Tillys Inc (TLYS) 2014 Q3 法說會逐字稿

Good day, and welcome to the Tilly's Inc. Third-Quarter Fiscal 2014 Results conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Miss Anne Rakunas, ICR Inc. Please go ahead ma'am.

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Tilly's third-quarter FY14 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 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 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 the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that's included in our third-quarter 2014 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.

As 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 today.

On our call, I'll be providing you with an overview of our third-quarter performance and the key factors that drove our results. Next, I'll review the progress made on our 2014 strategic initiatives during the quarter, and then Jennifer will review our financial results in more detail and provide our outlook for the fourth quarter of FY14. I'll provide a few closing comments, and then we'll open up the call for your questions.

We are pleased with the meaningful progress we are making on our initiatives to increase sales and profitability, as our third-quarter results exceeded expectations. During the quarter, we continued to focus on product differentiation and innovation, and further improved our digital capabilities.

The moderate improvement in sales trends that we experienced at the beginning of the third quarter, continued throughout the back to school selling period and into September. While we recognize there is still more work to be done, we are encouraged that our efforts, together with a slightly better teen retail environment, resulted in a general improvement in customer response.

Additionally, our strong product offering and disciplined inventory management resulted in an increase in product margins. We continued to control our expenses, ending the quarter with a higher cash balance year-over-year, and we maintained our debt-free balance sheet.

During the third quarter, we continued to advance our 2014 growth initiatives that we believe are laying a solid foundation for increased market share and improved profitability. As we previously outlined, these include increased product differentiation and innovation, a greater emphasis on our digital platform, and [devolving] our real estate strategy.

First, in terms of product differentiation and innovation, we continued to do what we do best. We stayed true to our convictions, and made significant investments in dominant on trend products and categories. This resonated well with our customers, and drove an improvement in traffic and sales trends during the quarter.

In keeping with our history of offering our customer the most relevant assortment of action sports inspired merchandise, we introduced more products and brands that are new, unique or exclusive to Tilly's. Our new brands, brand extensions, exclusives and collaborations continued to perform well and strengthen our confidence in this product strategy.

We introduced new brand expansions including GoPro, Stance, Sector 9 and Full Tilt Dream. We delivered a number of exclusive products, including collections from Hurley and LRG. We also introduced several new or exclusive collaborations, including offerings from Volcom, Adidas, and Vans.

The back to school men's footwear initiative that we rolled out late in the second quarter, was well received. And helped drive improved footwear comparable store sales during the third quarter. This initiative has continued to strengthen our footwear business into the fourth quarter.

Turning to our digital platform. During the quarter, we launched a new state-of-the-art responsive design e-commerce platform for desktop and mobile. We are pleased with the seamless and efficient execution of its launch, which was on time and on budget. The new platform offers significantly improved look and feel, navigation and performance, and offers a much more compelling user experience.

Another key element of our digital initiative is our Tilly's Hook-Up loyalty program which allows us to better engage and interact with our customer, in order to drive traffic both online and in store. We are now well past the one million mark in terms of sign-ups.

With the investments we have made in our loyalty program and enhanced customer analytics, we now have the tools to more fully customize our communications with our customers. Given what we know about their shopping habits, we are now able to tailor our product, marketing and promotional activity based on user preferences which we believe will lead to improved sales and profitability.

We believe our new state-of-the-art e-commerce platform, dedicated e-commerce fulfillment center, and Omni channel capabilities now put us significantly ahead of our peer set. And position us well to take advantage of the extraordinary e-commerce opportunity we see ahead of us.

Looking at progress related to our real estate strategy. We opened five new stores in the third quarter, including two outlets, and closed one store for a total of 207 stores open at the end of the quarter. We have opened a total of 19 stores in FY14 in both heritage and new markets, for a total of 212.

As a group, our new stores opened this year are performing well and in line with the new store economic model, and more stringent site selection process we outlined earlier in the year. The success of our store openings in new markets such as Atlanta, Georgia; Springfield, Missouri; and Memphis, Tennessee reflects the relevance of the Tilly's concept, the appeal of our dominant and branded product offering, and our dynamic and exciting store experience.

Our team continues to deliver the complete Tilly's brand experience in these new locations, which has also contributed to their solid performance. We continue to benefit from improvements in the tenure, hiring, and training of the store teams, and these new stores exemplify solid execution on that front.

The pipeline of real estate opportunities is strong in quality locations that will allow us to broaden our reach, to both existing and new customers. As always, we remain very disciplined in our site selection and buildout process, which is designed to meet our long term profitability targets.

And now, I'd like to turn the call over to Jennifer for more detail on our fiscal performance in the quarter, and to provide our fourth-quarter FY14 outlook. Jennifer?

Thank you, Dan, and good afternoon, everyone.

For the third quarter, net sales rose 6.1% to $131.3 million compared to $123.8 million in the third quarter of 2013. Comparable store sales, which include e-commerce sales, decreased by 1.2% compared to the same period in 2013. Reflecting a moderate improvement in sales trends, driven by the progress on our initiatives and a slightly better teen retail environment, as Dan mentioned.

During the quarter, we experienced continued improvement in men's, footwear, accessories, and kids. The improvement in footwear was driven by a men's key back to school initiative, rolled out late in the second quarter. Our third quarter comps reflect decreases in traffic, partially offset by increased average transaction value.

Gross profit increased 7.1% to $40.5 million or 30.9% of net sales, compared to 30.6% of net sales in the third quarter of 2013. The 30 basis point improvement was primarily due to a 30 basis point increase in product margins. Occupancy deleverage was offset by favorable pickups in the quarter related to new stores and store closures.

Selling, general and administrative expenses were $32 million or 24.4% of net sales, compared to an SG&A rate of 22.4% in the third quarter of 2013. And primarily reflect deleverage on store payroll and incremental marketing expense in the quarter. We also expect to incur incremental marketing expenses in the fourth quarter, based upon the continued strength and customer response to our marketing efforts to date.

Our operating margin was 6.5%, compared to 8.2% in the third quarter of 2013. Net income was $5.1 million or $0.18 per diluted share based on a weighted average diluted share count of 28 million shares, and an effective tax rate of approximately 40.2%, which was slightly lower than expected due to higher pre-tax income in the quarter than estimated. This compares to net income in the third quarter of 2013 of $6.1 million or $0.22 per diluted share, based on a weighted average diluted share count of 28.2 million shares and an effective tax rate of 40.1%.

Turning to the balance sheet. We ended the quarter with cash and marketable securities of $61.3 million, an increase of 21.2% over the third 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 $5.2 million, compared to $12.2 million in the third quarter of 2013, and was primarily related to new stores and remodels. Inventory totaled $62.2 million at the end of the quarter, up approximately 2.5% on a per square foot basis compared to the prior year as planned, and reflecting the significant reductions to inventory last year.

We expect inventory per square foot at the end of the fourth quarter to be up in the low single digits compared to the end of the fourth quarter 2013 as we are also up against significant inventory reductions last year.

Now turning to our outlook for the fourth quarter of FY14. Our outlook for the fourth quarter reflects solid performance through November, tempered by historically inconsistent traffic and consumer spending patterns before and after the peak weeks of holiday. Based on these assumptions, we would expect fourth-quarter comparable store sales to be flat to negative low single digits.

And net income per diluted share to be in the range of $0.15 to $0.19. This assumes an anticipated effective tax rate of approximately 40%, and a weighted average diluted share count of 28.1 million shares. Fourth-quarter 2013 net income per diluted share was $0.19, based on a weighted average diluted share count of 28.2 million shares.

We continue to expect FY14 capital expenditures to come in between $24 million to $28 million representing an amount lower than FY13, as our new e-commerce fulfillment center is complete. The majority, approximately $23 million, relates to the opening of 19 new stores during the year, remodels and refreshes of our existing stores, as well as investments to further improve capabilities across our digital channels as we have discussed.

The fundamentals of our business remain strong, and we continue to generate solid cash flows to fund our growth initiatives. We have a strong balance sheet with no debt, and we remain focused on stringent cost discipline as we continue to invest in our business for the long term growth.

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

Thanks, Jennifer.

Our third-quarter results illustrate the progress we are making on our initiatives to increase sales and improve profitability, and we believe we are on the right track with our efforts. Our differentiated product offering, engaging marketing, and promotional activities, dynamic store experience, and digital capabilities have us well-positioned for the important holiday selling season.

We have seen a good start to the holiday season, with continued improvements in the sales trends through November. I am encouraged by these improved trends, which reflect meaningful progress on our initiatives.

And while we are pleased with the trends during November, we recognize that the majority of the holiday period it still ahead of us and traffic and consumer spending patterns remain inconsistent. We strongly believe in the fundamentals of our business, and remain disciplined and committed to pursuing opportunities that we believe will increase our market share, deliver strong product margins, and improved profitability in the long term.

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

(Operator Instructions)

Neely Tamminga, Piper Jaffray.

Congratulations on navigating in a very difficult environment out there. It's good to see the progress.

Thanks.

Yes, you bet. So a question for you first, Dan, and then I do have a follow up on the metrics for you, Jennifer. So on the big picture as it relates to the OmniChannel e-commerce dedicated facility, how should we think about -- could you use maybe Cyber Monday or Black Friday weekend to help us contextualize the efficiency that that facility has really gained for you guys maybe this year versus last year? Since of this is the first Cyber Monday and Black Friday utilizing that, that would be helpful.

And then just a housekeeping follow-up on the metrics, Jennifer. How should we be thinking about the underlying comp metrics for Q4? Would they be comparable to that of what we just saw for Q3, slight declines in traffic, positive increases in transaction value? Is that what would be built up in the assumption on the comps? Thank you.

On the first part, Neely, we are relatively new in the facility and relatively new with our new e-commerce platform. But we are, as we said, pleased with the strong start. Pleased with the seamless execution in both the launch of the new website and bringing this new facility online.

A little early to quantify, and we look forward to giving more visibility to that probably in March as we talk about 2015. We've always said that we would enjoy most of the benefits beginning in 2015.

So we're still working out the kinks and getting really efficient there. Rest assured, we will become very efficient as demonstrated by our ability to do that in other areas of the business.

Neely, regarding the underlying metrics for Q4. You will expect to see those consistent with Q3, being, as we mentioned, continuing to have traffic headwinds. And then having some offset from ADS as well as conversion.

But we are seeing positive conversion driving that transaction value as well for Q -- ?

In the third quarter, it was nearly flat. But more recently, we've seen some strength there.

That's awesome. Great. Thanks you guys, happy holiday, and congrats.

Thanks, Neely.

Dave King, Roth Capital.

First off, just wanted to follow up on some of your comments. Traffic and sales were fairly strong throughout back to school, month of September, and then it sounds like they may have dropped off in October and then rebounded again in November.

First, is that a fair characterization? And then how should we think about that in terms of the colder weather that we're seeing across most of the country? Being that you have still a fair amount of your footprint in California, West Coast, et cetera. Any color you can share there in terms of how that impacted you. Thanks.

So I think you should probably temper your view of the volatility within the quarter. We saw the trends improve as back to school unfolded, and continued to improve into September. And then softened up a bit, I think we know we were affected a bit by lack of clearance particularly on e-commerce and warm weather that negatively affected our Winter categories in the month of October.

That was partially offset by the addition of a Fall catalog, which we mailed and saw good response to. When you step back and look at the big picture, you say it's a nice trend coming through the quarter, and we've seen a good start to the holiday season. But we remain cautious about what can happen in early December and in January as a result of historical patterns.

Sounds prudent. And then one quick follow up if I may. Dan, any color you have or anything you can share at this point in terms of initial traction of the outlet concepts, and how that's been going? Thank you.

Their numbers are incorporated in our comments around new stores, and we're pleased with the performance of them as a group. I think we opened five in the year, and all really right before back to school, with another one just a couple of weeks ago. It's still very early in the concept, but we're pleased with them being part of the group that is performing as expected.

Jeff Van Sinderen, B, Riley.

Let me add my congratulations on the sequential improvement in the comp. So I guess a few questions to ask here, and I'll try to roll them together.

But can you break out the e-commerce growth for us in the quarter, and the brick and mortar comp? And then also just in terms of the marketing, front how much was marketing up in Q3 and then how much are you planning it up in Q4? And then maybe you can just also touch on planned discount levels for Q4 versus last year. Thanks.

So we aren't breaking out the specific numbers of e-commerce versus brick-and-mortar. It's such an integrated customer experience. But we can say that the e-commerce performance was ahead of the total Company performance, so ahead of that negative 1.3%. I think that's really all that needs to be said about that.

In terms of marketing, the significant thing to think about there is that marketing we added a book in Q3. Because of the strength of the response we were seeing to our marketing efforts, we talked about this on the last call. That was a meaningful and incremental addition to the quarter.

We don't have that or don't need that opportunity in the fourth quarter. But you could look for us to increase the marketing spend in areas where we have historically spent our money, both catalog and in our digital efforts. So we won't be specifically quantifying that for fourth quarter, but slight increases there as a result of increased response to our efforts.

And then in terms of discounting, we have seen a good start to the holiday season. We're pleased and encouraged by those results. Through the Black Friday weekend and Cyber Monday, we actually were no more promotional than the year prior, and I think we even had better efficiency on our promotional activities. So we're continuing to execute with long-term product margin approach, and maintaining the integrity of the brand and the brands we carry.

Got it. Thanks very much, and good luck.

Thank you.

Liz Pierce, Brean Capital.

Congratulations, guys. Nice job in a tough environment.

Dan, I was curious about your comment on teen retail suggesting that the environment is better. And then related, how the juniors, I think you called out everything but juniors. And was curious if there were any comments on how that performed? Thanks.

So our comments on teen retail are really coming, we're not trying to overstate that. But it does appear that there for us and for our teen customer, we're seeing some slight improvement in the fundamentals of their behavior.

So that's a slight improvement in the traffic trends, slight improvement in conversion trends and ADS trends, a slight improvement in the response to our marketing efforts. It just seems like things are improving slightly, so we thought it was important to call that out.

In terms of lack of commenting on juniors, we generally make it a point to comment on the things that are meaningful in movement and direction. Juniors has been and has always been an important part of our business, but there was no meaningful call out there in terms of its performance relative to the second quarter. So it just wasn't important to highlight it.

Thanks, and best of luck, guys.

Thanks, Liz.

(Operator Instructions)

Lindsay Drucker Mann, Goldman Sachs.

This is Eddie on for Lindsay. I was wondering if you could provide some more context around the improvement in product margins? Was that simply a function of better inventory management, or did you also see reduced promotions, or any other factors? And then how much of that would you attribute to internal factors that you could control, versus just the environment appearing to be better?

So the improved product margins were on top of last year, which was the highest product margin in the past five. So that puts it into context. These are very healthy margins, and come as a result of good inventory management and investments in strong performing categories.

So much of it is internal. But we have to call out that we do see a general improvement, a slight improvement in the overall teen consumer environment too. So that has to be contributing to some of it.

At this time, we have no further questions. I'll turn the call back to Mr. Dan Griesemer for closing remarks.

Thanks again for joining us, and look forward to discussing our fourth-quarter results with all of you in March. And hope to see you at the ICR Xchange in January. Have a good evening.

This does conclude our conference. Thank you for your participation.