Tillys Inc (TLYS) 2014 Q4 法說會逐字稿

Good day, and welcome to the Tilly's Incorporated fourth-quarter FY14 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Anne Rakunas of ICR. Please, go ahead.

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

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.

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

Thank you, Anne. Good afternoon, everyone. Thank you for joining us today. On our call, I'll be providing you with an overview of our fourth-quarter performance and the key factors that drove our results. Next, I would like to highlight areas of focus for us in FY15 as we work to further advance our strategic initiatives. Then, Jennifer will review our financial results in more detail and provide our outlook or the first quarter of FY15. I'll provide a few closing comments, and then we'll open up the call for your questions.

Our fourth-quarter results further illustrate the progress we are making on our strategic initiatives to increase sales and profitability. We achieved a net sales increase of 9.2% and comparable store sales growth of 2.9%. We drove this growth through our continued focus on product differentiation and innovation, our engaging marketing activities, our improved digital capabilities, and strong performance of our new stores opened during the year. We also benefited from a slight improvement in the retail environment that we began to see late in the third quarter.

Our disciplined inventory management and planned promotional strategy delivered healthy product margins, and we exited the fourth quarter with inventory well positioned for the spring season. I am very proud of the strong execution of our entire Tilly's team, as we delivered diluted earnings per share of $0.25, a 32% increase over the fourth quarter last year.

These results are the product of continued and diligent focus on our key initiatives not only during the fourth quarter but throughout the entire year. These initiatives include increased product differentiation and innovation, a greater emphasis on our digital platform, and evolving our real estate strategy. I'd like to discuss each one in turn.

During the quarter, we made significant investments in dominant on-trend products in categories which resonated well with our customers. We introduced more products and brands that are new, unique or exclusive to Tilly's. We were pleased with the performance of our new brands, including Hall of Fame and Free People, and brand expansion such as GoPro, Stance and Patrons Of Peace. During the quarter, we also introduced exclusive products from Neff, LRG and Imperial Motion, and several new or exclusive collaborations, including offerings from Volcom, Rook and AYC.

Turning to our digital platform. During the quarter we continued to refine, and benefit from, our new state-of-the-art responsive design e-commerce platform for desktop and mobile that we launched in the third quarter. We've had a great response to the new platform, which offers significantly improved look and feel, navigation and performance, and offers a much more compelling user experience.

Turning to our real estate strategy. We opened five new stores in the fourth quarter, including one outlet, for a total of 212 stores at the end of the year. Overall in FY14, we opened a total of 19 stores in both our heritage and new markets, representing 8% in additional gross square footage over the prior year.

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 early in 2014. Our new store performance underscores the relevance of the Tilly's concept throughout the country and the significant opportunity we believe exists to further expand the Tilly's brand.

Our fourth-quarter results cap a year of meaningful progress in a challenging environment. At the beginning of FY14 we outlined our key initiatives to lay the foundation for increased market share, brand awareness and improved profitability. In the second half of FY14, we began to see these initiatives generate positive results.

Through operational excellence, we demonstrated our proven ability to appropriately position our merchandise offerings, delivering product margins at all-time high levels. We also controlled our costs, even as we continued to invest in future growth.

During FY14 we opened 19 new stores, including outlets. We successfully migrated our e-commerce operations to our new dedicated facility. We launched a new state-of-the-art responsive design e-commerce platform for desktop and mobile, and we rolled out a new loyalty program that now has well over 1 million members. Even with this focused investment in our future, we ended the year with a debt-free balance sheet and cash and marketable securities of almost $85 million, an increase of 40% compared to the end of FY13.

Building on this initial success, we will continue our disciplined execution of these initiatives in FY15 to drive further improvements in sales and profitability. We will continue our focus on product differentiation and innovation, applying our conviction to invest in key categories and products to maintain Tilly's standing as The Destination for the most relevant assortment of action sports inspired merchandise and brands.

Over the past two years we have invested significantly in our digital initiatives to take advantage of the extraordinary e-commerce opportunity we see ahead of us. In FY15, we expect to further leverage our new state-of-the-art e-commerce platform, dedicated e-commerce fulfillment center and omni-channel capabilities to increase our sales and profitability. We will use our new digital platform and our Tilly's Hookup loyalty program, two key elements of our digital initiatives to further build the Tilly's brand through customer awareness and loyalty.

The data and enhanced customer analytics provided by these tools will allow us to more fully customize our communications with our customers. With more targeted personalized messaging, we'll be able to gain greater reach and increase the effectiveness of our message to our customers. We will now be better able to engage and interact with our customers in order to drive traffic both online and in stores.

Today, we are also very pleased to announce the appointment of Jason Nazar to our Board of Directors. Jason is a proven tech entrepreneur. He co-founded and was CEO of Docstoc, a premier business content website that was later acquired like Intuit. He also regularly contributes to Forbes, the Wall Street Journal and Business Insider. Jason brings a wealth of e-commerce and online business strategy experience to Tilly's, and we look forward to his guidance and expertise.

Turning to our real estate strategy. As a leading retailer of the most sought after action sports inspired brands, we continue to see the opportunity for 500 stores across the United States over the long term. In FY15, we plan to continue to capitalize on the high-quality real estate opportunities we have to open at least 15 new stores.

In addition, we expect to refresh at least 25 existing stores in our fleet to further improve comps and profitability. These stores represent high-volume stores in great locations within our heritage markets and have the potential to see meaningful improvements by elevating the customer experience.

Now, I'd like to turn the call over to Jennifer for more detail on our financial performance in the quarter and to provide our first-quarter FY15 outlook. Jennifer?

Thank you, Dan. Good afternoon, everyone. Turning to our fourth-quarter performance, net sales rose 9.2% to $152.8 million compared to $139.9 million in the fourth quarter of 2013. Comparable store sales, which include e-commerce sales, increased by 2.9% compared to the same period in 2013, reflecting improved sales trends driven by progress on our initiatives and a slight improvement in the retail environment as Dan mentioned.

During the quarter, we experienced continued improvement in men's, women's, accessories and kid's. Our fourth-quarter comps reflect increased average transaction value and conversions partially offset by lower traffic. Gross profit increased 13.2% to $49 million, or 32.1% of net sales compared to 30.9% of net sales in the fourth quarter of 2013, representing an increase of approximately 110 basis points. This improvement was primarily due to a 40 basis point increase in product margins and lower buying, distribution and occupancy costs as a percentage of sales due to the positive comparable store sales.

Selling, general and administrative expenses were $37.8 million, or 24.7% of net sales, a 20 basis point improvement compared to an SG&A rate of 24.9% in the fourth quarter of 2013, and includes $1 million of non-cash store asset impairment charges, compared to $1.8 million of non-cash asset impairment charges in the fourth quarter of 2013.

Operating income was $11.2 million compared to operating income of $8.5 million in the fourth quarter of 2013. Our operating margin as a percentage of sales improved approximately 130 basis points in the fourth quarter of 2014, driven by higher gross margin and lower SG&A costs as a percentage of sales.

Net income was $7.1 million or $0.25 per diluted share based on a weighted average diluted share count of 28.1 million shares and an effective tax rate of approximately 37%. This reflects a lower rate than expected primarily due to certain tax credits. This compares to net income in the fourth quarter of 2013 of $5.4 million or $0.19 per diluted share based on a weighted average diluted share count of 28.2 million shares and an effective tax rate of approximately 36%, reflecting a one-time tax benefit related to the return to provision adjustments.

Turning to the balance sheet, we ended the quarter with cash and marketable securities of $84.7 million, an increase of 40% compared to the end of the fourth quarter of last year. We had no borrowings and no debt outstanding under our revolving credit facility the end of the quarter. Cash used for capital expenditures during the quarter totaled $3.8 million compared to $6.7 million in the fourth quarter of 2013 and was primarily related to new stores and remodels.

Inventory totaled $51.5 million at the end of the quarter up approximately 3.8% on a per-square-foot basis compared to the prior year and as planned, to best position us for the spring season and reflecting reductions to inventory last year. We expect inventory per square foot at the end of the first quarter to be up in the mid-single digits compared to the end of the first-quarter 2014, as we continue to be up against inventory reductions in the prior year.

Now turning to our outlook for the first quarter of FY15. We would expect first-quarter comparable store sales to increase in the low-single digits range and net income per diluted share to be in the range of $0.03 to $0.05. This assumes an anticipated effective tax rate of approximately 40% and a weighted average diluted share count of 28.2 million shares. First-quarter 2014 net income per diluted share was $0.02 based on a weighted average diluted share count of 28.2 million.

In line with the real estate strategy that Dan outlined today, we expect FY15 capital expenditures to come in between $23 million to $26 million compared to approximately $24 million in FY14. The majority relates to the opening of at least 15 new stores during the year, at least 25 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 healthy cash flows providing sufficient resources to fund our growth. As always, we remain focused on the 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. I'm pleased with our performance and earnings growth of 32% in the fourth quarter as well as the progress we made throughout the year to advance our strategic initiatives. Through solid execution, we maintained our dominate and differentiated brand experience and generated healthy product margins. We demonstrated cost discipline and operational excellence to improve our profitability in the second half of the year. And we ended the year with inventory clean and well positioned for the spring season.

I'd like to thank our entire Tilly's team and the many associates in the field for their disciplined execution and dedication during the year. Our business is fundamentally strong, and I believe we have established a solid platform to further improve our sales and profitability in FY15 and to achieve our long-term growth objectives.

These long-term objectives include annual square footage growth in the low double digits over 500 stores, e-commerce penetration of well over 15% and operating margins in the high-single digits. We have a talented and dedicated leadership team, best-in-class systems and distribution infrastructure to support our growth and significant financial resources. We are confident in our strategies and the customer's response they have driven. Our team is energized and ready to build on our 2014 performance making further progress in 2015.

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

(Operator Instructions)

Neely Tamminga, Piper Jaffray.

Thank you, good afternoon, and congratulations on solid execution this quarter. Question for you around trends, are there any early spring trends you would be willing to share with us that you are seeing, maybe particularly in women's that may have once been latent and now are stepping up a little bit or the weather is cooperating? Curious what you are seeing out there in the broader landscape within casual? Then, Free People, you mentioned Free People. Obviously, a great brand to add to your repertoire. I think we counted maybe around 20 stores, what are you thinking in terms of the potential for that brand in your broader chain? Thanks

Sure, no specific trend information that is worth calling out. The season is still pretty young in the spring season. We've got, really, spring break that is just starting to begin. We feel very good about the product offering. If you go into our stores now you can see the major points of view that we are communicating through all of our digital platforms as well as in our windows and in the store. We feel really good about where we are positioned, but nothing specific to call out there.

We commented about Free People because it was new in the fourth quarter. We do believe it is a great brand and a great offering and complements the other things that we're doing in our offering. We're really going to let the business dictate where else we take that, so that we will be able to sure that over time.

Dave King, ROTH Capital

Thanks. Good afternoon, everyone. I guess first, congrats on a nice finish to the year. My question has to do with the outlook. Dan, first what can you say, if at all, about how the first quarter has progressed so far? As we think about the rest of the year, and I guess actually in the first quarter, how should we be thinking about leverage points, particularly if the low-single digit comp environment persists for a bit? The fourth quarter looks like operating margin was, I think, fairly flat if I back out the impairment charge in the year-ago period. But, you have the product margin improvement, but obviously, there was some marketing spend and just digital initiative stuff that was in there as well, so how should we be thinking about that? Thanks

Sure, I'll take the first part and then Jennifer can take maybe the leverage points. Our outlook for the first quarter is taking into consideration the performance to date and our view of all of the things that we have planned for the quarter. It really is incorporated in all of that, it's just how we are feeling about the direction of the business. We are seeing nice response to our strategic initiatives, good response to our product offering, the things that we're doing on our digital product form and our new storms continue to perform. That's all incorporated in our view of the positive comps for the quarter.

David, with regard to leverage going forward, specifically in the first quarter, you can still expect the similar leverage that you see with buying, distribution and occupancy on a positive comp. When you get into SG&A and we look at for the points that you have discussed as well, is just some of the things we have been doing recently around marketing and increasing advertising spend that we take continue to see really good response to, as well as some other puts and takes around that. You would need to see, as you referenced, the low-single digit positive. We'd need to see a little bit on the higher end or up on that to begin to see any SG&A leverage.

Okay, that helps. Good luck with the rest of the year.

Thank you.

Jeff Van Sinderen, B Riley.

Good afternoon, let me add my congratulations. You sound upbeat on inventory, just wondering if there's any impact from the ports? Then, also should we expect merchandise margin to continue to improve on a positive comp? Maybe, you could just give us more on what's baked into your guidance for merchandise margins and discounting? Finally, any color you can share on your footwear business?

Thanks, Jeff. Regarding the port situation, it did have an impact on us. It's just the impact was not meaningful enough for us to call out.

On merchandise margins, we are very pleased with the increase in product margins in the fourth quarter. We believe we have a little bit of room to increase, slightly, product margins in the first quarter, and that's baked into our guidance. Our margins have always remained in a very healthy bandwidth. That is what you are seeing in terms of increase as really a function of improved regular price selling as it compares to the year prior. Discounting remains a very low percentage of our business. It always has been and remains a very low percent, so while we have strategic promotional plans that we continue to execute on, there is no real story there. It's a very low percentage of our total. We didn't call out footwear simply because, not because it's a problem, just because it wasn't a key driver. We really highlighted the big drivers of the performance. The men's footwear business still remains very, very strong. We've call that out now for several quarters, and that remains the case.

This sounds healthy. Best of luck for the rest of the quarter.

Thank you, sir.

Pamela Quintiliano, SunTrust

Great. Congratulations, guys. Thanks so much for taking my question. I actually had a few for you. First off, you had mentioned in your prepared commentary slight improvement in the retail environment late 4Q. Then, you also commented on lower traffic, I believe. If you could help align those two for me, and how we should think about the improved retail environment, just how to think about that with the traffic? Then, the second question was just when you talked about the exclusives, what percent do you have that are exclusives, and how does that compare to the past? Are you finding that you are getting more opportunities there? Lastly, just any loyalty program stats would be appreciated? Thanks so much.

Sure. The improvement, basically, we have seen and have invested ahead of the downturn. In the downturn, we continue to do the things that are for this business for the long term. When we look across all of the metrics in the business, we are seeing some consumer trends that indicate a slight improvement. Traffic remains challenging. We're certainly not out of the woods, but we have to certainly feel it's necessary to call out, when we see it, across conversion rates and average transaction values in response to our marketing efforts and things like that. We don't want to overstate it, but it is certainly a slight improvement from what we were talking about say maybe a year ago.

With regards to exclusives, we have a large percentage of our offering is exclusive or unique. It varies all the time. We haven't disclosed that number. Given the focus on differentiating and increasing the innovation in our product, you can be sure that it has increased from the year prior, and we see good response to that. I think it's really important to continue to differentiate our offering, so you will see us focusing on that going forward.

The loyalty program, well over 1 million members. We're going to begin harvesting -- this is just the very beginning stage. This is only, we are now one-year anniversary of the very first sign-ups, so we have got a long way to go before we can really harvest a lot of the information, but we can begin using this. We are very pleased with the response, with the engagement, with the continued rate of sign-ups, so we are pleased with this as an important component of our digital strategy.

I have one quick follow up. On weather, it's just if you've been seeing any impact? Others have touched upon it, particularly in February.

We certainly had stores that were affected by weather. We don't have a large concentration of stores that are in those markets, but those stores that were affected were affected like everybody else's. There certainly was some impact.

Okay. Thanks so much and best of luck.

Thank you.

Richard Jaffe, Stifel

Thanks very much, and well done guys. Dan, could you talk a little bit more about what was an e-commerce initiative that's now really much more than that, a digital initiative, how loyalty fits into that and how it's playing off the stores, driving traffic to stores and in turn driving the kids from stores back online to their mobile devices and how you see those synergies working and playing out by each channel?

Sure. Channel is becoming less and less important to our customer. They want what they want when they want it. They want to see it or learn about it wherever that needs to be. Social media plays a role in that. The loyalty program gives us our first view of being able to watch customer behavior across channels and be able to see recency and frequency to the degree that we would like to in order to be able to then begin customizing and tailoring and being more effective with the various marketing efforts that we have both online and off-line. It's all very connected. I think the view that we have is that the future is a seamless experience for channel and for brand and for product and that we have to be there and be relevant in all of those various channels.

So, it's really all channels all the time is the future?

Yes. Exactly.

Thanks.

Sharon Zackfia, William Blair

Hi, good afternoon. Just a few quick questions. Dan, on the prepared remarks you said low-double digit square footage growth remains the goal on an annual basis. That's clearly not happening in 2015, so can you talk about when you would expect that to re-accelerate? Then, maybe an update on East Coast versus West Coast performance?

Our long-term targets, we certainly feel that those long-term targets are appropriate. We have said we're going to be very judicious about the stores that we open and only open stores that make absolute sense and that are great deals in great centers with great locations. So, that number may ebb and flow as a percent. We don't manage to any one number, but we still feel those long-term targets are very achievable, whether we happen to hit them at any one point or not. We just feel those are the numbers that we are signing up for 2015, but no indication of backing off of the long-term growth potential for the Company in the future.

In terms of east versus west, we have seen some strength in our heritage markets that's good to see. We did have some of our eastern stores that were affected by weather, like some of others, but all of it is incorporated into our guidance and our view that the things that we continue to focus on, the decisions that we are making that we believe are right for this brand and for this business for the long term are the right things to do. Overall, we are pleased with the way that the whole chain is performing.

Great. Thank you.

Thank you.

(Operator Instructions)

Liz Pierce, Brean Capital.

Thanks. I'll add my congratulations. Dan, circling back on the real estate. Is it fair to say that maybe the stumbling or the roadblock for this year to hit those targets is you can't find the right real estate or is it just matter of making the right deal for the right real estate?

It's a matter of making the right deal. We have ample opportunities, and what we won't do is hasten a negotiation in order to hit some number. So, we'd rather walk away and let a deal take whatever natural course it is. That process is fluid and dynamic, and we're looking at stores that are still opportunities for this year as well as ones that maybe for two years from now. You are slicing at a particular window of time and that happens to get us the result for the numbers that we think we're going to deliver for this year. That's all it is. It is us being very critical about the stores that we're going to open, and it just happens to be the count this year.

Okay. Are any of those outlets for this year?

Yes, there are a few. Yes.

Any commentary on how the traditional outlets are performing or have performed?

There, nothing specifically about outlook other than we are continuing to open them going forward and recognize that they are a vibrant component of our total store mix. All of the performance that we have shared, the outlet numbers are included in our commentary around new stores, which are achieving our economic and more stringent economic model and site selection process.

Okay. Lastly, on the catalog that just dropped, was that -- is the timing consistent with last year, and what is the plan this year for the catalog?

Let's see. I think this book dropped one week earlier because of the two-week earlier Easter, and we sync it up based on spring breaks, when are the peak spring break time period, and that moves each season. So we try to time this second book with that. It's really just shifted, I believe, just one week. Our view is that the response to our marketing, in total, has been improving and we called that out. I think we remain very pleased with the catalog and with the other marketing efforts that we are executing on.

Great. The catalog looks adorable. All right, best of luck, guys. Thank you.

Thanks

Dave King, ROTH Capital.

Thanks for taking my follow up. Just a quick one on the cash balance. Obviously and even mindful of the lease obligations you have, but what are the updated thoughts there in terms of it continues to grow? I think you did -- I don't -- I haven't checked the number exact, but I want to say $35 million in cash flow from operations in 2014 give or take and CapEx plans for 2015, I think you said $25 million-ish, so you are still generating cash there. What are the thoughts on buy back at these levels and plans for cash in general? Thanks.

We continue to look at uses of cash. We believe that the best use remains in investing in the future of this business and brand and executing the business. If there was anything to share in that regard, we certainly would let you know. We will do that if something comes up.

All right. Fair enough. Thank you.

Thank you.

There are no further questions at this time. I'd like to turn the conference back over to your presenters for any additional and/or concluding remarks.

Thanks again for joining us. We'll look forward to discussing our first-quarter results all with you in May. Have a good evening.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.