Tillys Inc (TLYS) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Tilly's, Inc. first-quarter 2016 earnings results conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Chris Lal. Thank you, you may begin.

Thank you. Good afternoon, everyone.

Thank you for joining us today to review Tilly's first quarter FY16 earnings results. On today's call are Ed Thomas, President and CEO; and Mike Henry, CFO. A copy of today's earnings press release is available in the Investor Relations section of Tilly's website at tillys.com.

Shortly after we end this call, a recorded replay will be available for 30 days in the Investor Relations section of the Company's website. I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Tilly's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Tilly's business.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter 2016 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 are providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, and you can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release. Today's call will be limited to one hour. When we get to the Q&A portion of the call, we ask that you 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 Ed Thomas, Tilly's President and Chief Executive Officer.

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

I will provide a brief overview of our FY16 first quarter performance before updating you on our key initiatives for FY16. Mike will then review our first quarter results in greater detail and introduce our FY16 second quarter outlook. Our FY16 first quarter comp sales declined 4%, in line with our outlook range of down 3% to 6%. Our comp sales trend began to improve in the final two weeks of the quarter, and this improvement has continued into the second quarter.

Our online business continued to perform well with strong growth in the first quarter, but this was offset by negative comp in stores. All departments comped negative single-digits with the exception of our boys' business which comped positive. On a GAAP basis, our operating loss was $4 million and our loss per share was $0.10. On a non-GAAP basis, excluding a legal provision, our operating loss of $2.3 million and loss per share of $0.06 for the quarter were on the better end of our outlook ranges.

We ended the quarter with inventory down 7.4% on a per-square-foot basis and consistent with last year in terms of aging. As we look forward, we continue to bring in new brands to create a sense of newness and uniqueness to Tilly's. We are constantly editing our broad and diverse assortment to provide our customers with the most exciting and compelling assortment that speaks to their lifestyle. Our FY16 initiatives are aimed at driving top line, offsetting declines in store traffic, and improving profitability.

We touched on these initiatives during our last call, and I will now update you all on our progress. As discussed on our last call, we identified opportunities for us to improve upon micro merchandising and product allocation. We began testing some changes in a small number of stores a few months ago to improve sales performance.

During the first quarter, we expanded the number of stores involved and we continue to be encouraged by the results we have seen. This group of stores has generally outperformed the chain in terms of comp sales in recent weeks and months.

Turning to our digital online efforts, our customers want a seamless, satisfying shopping experience regardless of how they interact with us. We are on track to launch buy online, pickup-in-the store and ship-to-store during the second quarter to complement our already successful ship-from-store program.

We are also on schedule to launch an improved and rebranded customer loyalty program during the second quarter. This new program offers more frequent and compelling benefits to our most loyal customers and will be integrated with our mobile app. We are excited about the potential of these new initiatives have for improving customer engagement, satisfaction, and our overall sales results.

Now turning to inventory management, our customers want frequent, new and unique offerings. Consequently, we have been reacting faster to move through slow sellers and allow for better flow of new product.

Although our product margins declined in the first quarter compared to last year, they were still very strong. Our team did a good job of managing inventory to sales with inventory per-square-foot coming down 7% relative to our comp sales decline of 4%. We continue to work to improve our inventory flows and we are in active discussion on this topic with all sources. We continue to bring in new brands and work with our existing brand partners to emphasize uniqueness to Tilly's and there will be more to come in this area over time.

Now turning to real estate, as we noted during our last call, we have slowed new store growth due to the very challenging retail environment we all are living in. We currently have just three new store openings slated for FY16. However, it is important to note that we are also uniquely positioned to continue growth when the time and economics are right.

We currently have 226 stores in 32 states, much less than many of our competitors. Roughly half of these stores are in malls and half are off-mall. Our flexible real estate model and strong balance sheet leaves us uniquely positioned to be very selective about opening new stores in great centers with the proper economics. We will fill within existing markets only when the time, economics, and location are right.

Now I'll turn the call over to Mike to provide a more detailed review of our first quarter operating results and to introduce our second quarter outlook. Mike?

Thanks, Ed, and good afternoon, everyone.

Our first quarter operating results for FY16 compared to FY15 were as follows: Net sales of $120.2 million were flat to last year; total comparables store sales, including E-commerce, decreased 4.1% with strong E-commerce growth offset by negative store comps.

All departments comped negative single-digits with the exception of boys', which comped up in the single-digits. Our comps were driven by lower traffic partially offset by stronger conversion. We ended the quarter with 224 stores, a 5% increase from 213 stores a year ago. Gross profit was $32.6 million, a 9.6% increase from $36.1 million last year.

Gross margin declined 290 basis points to 27.1% from 30%. There were three components to the gross margin decline. First, occupancy costs deleveraged 170 basis points due to the negative comp and having 11 net new stores year-over-year. Second, product margins remained strong, but declined 90 basis points due to increased mark downs. And, third, distribution cost deleveraged 30 basis points on the negative comp, largely due to increased shipping costs associated with increased E-commerce sales.

SG&A expenses were $36.6 million compared to $33.9 million last year. Of this $2.7 million increase, $2.4 million was due to the combination of legal provisions and non-cash store asset impairment charges. The remaining increase of less than $300,000 was primarily attributable to store payroll associated with 11 net new stores and minimum wage increases offsetting other expense reductions. Although we were able to absorb minimum wage increases without increasing our average payroll per store, we still deleveraged store payroll on the negative sales comp.

Our income tax benefit was $1.1 million, or 29.5% of our pre-tax loss compared to income tax expense of $0.9 million, or 40% of pre-tax income last year. This lower effective tax rate was due to a $0.4 million discrete charge related to restricted stock vesting during the quarter.

On a GAAP basis, our net loss was $2.7 million, or $0.10 per share this year, compared to net income of $1.3 million, or $0.05 per diluted share last year. Weighted average shares for the quarter were 28.4 million. On a non-GAAP basis, excluding legal provisions, our net loss was $1.7 million, or $0.06 per share, which was at the better end of our outlook range for the quarter, which did not contemplate the change in legal provisions.

Turning to the balance sheet, we ended the quarter with cash and marketable securities totaling $88 million, an 11% increase compared to $79 million at this time last year. We have no debt under our credit facility.

Inventory decreased 7.4% on a per-square-foot basis compared to our comp sales decline of 4.1% and our inventory aging was consistent with last year. Capital expenditures were $4.3 million this year compared to $5.1 million last year, primarily for remodeling stores and for two new stores that opened just last week.

Turning to our outlook for the second quarter of FY16, based on current trends we expect comparable store sales to be in the range of flat to minus 4%, operating results to range from break-even to a loss of $3 million, and per-share results to range from break-even to a loss of $0.06. We expect our second quarter tax rate to be approximately 40%. We expect diluted shares to be approximately 28.5 million. We expect inventories per square-foot to continue to remain below LOI levels during FY16, and total CapEx for the year to be approximately $25 million.

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

Thanks, Mike.

I'm excited about the opportunities we have identified thus far in my first seven months back at Tilly's. We have a number of things to work on as we discussed to improve our competitive position positioning, and I look forward to sharing our progress with you throughout the remainder of the year.

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

(Operator Instructions)

Betty Chen from Mizuho Securities.

Thank you. Good afternoon, very nice execution in this tough environment. I was wondering if you can talk little bit more, Ed, I think, about the micro merchandising? It sounds like the control group continues to outperform. Is there any color you can give us, or quantify the level of out performance, and what are some of the adjustments that you've been making in those stores to see that improvement?

My second question is regarding some of the late quarter Q1 trends and early Q2. Can you talk about the difference there? Is it more traffic driven or kind of what did you see in the business in late Q1 to kind of see that improvement? Thanks.

Okay. Well, starting with micro merchandising, I'm not going to really specify what the numbers are, but the numbers are pretty good. And what we've been doing is, some of these stores in the test group, I think, were probably penalized, not getting the full assortment, or not getting enough merchandise.

And we saw that early on and we've adjusted accordingly. We are using our store profiles, which we did a few months ago, to adjust every store's merchandise mix to what we think the profile -- what we know the profile to be. So we continue to do that. Some of these things are specific to the stores that we're doing and others, I would say, others we could roll out to the whole chain. But I would say it's more store specific for the --what we call an underperforming store than a chain-wide thing. So that's kind of it on micro merchandising.

Secondly, in terms of what we've seen the last couple weeks, I think we, like most retailers, have been challenged with traffic, and, certainly, our conversion rate actually was pretty good in the quarter. So where we are actually seeing customers walk into the store, we are doing a better job of converting them, but certainly I think that we're starting to see some traction in some of the things we're doing, but also a lot of it's related to improvement in traffic in general.

Okay, that's great. If I could sneak one in for Mike, with inventory so clean coming into the second quarter, how should we think about merchandise margin opportunity or gross margin, as well, in Q2?

Yes, that will depend on exactly where we land in our earnings range, right. So coming out of Q1, our product margins were down 90 basis points. If we're to the better end of our range, we might not see that kind of product margin degradation. If we're at the lower end of the guidance range, you might see something similar. There's a range there depending on exactly what you assume on the top line.

Okay, great. Thank you so much and best of luck.

Thank you.

Dave King from Roth Capital Partners.

Thanks, good afternoon, guys. I guess a follow-up to a couple of Betty's questions. In terms of the improving comps as the quarter progressed, and into May a little bit, it sounds like some of that was traffic, but are there any category standouts there?

And then as we think about the test group and the micro merchandise stores, how many stores are in that test group now? And am I understanding your comments correctly, Ed, in terms of how much opportunity is there still to roll out some of those things that you learned in the underperforming stores to other stores? Or is it more just specific to those stores? Thanks.

Okay, so as far as the micro merchandising goes, again, a lot of these, what I would call store specific things that we identified where a store didn't -- we weren't capitalizing on particular brands, we didn't have enough inventory of a brand, or we just weren't putting a brand in specific stores. It is more like that, so I'd say it is less of -- if we see something that's a chain-wide opportunity, we are not going to wait for the test of the stores, we're going to do it right away.

So I think from that perspective, we are learning more as we go along, and we're just paying a little bit more attention and I think just because of that and adjusting the merchandise mix and adjusting some of the marketing that we're -- local marketing we're doing -- I think that's overall driving a lot of the results.

In terms of our overall improvement in the last few weeks, I think it's across all categories, it's not specific to any one particular category. So I've never felt that we had any major merchandise misses or weaknesses, I think it's more -- again, I think, we have traffic counters in all our stores, so we can see it. I think it's more traffic related and once we see the traffic the customers' reception to our merchandise mix overall is pretty good across the board.

Okay, that helps, thanks for the color there. And then in terms of the digital initiatives that you've been rolling out, and particularly with free shipping, or more shipping initiatives is a better way of characterizing it, being part of the sort of E-commerce part of it going forward, how do you think about the ROI in your E-commerce business versus the bricks and mortar business?

Is it similar, are we in a new paradigm, this is sort of a high-level question. Are we in a new paradigm in terms of how to think about return on investment as a retailer, I guess, what are some your high-level thoughts there, Ed?

Okay. We're sensitive to that business, the E-commerce business as a standalone business, and its profitability, and it is profitable for us today. So it's not -- I know that -- I've seen some comments by some retailers have been challenged with that. Certainly, we can get better in improvement. Look, free shipping is part of everybody's formula to a certain extent, it is not new to our Company, it's been done in the past, and we are selective when we do it. So we are very sensitive in terms of how we manage that business and making sure it's profitable, and at the same time giving our customers multiple choices in which to shop our merchandise mix and our brands.

Pam Quintiliano from SunTrust.

Great, thanks so much for taking my questions, guys, and congrats on the quarter, especially in this challenging environment. I have a few for you and I apologize, I hopped on a little bit late, so I apologize in advance if they were already answered. Can you just quickly talk about the performance of guys versus girls and also any difference in their regional performance?

Yes. We commented in our scripted remarks that all departments comped down in the single-digits. So there wasn't a lot of variability between the departments. Our boys business was what comped positive, and that was a low-single-digit positive. So there wasn't a lot of disparity between the different departments.

And then geographically here recently as we headed towards the end of the quarter, it was really in our heritage markets where we saw improved response. We have seen some of the same challenges as we've seen, comments from others about the Northeast lately in recent weeks, and we have seen that impact as well, but really, our heritage markets is what picked up there towards the end of Q1 leading into Q2.

(Inaudible) And then -- thank you -- can you also talk about, just, there's a lot of talk out there about the health of the consumer and there's been some positive trends, some macro-wise, but yet there are several retailers who are kind of scratching their head that's not translating into sales volumes and when they are anticipated. So how do you think about just how your consumers are feeling right now and their willingness to part with their precious cash?

I think it's a challenge for sure, but in terms of there's a lot of things, particularly in the teen, young adult category that there's a lot of other things that they can spend their money on, But I think, certainly there is, I think, there is pent-up demand in some respects.

And we've talked about this in the past, as I think a little bit more newness and merchandise mix from across the board, whether it's men's, women's certainly will drive better results. So I don't think what were seeing in terms of headwinds is so much economic.

Clearly, the Web has become a more significant weapon and I think the traffic -- I think the biggest challenge in the industry is getting consistent traffic into the mall is probably a more -- a bigger challenge for everybody than it is the consumer sentiment.

And if I could follow up on [a few] more, it leads right into your commentary on the mall traffic. What -- how do I think about what you're doing to combat that, because there's what's in your control and what's not in your control?

So when I think about touch points to the consumer and how you're communicating with them, and if you're thinking about doing anything differently going forward, being more aggressive, approaching the creative differently.

And then when I think about online and all this talk about [Amazon-able] versus [un-Amazon-able] and given you guys have some product that is available that other retailers, as well as a third-party component, how you defend yourself against that?

Okay, so look at -- some of the things that we are doing for omnichannel, particularly, ship-to-store, and buy online and pick-up-in store, I know from prior experience and from other retailers that that will definitely drive traffic to our stores. So we're excited about that.

A lot of times it results in an incremental purchase when they come to pick up the merchandise. So that alone was not going to solve the problem, but certainly it helps. And I think the other thing that we see today is the customer does a lot of homework online before they go shopping in the mall, and so I think whatever marketing we do online is really important because it's -- the days of lingering around the mall like they used to, I don't think -- I think they are gone. They're not completely gone, but I don't think they spend as much time in the mall as they used to.

So there's a number of things, and our Company historically has done a number of special events for specific stores throughout the mall that draws traffic. So there's a bunch of stuff like that that I think we can -- we have done, we'll do some new stuff, and we'll continue to do that in the future.

In terms of the Amazon effect, a lot of our brands do not sell directly online, and it doesn't mean it wouldn't happen someday. We are hoping it doesn't, but certainly, even with Amazon and some of, a lot of our brands have their own websites too. I think our E-Commerce business is very healthy and we see it continue to grow despite the Amazon effect and other competitive factors that we are dealing with with online-only retailers.

The other thing I think I'd point out is that we have such a broad and diverse assortment. We had sales from over 600 different brands last year, for example. Some of those are tests, not all the stores, or all-store buys, and some of them are very limited distribution, so they're not ready to be at an Amazon just yet. Those are some things that we have coming in and out of our assortment all the time that helps make our assortment unique and diversified from what you might perceive from others.

Neely Tamminga from Piper Jaffray.

Great, thank you. Ed, I want follow up a little bit on the comment you made around the consumer does a lot of homework online. We agree. We think it's about 100% digital search before they do any sort of physical purchases, and I guess to that end, buy online, pick-up-at-store, ship-to-store, ship-from-store, these are all important initiatives, but particularly if you allow the consumer to know that that product is in their nearby store too, are you guys -- I know it's a super specific question -- but are you putting location-based inventory in that watch here in Q2?

It's a great question. We are working on that. We don't have it in place now to the extent that I'd like to see it, but certainly it's in our short-term plans to improve the whole inventory visibility for the consumer so they can see it for sure.

So, yes. But there's different things that we do. Our customer service that supports E-commerce is excellent in terms of rerouting customers to different areas, or specific stores where we may have merchandise. So we know that's really important and we will continue to improve upon that over the next year or so.

Okay, that's helpful. And we will look for that in our local market for sure.

And then while I have you on the phone here too, Ed, as we look into the fall, there has been some elements of denim that seem to be working, in our own survey work and across a handful retailers. And, obviously, denim is much more of a Q3 sort of dynamic.

How are you thinking about that category and how important it is to your customer, and is there a reason to kind of upgrade her assortment in her own closet in denim? Or are there other categories that were missing?

And then before I lose the queue, Mike, on D&A, what are you anticipating for D&A this year? Thank you.

Okay. So I'll give you a quick answer on denim. I think denim, it's an important category for us and certainly not as important for us as it is with other retailers, but certainly it's an important category. Our denim results have been decent and I would expect that to continue.

So I know that certain retailers are challenged still with denim, but we're seeing enough and hearing enough, and seeing enough of our own results that I'm encouraged that denim will improve. And I'm not expecting any -- there's always some newness in our inventory mix going into fall and back-to-school. There will be again this year and I'm happy with what I've seen go in, but there's no one dominant category that I would say sticks out.

Thank you.

And then on D&A, I don't have a full-year number here in front of me. I'll have to bounce back to you with that one.

Sounds good. Thank you, guys. Best of luck.

Thank you.

Howard Tubin from Guggenheim.

Thanks, guys. You did a great job with expense management in the quarter, [ex-] items growing very low-single-digits. Can we expect that growth rate to keep up over the next several quarters?

So can you help me understand that question a little bit better? You're saying the growth rate --

Oh, just growth rate in SG&A dollars sort of quarter-over-quarter grew very low-single-digits and I expect --

Part of how we plan the year definitely, we tightened a number of things in a number of areas so, yes, I expect us to remain fairly tight to LY on a percentage basis assuming we don't have meaningfully negative comps over the remainder of the year.

We've been pretty strict on head count and open positions and relooked at a variety of contracts and tightening marketing spend and things of that nature, so I think you can continue to expect that type of behavior from us going forward.

That's great, thanks.

(Operator Instructions)

If there are no further questions, I'd like to turn the floor back over to management for any closing remarks.

Thanks, again, for joining us. We look forward to discussing our second quarter results with you all in August. Have a good evening, everybody.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.