll costs and slightly lower product margins.

Net income was $1.3 million, or $0.05 per diluted share, based on a weighted average diluted share count of 28 million shares and an effective tax rate of approximately 46%, which was higher than expected due to certain vested stock option forfeitures in the quarter. This compares to net income in the second quarter of 2013 of $4.3 million, or $0.15 per diluted share, based on a weighted average diluted share count of 28.1 million shares and an effective tax rate of 40%.

Turning to the balance sheet. We ended the quarter with cash and marketable securities of $57.4 million, an increase of 13% over the second quarter of last year. We had no borrowings and no debt outstanding under our revolving credit facility at the end of the quarter. Cash used for capital expenditures during the quarter totaled $6.7 million, compared to $12.4 million in the second quarter of 2013, and was primarily related to new stores and remodels and the completion of our new e-commerce fulfillment center.

Inventory totaled $70.4 million at the end of the quarter, approximately flat on a per-square-foot basis compared to the prior year. We remain focused on continuing to deliver healthy profit margins and maintaining strong inventory management. We expect a slight improvement in product margins in the third quarter and inventory per square foot at the end of the third quarter to be flat to slightly up in comparison to the prior-year period.

Our outlook for the fiscal 2014 third quarter reflects the improved sales trends experienced to date while also recognizing the potential for continuation of traffic headwinds. We expect third-quarter comparable store sales to decline in the mid-single digits and net income per diluted share to be in the range of $0.09 to $0.13. This assumes an anticipated effective tax rate of approximately 41% and a weighted average diluted share count of 28.1 million shares. Third-quarter 2013 net income was $6.1 million, or $0.22 per diluted share, based on a weighted average diluted share count of 28.2 million shares.

We continue to expect capital expenditures to decline in fiscal 2014 to between $24 million to $28 million as our new e-commerce fulfillment center is complete. The majority, approximately $22 million, relates to the opening of at least 18 new stores during the year and remodels and refreshes of our existing stores as well as investments to further improve capabilities across our digital channels, as we have discussed.

Our business continues to generate solid cash flows and we remain debt-free, with sufficient resources to fund our growth initiative. We remain committed to stringent cost discipline as we continue to invest in our business for long-term growth.

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

Thanks, Jennifer. I'm not satisfied with our results. However, I am proud of our team's ability to remain focused on the long-term health and growth opportunities of our business. While aware of the overall challenging retail environment, improvements in sales trends so far in the third quarter give us confidence that we have the right strategies and plans in place to best position our business for the second half of the year and beyond. We remain disciplined and committed to pursuing opportunities that we believe will increase our market share, deliver strong product margins and improve profitability in the long-term.

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

(Operator Instructions). Betty Chen, Mizuho Securities.

It's Alex Pham on for Betty. I was just wondering if you could talk a little bit about the competitive landscape. Definitely traffic has been down across the board for many retailers. And just wondering if you could talk about some of the strategies that you guys were going to implement in terms of being able to combat that traffic and the traffic decline in the back half.

So we believe the competitive environment will remain relatively promotional, as we have seen them do pretty much all year and certainly through back-to-school. We remain intently focused on the things that we can control, and that's the product offering, the experience in any channel the customer chooses to access us, and controlling the overall cost and execution. So it really is around a focus on the product, as I have articulated already, and certainly opportunities through our digital channels -- those are the areas we are focusing on.

Great. Thanks, and best of luck.

Jeff van Sinderen, B. Riley.

I wonder if you could just give us a sense of what the brick-and-mortar comp was versus the e-com business, how much the e-com business grew in the quarter. And then maybe are you expecting that to remain pretty similar in Q3? And then also maybe you could just touch a little bit more on what you're seeing drive the improvement that you are seeing so far for back-to-school. Are you seeing positive comps? Is it transactions running positive, EBT you are? Anything you can say there. And then also if you exclude the clearance merchandise, I know you mentioned full-price selling was getting better. But is that excluding the clearance merchandise? And then also if you can just speak to whether or not you are more or less promotional versus last year excluding clearance.

Wow, that's a lot there. (multiple speakers) I think I took a lot of the notes. Essentially the e-commerce performance was better than the brick-and-mortar. The total -- we look at the total as a combined total channel agnostic. We're viewing that as the way we are going forward. Q3, we have seen a general improvement in all trends in the business, and that's coming from improvement in traffic, improvement in conversion, improvement in average dollar sale. Category -- all categories have generally improved, led particularly by men's and accessories. E-commerce is better across the board. We think that -- estimate that a couple of hundred basis points in comp drag were created by lack of clearance in the quarter. And we have seen these trends improve; the beginning of the quarter was -- the second quarter was soft. Business improved in June and July, and we have seen it continue to improve thus far in the third quarter. And that includes performance and regular price excluding clearance impact.

Okay. That's a great summary. Thanks. I'll let someone else jump in.

Dave King, Roth Capital.

I guess there was a lot of questions there. I guess following up on one of Jeff's in terms of the e-com business. Did I hear you right in your response, Dan, that e-com business in the quarter -- how did that trend versus the prior quarter? And what I'm looking for is also just kind of a sense of how much the lack of residual inventory on the e-com business kind of weighed there. Because it sounds like on the overall, there's probably a couple hundred basis points if I heard you correctly, so just better understanding of that would be helpful.

Sure. E-commerce was down slightly in the quarter. Regular-price business was up, and the large headwind -- the e-commerce experience was the clearance performance. As I said, we have seen all of it improve as we've gotten into the third quarter, but that's really what drove the e-commerce performance better than the total, but still just slightly negative.

Okay. That helps. And then maybe turning to the guidance, Jennifer, it sounded like in your remarks, you said that product margins for the third quarter, you thought would -- you guys are expecting them to be up. I guess I'm just looking for some color on that with inventory on a square-foot basis, at least as we see it at the quarter-end kind of being flattish, even amidst kind of the comp declines. And then reconciling that with what the EPS guidance is, I'm trying to figure out how we should be thinking about that in both the product margin versus deleverage kind of basis, and then maybe the difference being kind of how we should be thinking about SG&A.

Sure. Product margin being slightly up in the third quarter is what we have reflected in our guidance. And that's looking at considering last year in the third quarter, it represented -- our product margin actually represented one of the highest that we've had in the third quarter in six years. So reflecting that is where we are coming out with a slight improvement in product margin. And we should expect in the third quarter the normal deleverage that we typically have on occupancy to get to the gross profit, and then, as well when you move to SG&A, similar normal deleverage on our payroll as well as increased opportunities for marketing spend in the third quarter.

Okay. And how much should we be thinking about in terms of that marketing spend delta generally?

We are not disclosing that, but I think it has a pretty meaningful impact on overall gross profit and operating income when you look at that in the third quarter.

Fantastic. Thanks.

Richard Jaffe, Stifel.

Dan, just a question following on your comments. Obviously, the new brands, the unique and exclusive products, the collaborations are really important to the business and driving traffic. Could you give a sense, has that become half your business, three quarters? If it is a source of success and clearly a point of differentiation in a highly competitive market, is there a chance to do more to make the store skewed more heavily towards exclusives and new product to create an environment that's that much more exciting and perhaps driving sales as well?

Yes, it is a meaningful percent. It is, as we have said, going to increase in the amount of these kind of things that we are doing as the year progresses. And we've made nice strides going into the back-to-school offering and look to continue to do that going forward as we work on further innovation and differentiation of our offerings. It is certainly, you're pointing out, a good opportunity, and we recognize it and want to continue in that direction. But it isn't just coming from new brands; it's also working with our long-established and highly productive, very important brands to make sure that what we have from them is unique and differentiated as well.

So we should look for incremental improvement 3Q, 4Q, and then into spring 2015. Is that safe to say?

It appears that the things we are doing are working, given the strength and improvement in trends we have seen for back-to-school so far. I think we recognize it as an important component of making sure this offering is as compelling to our customers as possible. So that would be safe to say that you would expect to see more of it.

And given that and your very cautious guidance for third quarter, could you just reconcile what you've seen as an improving trend and a better mix coming down the pike, and yet 5% comp declines, significant earnings decline? Could you sort of talk us through that? Or (multiple speakers).

While we are certainly encouraged by the trends we have seen thus far in the quarter, we also realize that there have, over the last several quarters, been meaningful traffic headwinds and that we've also had a historical pattern of post-peak time selling softness. And we are incorporating all of those views into our guidance, which gets us overall -- an improvement in the overall environment from the high single digits to the mid-single digits, but a caution given some historical patterns that we have seen.

Okay. Thanks very much.

Stephanie Wissik, Piper Jaffray.

It's actually Maria (inaudible) on for Stephanie. We just had a couple of quick questions. I'm just wondering if you can talk a little bit about how the brands have been supporting value-based promotions for assortments in order to allow you to compete in the promotional environment in the back half.

So one of the things that has always been a cornerstone of Tilly's success has been the incredible relationships we have with the brands and brand community here in Southern California and across action sports. And it is through decades of dealing with them with a high level of integrity that has positioned us to be able to take advantage of a lot of different things, including making sure there is the right value component in our offering. But a lot of that value also can come from other places, and we have a highly regular price business. The overwhelming majority of our business is regular price, but we have great support and partnership across all product categories and all brands.

Great. Thank you. And if I can squeeze one more in, can you just talk a little bit about how denim has been performing? Obviously it's been quite challenging so far, but can you also talk about what percentage of your mix that is? Thank you.

Denim still is a large percentage, and it obviously is not the hot trend category this fall. We acknowledge that, recognize it. It is still a very big business. But we were able to direct our assortments into things as I had mentioned -- the jogger pants, particularly in men's, and denim alternative bottoms on the junior side. I think we are well-positioned from a trend standpoint in our offering. It's still a big part and a big important part of the business, but it seems like there's other categories making up the softness that's going on there.

Great. Thank you so much. Best of luck.

Sharon Zackfia, William Blair.

I think I'm going to ask a question that was already asked, but maybe ask it in a different way. I guess the guidance for the third quarter kind of implies a similar operating margin decline to what you saw in the second quarter, but on a slightly better comp and, it sounds like, better merchandise margins. Can you help us kind of reconcile that difference? Is that the marketing you were referencing?

On operating income, Sharon, in Q2 definitely it was disappointing on the decline over LY. Our Q3 guidance reflects another disappointment, but an improvement on that. So definitely most of that, kind of going back to what we discussed, is going to be highly driven by the deleverage in occupancy and the deleverage in payroll. As you referred, the opportunities for some additional marketing activities in the quarter was slightly offset by improved product margins.

Right, but I think the operating margin, kind the implication is still down 400 basis points year over year roughly for the third quarter, which is what you saw in the second quarter. I guess I'm surprised that you would see some sort of abatement there on a year-over-year comparison if merchandise margin's a little bit better and the comp's a little bit better.

It's a much bigger volume quarter. Those 400-basis-point change delta that you referring to is a higher number and a bigger base. I think that's where the disconnect might be coming from, Sharon.

Okay. Maybe just a separate question. Are you seeing any difference in kind of appetites for your product assortment, either in California versus the rest of the country, kind of the West Coast versus Midwest, East Coast discussion?

No. No real meaningful differences there to highlight, no. The improvements that we have seen as we've begun the third quarter have been pretty consistent regionally as well.

Okay. Thank you.

(Operator Instructions). Pam Quintiliano, SunTrust Robinson Humphrey.

This is Nick Hiatt; I'm on for Pam. I'm just wondering if you can talk us through your thoughts on new trends that you're seeing. I know you talked about men's joggers and I think juniors' fashion tops. I'm wondering if you can talk about any other trends you're seeing and what is and is not resonating.

Well, I think if you went into our store right now or went online, you would see some of the things that we think are happening in the action sports industry and across the lifestyle. It's really around fashion and fashion trends that have been manifesting themselves for quite some time. The active influence that has made the jogger relevant seems to be happening on the guys' side. There's also some influence there as we talked about expanding our Full Tilt offering on the junior side. The junior trends that are important to us right now, we call it Vintage Romance and the 90's Muse, which kind of captured kind of the whole look and feel of things that are going on there. So those are the trends. All you have to do is go online or look at a store, and you kind of see the things that we think are trending and important right now.

Okay, thanks. Good luck on the quarter.

That concludes today's question-and-answer session. Mr. Griesemer, I will turn the call over to you for any additional and closing remarks.

Okay, great, thank you. And thanks again for joining us. We look forward to discussing our third-quarter results with all of you in early December. Have a good evening.

Thank you.

This concludes today's conference. Thank you for your participation.