Tillys Inc (TLYS) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Tilly's Inc third-quarter 2015 results conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Anne Rakunas of ICR. Thank you. You may now begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Tilly's third-quarter FY15 earnings results.

On today's call are Ed Thomas, President and CEO; and Michael Henry, CFO. A copy of today's press release is available in the Investor Relations section of Tilly's website at www.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 made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third-quarter 2015 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.

We also note that this call contains non-GAAP financial information. We're providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. And you can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release.

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 Ed Thomas, Tilly's President and Chief Executive Officer.

Thanks, Anne. Good afternoon, everyone, and thanks for joining us today.

I am thrilled to be back at Tilly's, and excited to be back in the day-to-day of working with a very talented team. The team retail landscape has never been more challenging, but I believe Tilly's has significant potential, and I feel I'm in a unique position to help achieve that potential.

As some of you know, I served as Tilly's President and co-CEO from September 2005 to October 2007, and have been in the retail industry for over 30 years. Given my past experience, I've been able to hit the ground running in my first 50 days as CEO, diving into every facet of the business.

From a high-level initial observations, I believe there are opportunities to strengthen inventory management, drive additional growth through our online and digital capabilities, improve the productivity of our real estate portfolio, and lower our cost structure. I've already been able to identify some opportunities for improvement in each of these areas, and I look forward to working with our team to execute on these targeted improvements.

I am in the process of developing a near-term action plan. This plan will identify several immediate initiatives that we believe will begin to generate improved operating results and deliver long-term shareholder value. I expect to share further details regarding this plan with you during our fourth-quarter earnings call in March.

That said, there are a few key issues that I'd like to briefly discuss now. First, I believe we can further improve our inventory management. After the solid performance we saw in August and September, we were a little surprised by the level of deceleration of our business during October. As a result, we ended the quarter with inventory at the high end of our original outlook.

I believe we have opportunities to improve our management of inventory by changing our approach in messaging related to promotions, making our inventory flows more timely, and micro merchandising to geographic differences in climate and brand performance. I expect us to be better at managing inventory levels closer to the comp store sales performance going forward.

Second, we need to carefully evaluate our existing real estate portfolio, and slow down the rate of our new-store growth over the near term. We will continue to open a small number of new stores over the next year, where we believe we have an outstanding opportunity. But our primary focus will be to improve the performance of the stores we already have.

We have evaluated our real estate portfolio and realized that a number of stores opened in recent years haven't matured at what we feel is an acceptable rate. And many of these stores are in very good malls. I believe some of this under-performance is self-inflicted, and we can do a number of things to get these stores back on a good trajectory.

Third, I believe this Company has a major opportunity to continue to grow and improve our online and digital capabilities through omni-channel execution. Since re-platforming our website in the third quarter of last year, the Company has experienced meaningful online growth in each quarter. But I believe there's even more opportunity here. We need to develop the capabilities to allow customers to buy online, pick up in-store, and ship to-store. We also need to optimize our mobile app, and integrate all of this into our loyalty program.

Omni-channel execution is a very important goal, and I feel we are behind where we should be in this area. This will be a key focus for us in the near-term. More to come on these topics and others as I get deeper into the business, with a little more time behind me.

Now turning to specifics on the third quarter, total comp for the quarter was up 3.9%, which was better than our outlook of up low single-digits. Like many retailers, our online business was significantly stronger than our brick and mortar stores. All product categories comped positive, with the exception of footwear, which was down slightly.

Our business was particularly strong in women's, boys, and girls. Our EPS for the quarter was $0.10, which included $0.06 of non-comparable charges for severance obligations, and non-cash store asset impairment charges. In absence of these items, our non-GAAP EPS was $0.16.

Now I'll turn the call over to Mike to provide an overview of our FY15 operating results in more detail, and introduce our fourth-quarter outlook. Mike?

Thanks, Ed, and good afternoon, everyone. Our third-quarter operating results for FY15 compared to FY14 were as follows.

Net sales increased 8% to $142 million from $131 million. Total comparable store sales, including e-commerce, were up 3.9%.

As Ed mentioned, all departments comped positive, with the exception of footwear, which was down slightly. Our comps were driven by stronger conversion, offset by lower traffic versus the prior-year period. We ended the quarter with 220 stores compared to 207 at this time last year, a 6% increase in store count.

Gross profit increased 10.1% to $44.6 million from $40.5 million, due to the sales growth. Gross margin improved to 31.5%, compared to 30.9%. This 60-basis point improvement was primarily attributable to the approximately 40 basis points from the leverage of buying distribution and occupancy costs, and approximately 20 basis points from better product margin.

SG&A expenses were $39.3 million compared to $32 million, and deleveraged 330 basis points. Third-quarter SG&A includes $2.4 million of charges related to separation obligations for our former CEO, and non-cash store asset impairment charges related to six stores. Third-quarter SG&A also includes a timing shift in marketing activities into Q3 this year from Q2 last year, as described during our last earnings call.

Our income tax rate for the third quarter was 48.0% compared to 40.2% in the third quarter last year. This rate increase was primarily due to stock option expirations that increased third-quarter income tax expense by approximately $0.4 million. Due to our limited history as a public Company, when stock option expirations or forfeitures occur, we must write off previously recognized deferred tax assets to the P&L, rather than offsetting them against a long-standing APIC pool with inequity.

Net income, inclusive of the non-comparable SG&A items and tax rate impact from stock impact expirations just noted, was $2.8 million or $0.10 per diluted share, compared to $5.1 million or $0.18 per diluted share last year. Non-GAAP net income excluding those items was $4.5 million or $0.16 per diluted share. Weighted average diluted shares for the quarter were 28.4 million.

Turning to the balance sheet, we ended the third quarter with cash and marketable securities of $76 million, a 24% increase versus last year -- and no debt under our credit facility. Inventories were up 6.5% on a per-square-foot basis, compared to our comp increase of 3.9%. This inventory result, while at the high end of our original expectations entering the quarter, is higher than we would have liked. However, our inventory aging is slightly healthier than at this time last year, and we believe we'll be able to manage our inventory during the peak holiday selling seasons in a manner that will result in modestly lower but still healthy product margins.

Cash used for capital expenditures during the first three quarters of FY15 was $17.5 million compared to $19.8 million last year, primarily for new and remodeled stores and improving our digital capability. We expect CapEx to be in the range of $24 million to $25 million for the full fiscal year.

Turning to our outlook for the fourth quarter of FY15, based on current trends, we expect comparable store sales to be in the range of minus 2% to minus 4%, operating income to be in the range of $7 million to $9 million, and net income per diluted share to be in the range of $0.10 to $0.12, versus $0.25 last year. The primary factors driving EPS down year-over-year are the negative comp and a continuation of stock option expirations that will push our tax expense higher in the fourth quarter, resulting in an effective tax rate of approximately 60%.

We expect to end the fiscal year with 224 total stores, and with inventories approximately flat to down slightly on per-square-foot basis. Diluted share count is anticipated to be approximately 28.5 million shares.

With that, I turn the call back over to Ed.

Thanks, Mike. I'm excited to be back at Tilly's, and look forward to working with the team to improve and grow the business. The Tilly's brand has broad national appeal, the Company has a talented management team, good cash flow and a debt-free balance sheet.

Leveraging this solid foundation, we will make decisions with a long-term view, but with a sense of urgency to begin driving better results as soon as possible. Given the slower start to the fourth quarter, we are and will continue diligently managing our inventory to better-position ourselves entering FY16.

With that, I'd now like to open the call up for questions. Operator?

(Operator Instructions)

Betty Chen, Mizuho Securities.

Hi, there. This is Alex Pham on for Betty. Congratulations on the solid third quarter. I was just wondering, on the store target -- you mentioned, Ed, on the call, that you had a handful of underperforming stores. I was just wondering if the plan going forward was to close those stores? And if you were going to revisit that 500-store long-term target with, I believe, 100 outlet stores?

No. You know, I think our position on that is, there is no need to really close any stores, other than the normal course of business. In terms of store growth, I believe -- it's hard to figure out in this environment how many stores is the maximum potential. But certainly the Company has tremendous potential to keep growing stores. So there's nothing fundamentally wrong. We just think that -- I think that there's a lot more upside in stores that we have. And that's what we're going to focus on in the short term.

Great. And then I was just wondering -- in terms of the 4Q guidance, I was wondering if you could talk a little bit about some of the comp drivers for holiday, and maybe into 2016? It definitely seems like traffic has been challenging for most retailers. Maybe talk about some of the low-hanging fruit in terms of product categories or opportunities that we think we have for, again, holiday, and maybe into 2016?

Well, I think as we mentioned, most of our categories for the quarter performed positively, which is a good sign. I'm very encouraged by -- we talked a lot about inventory management, and really, the quality of the inventory in the mix overall is very good. So I would expect -- we've seen a pretty significant uptick in our eComm business, which, I think we're seeing very similar to many retailers, a little bit of a shift away from the actual physical store visit, to online. But what we're seeing, even recently, in the last couple of days, we've seen very strong online business. Which indicates to me that we really don't have to do anything materially different than what we already planned. And what we did for Black Friday -- it was planned. And so it wasn't unusual. I think we were one of the few retailers that did not run 50% or higher off the whole store. And overall, we are pleased with our results, and certainly will be more profitable as a result.

Great. Thank you very much, and best of luck.

Thank you.

Jeff Van Sinderen, B. Riley.

Let me just say, welcome back to Tilly's, Ed. Just as a follow-up to what you were saying on Black Friday, maybe you can just give us a better sense of what you saw there, the progression, how that's playing into your thoughts on Q4? Maybe if you could just give us a sense of what you saw in brick and mortar, or traffic conversion? I know you said eComm was up. So anything there? And then also if you could just maybe give us a better sense of how you're going about the process of looking at your real estate?

Okay. Jeff, the traffic, in general, over Black Friday, pretty much across the country, was down. There's no question about that. I think our conversion was pretty good. And again, we saw very strong sales on our online business, and that's continued on, post-Black Friday. So I think it's really hard. In all the years I've been doing this, it's the hardest thing to do, is forecast what traffic and sales are going to be. But I'm encouraged with what I've seen over the past few days. And I would expect that momentum to continue.

Regarding real estate, the quality of our portfolio is very good. So there are very few stores that I can see -- and knowing a lot of the locations we're in, from my prior life, I just think we have a greater potential to develop sales in those stores. And there's a lot of -- there's no major surgery that has to be done. It's more some tiny stuff that I think we can tweak to drive sales -- drive the productivity of those stores up.

Does that answer your question?

Yes, thank you very much. And good luck for the rest of the quarter.

All right, Jeff. Thank you.

Dave King, ROTH Capital.

Thanks. Good afternoon, everyone. Following up a little bit on Jeff's question, but just thinking about the outlook a little bit. So despite the lower sales or whatever slower sales growth that you are expecting for the fourth quarter, it still seems that operating income is a little bit better than I would've expected. Can you talk a little bit about the geography of that? Whether that's -- to what extent there's BDO deleverage in there? It sounds like the product margins are going to be modestly lower, I think, if I heard the comment correctly. And then to what extent is that maybe slower growth in OpEx, and what are the drivers there? Thank you.

Yes, Dave, this is Mike. So the general comp leverage points we talked about in the past remain the same. For us to begin to get leverage on buying distribution occupancy, we generally need a 2% to 3% positive comp on SG&A. We basically need a 3% to 4% when you're looking at it on an annualized basis. The product margins -- on a negative comp, you might be expecting a little bit tougher on product margins than what we are. We expect, as I said, that they'll be modestly lower, but still quite healthy. This Company has had quite a track record of delivering healthy product margins from quarter to quarter for many years, and we expect that to continue.

Even on negative comp, one of the areas within BDO expenses is distribution. We continue to get great labor efficiencies out of our new eComm fulfillment center that we opened a little over a year ago. We're annualizing against some of those things now. But the team continues to deliver great labor efficiencies, and we see the benefit of that within the BDO expenses. And in terms of SG&A, in Q3, obviously there's lots of noise in there because of severance and impairments and the marketing shift and what have you. But Q4 being the largest revenue quarter of the year actually gives us a lot more wiggle room with which to leverage SG&A, even on a more modest comp. So that's directionally what you're looking at there.

Okay. So that's a function of leverage, I guess. Because if I even look back to a year ago, I want to say, the seasonal uptick in SG&A might have been a little bit more pronounced in 4Q over 3Q than what it seems like you're guiding to now. Is there any slower growth in marketing spend, or slower growth in anything in particular that may be occurring? Or is it just the leverage [that's up]?

No, nothing in particular. We're always very cost-conscious in this business, and trying to find ways to be more efficient in what we do. We've been pretty darn tight on headcount additions over the last year, plus just trying to hold the line on expenses the best we can. So it's probably not increasing as much as you might anticipate on the comp guidance that we gave.

Okay, that helps. All right, I'll step back. Thank you. Good luck.

Thank you.

(Operator Instructions)

Liz Pierce, Brean Capital.

Thanks, good afternoon. Welcome back, Ed. A question on the micro merchandising, in terms of how you plan to do that, and like, what percent of stores would you say need that fix? Because it seems like, just given how the stores are kind of geographically concentrated, it wouldn't seem that there were that many that might need that kind of fix.

Well, I think it's hard to determine exactly how many stores. But certainly, things like some stores not getting our full assortment of goods, that's something that would apply to a number of stores. Whereas the climatic adjustments and the timing of when we get certain short sleeve-type of goods or summer goods into certain of our warmer-weather stores, that's a much smaller part of the population. But we have the tools in place to be able to do that. It's not as if we don't have the information or the systems to be able to do it. It's just looking at them and understanding the results on a store by store basis a little bit better than, I think, what's been done in the past.

And so, Ed, I would presume -- as a follow-up on that -- I mean the people -- so you said you have the tools, the systems. And I presume then the people are in place. This is not something you're going to have to add to, it's just a matter of what they do with the data?

Yes, Liz. We definitely have a very talented experienced team that -- just, it's kind of a different point of view, a little bit different point of view for them to take a look at. So it's not going to require any major investment in people or systems. It's really us just looking at things a little bit differently than maybe what's been done in the past.

Okay. And I presume what you're getting out of the online experience is shedding additional light into that?

Well, certainly, online is -- it sheds -- there's so much information you can get from your online business, and it's pretty instant. So, yes, it's been very helpful. But we're looking at things like choice count among stores, and is it consistent from store to store -- that really has nothing to do with online-only. But we do know from -- for example, we do know in certain parts of the country, where we may be a little bit underperforming in certain stores, the online business for those geographic areas is actually pretty good. So it's really subtle adjustments to what we've been doing historically.

Okay. I will stop there, and best of luck for Q4.

Thank you.

Dave King, ROTH Capital.

Thanks for the follow-up. Just one quick one. Ed, I appreciate all of the color in terms of strategic vision outlook, especially with you only being on the job for 50 days or so. There's one more, maybe more -- thinking about not just fundamental drivers, but fundamental strategy, but maybe more on just capital allocation. Your cash balance continues to generally move higher, and remains really strong, I guess. What are the thoughts about buybacks and/or returning capital in any way? Any initial thoughts you can share, I think, would be helpful. Thank you.

Obviously being here only 50 days, it's hard to -- I haven't even had time to put a full strategy together. So I do know, in fact, that our Board reviews use of cash and capital investments on a pretty regular basis. So I think at this point, really, it's giving me more time to determine where we are going to invest, the store count, and so on and so forth, before we really decide on any firm action.

Okay. Thought I'd try. Thanks for the help.

Thank you. This concludes the time for today. Thank you for joining today's conference. You may now disconnect.