Tillys Inc (TLYS) 2017 Q1 法說會逐字稿

Greetings, and welcome to Tilly's First Quarter Fiscal 2017 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Gar Jackson, Investor Relations. Thank you. Mr. Jackson, you may now begin.

Thank you, operator. Good afternoon, everyone, and welcome to Tilly's Fiscal 2017 First Quarter Earnings Call. Ed Thomas, President and CEO, and Michael Henry, CFO, will discuss the company's results and then host the Q&A session. For a copy of Tilly's earnings press release, please visit the Investor Relations section of the company's website at tillys.com.

From this same section, shortly after the conclusion of the call, you will also be able to find a recorded replay of the call for the next 30 days. Certain forward-looking statements will be made during this call that reflect Tilly's judgment and analysis only as of today, May 23, 2017, 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 any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2017 first quarter earnings release, which was furnished to the SEC today on Form 8-K as well as our other filings with the SEC referenced in that disclaimer.

(Operator Instructions) With that, I now turn the call over to Ed Thomas, Tilly's President and Chief Executive Officer.

Good afternoon, everyone, and thank you for joining us today. I will provide a brief overview of our fiscal 2017 first quarter results and then provide a progress update on our key initiatives. Mike will then review our results in more detail and introduce our second quarter outlook.

Our fiscal 2017 first quarter comp sales, operating results and earnings per share were all above our original outlook ranges. We achieved our fourth consecutive quarter of year-over-year operating income improvement.

After starting the quarter with a negative double-digit February comp, we bounced back with a nearly flat March comp and a positive low teens April comp due to the Easter shift. Total comp sales, including e-commerce, were up 0.6% for the quarter and were up 5.3% for the combined March, April period.

Over the past year, we have been working hard to better engage with our customers and improve the performance of the business. While we believe our merchandising and traffic-driving initiatives have had a positive impact, our spring assortment, which includes a variety of new styles and brands is performing well over our -- based on our March -- combined March, April comp and the positive momentum we've seen carry into May.

On a total company basis, positive comps in our men's and boys' department offset low single digit negative comps in other departments for the quarter. We believe that our assortment, combined with our successful in-store events and contests, drove a modest improvement in store traffic for the quarter despite what has been widely reported as continuing negative mall traffic environment.

As just one example, we conducted a fun in-store virtual reality event for the movie Kong during the first quarter, which was very well received. We will continue creating what we hope are compelling in-store events and provide support to local schools and sports programs in order to engage more directly with our target customers and drive traffic to stores more frequently.

While we are not ready to discuss details yet, we are in active discussions regarding potential new co-branded events that we believe will be exciting for customers. We look forward to sharing details about these co-branded events at a more appropriate time.

We continue to focus on improving sales productivity in our underperforming stores. As you may recall, we identified over 40 stores where we believe top line performance should have been stronger based on the quality of the real estate involved. We made various assortment adjustments in these stores based on individual store profiles over the past year or so.

As a whole, they've generally continued to outperform the rest of the chain from week to week, and we believe there is still additional room for improvement. We meet on this every week as a senior team, and we will continue to refine our efforts with these stores to drive better sales productivity.

Turning to our technology investments. As we noted previously, we are upgrading and implementing a variety of in-store and online technologies to create and improve our omnichannel capabilities and customer engagement. We expect our upgraded website platform, enterprise order management, new point-of-sale and customer relationship management systems to launch during the second half of the year.

Our soft launch of our buy online, Pick Up In Store initiative went well, and we just expanded this program to the whole chain. We plan to launch our ship-to-store program in conjunction with a new integrated order management POS system ahead of the holiday season. We're excited about the potential these new capabilities have to improve customer engagement, drive store traffic and increase sales opportunities.

Turning to real estate. As we noted during our last earnings call, we have lease decisions to make this year that impact over 20% of our store fleet. We have a similar number of lease decisions to make in each of the next 2 years. These lease decisions span all markets and store types and include lease extension options, lease kick-out opportunities and lease expirations that require negotiated renewals. It is uncertain what the net result of these decisions will be at this time, but we are working hard to realign lease cost structures wherever possible in light of the existing retail environment.

In closing, despite thousands of store closures, several bankruptcies, continuing declines in mall traffic in the broader retail environment, we have delivered 4 consecutive quarters of improved year-over-year operating income, and we aim to continue this momentum. We are constantly looking for ways to drive traffic and sales, both in store and online, and to be more cost-effective with our spending.

Now I'll turn the call over to Mike to provide more details on our fiscal 2017 first quarter operating performance and to introduce second quarter earnings outlook. Mike?

Thanks, Ed. Good afternoon, everyone. As Ed noted earlier, our fiscal 2017 first quarter comps, operating results and earnings per share exceeded our outlook ranges. Details of our first quarter operating results compared to last year's first quarter were as follows.

Net sales of $120.9 million increased 0.6% from $120.2 million. Total comparable store sales, including e-commerce, were up 0.6%. Store comps were just shy of flat on store traffic that was up 1%. E-commerce sales increased 6% and represented 13.4% of our total sales versus 12.7% a year ago. Our store count dropped to 222 from 224 a year ago.

Gross profit of $32.9 million was an improvement of $0.3 million or 1%. Gross margin was 27.2%, an improvement of 10 basis points. An 80 basis point improvement in buying, distribution and occupancy costs more than offset a 70 basis point decrease in product margins. Buying, distribution and occupancy costs decreased $0.8 million primarily due to having 2 fewer stores. Product margins declined modestly due to increased markdowns but remained very healthy overall.

SG&A expenses were $33.2 million compared to $36.6 million, a decrease of $3.3 million. As a percentage of net sales, total SG&A was 27.5% compared to 30.4%, an improvement of 290 basis points. As a reminder, last year's SG&A included $2.4 million for the combination of a legal provision and noncash store asset impairment charges, representing 200 of the 290 basis point of SG&A improvement. After consideration of this noncomparable variance, total SG&A dollars were down another $0.9 million primarily from reduced marketing expenses.

Our operating loss was $0.3 million or 0.3% of net sales compared to an operating loss of $4 million last year or 3.3% of net sales. Despite our operating loss, we incurred income tax expense of $0.1 million due to certain discrete charges relating to employee stock grant activity and required estimated tax payments in certain states. Our net loss for the quarter was $0.2 million or $0.01 per share compared to a net loss of $2.7 million and $0.10 per share last year. Weighted average shares for the quarter were 28.7 million.

Turning to our balance sheet, which remains strong. We ended the quarter with cash and marketable securities totaling $105.6 million, a 19.5% increase compared to $88.4 million at this time last year, despite having paid the first-ever special cash dividend to stockholders of $20.1 million in the aggregate from cash on hand during February.

We have no debt under our recently renewed credit facility. Inventory decreased 6.8% on a per square foot basis compared to our comp sales increase of 0.6%, and our inventory aging was improved versus last year. This was on top of last year's 7.4% inventory decrease.

Capital expenditures for the quarter were $3 million compared to $4.3 million last year and have primarily been for the IT investments noted earlier and the remodeled stores.

Turning to our outlook for the second quarter. Based on current trends and with an expectation of continued choppiness in store traffic, we expect second quarter comparable store sales to be in the range of flat to up low single digits, operating income to be in the range of $1.2 million to $3.5 million and earnings per share to be in the range of $0.03 to $0.07 compared to last year's $0.05. We expect our second quarter tax rate to be at a more normalized rate of approximately 40% and weighted average shares to be approximately 29 million. We expect inventories per square foot to remain below LY levels and our store count to remain unchanged at 222 total stores, which is a decline of 3 from the end of the second quarter last year.

Operator, we'll now take questions.

(Operator Instructions) Our first question is from Jeff Van Sinderen of B. Riley.

So first, I just want to say great job getting SG&A down and getting flow-through from that. How should we think about SG&A going forward? Are there other reductions we should be looking for as the year progresses versus last year?

During the second quarter, it should be down modestly relative to LY again. We have made several structural changes in the marketing area in particular. But in every facet of the business, we've been really looking at every single contract. We've had some favorability from open headcounts and the like that continue to be a benefit to us. So we're going to continue to be very tight on SG&A going forward. And at least for the second quarter coming up, based on the guidance range we have, it should still be a little bit below LY.

Okay, great. Ed, do you think the landlords have figured it out yet that if they don't reduce rents, they're going to have a bunch of ghost towns on their hands?

Wow. Jeff, it's -- obviously, it's a challenge for every retailer in the country with declining productivity and rents. And we have great relationships with our landlords, and we continue to work closely with them to improve our own economics. But I can't -- obviously, I can't speak for them.

Okay, fair enough. Just one more, if I could squeeze it in. Merchandise margins, how should we think merch margin? I mean, obviously, you guys are -- you're offsetting that with some other savings. I'm just wondering if we should think that, at some point here, your merch margin year-over-year will start to inflect?

Yes, it should stabilize at some point. As soon as Ed came onboard, we really took a hard push at getting inventory levels down as well as acting faster on things that were not selling at an acceptable rate. We continue to do that, but we have been doing that for the entire past year. So at some point, we would expect that to moderate and hopefully start turning the other way at some stage.

The next question is from Dave King of Roth Capital.

I guess, first off, maybe following up on Jeff's line of questioning a little bit. It seems that the operating income guidance, it assumes a little bit of margin degradation even on a flattish comp, if I look at the low end of the range. I guess, if I compare that to the improvement you've had over the past few quarters, even on a flattish comp, I guess, what are sort of the takes that might be driving that? You touched on it a little bit, Mike, but are there wage increases that we should be factoring in? Or is it more of a product margin issue?

There certainly have been legislated minimum wage increases that we have been absorbing and are a factor year-over-year. At the lower end of our guidance range, if we're closer to flat, we still would have some product margin erosion to try and keep inventories as clean as we can. We're going to continue keep inventory very well controlled. So that might be something you might factor in.

The merchandise margins in this company have been consistent for many years, as you know. Again, like Mike said earlier, we've been very disciplined since we've both joined the company in terms of making sure that markdowns are more timely and so on and so forth. And then merchant team has done an excellent job of executing that strategy and also keeping inventory comps in line with our sales comps.

Okay. Okay, fair enough. And then in terms of the Pick Up In Store launch, Ed, is there anything to point to there in terms of early learnings? Or has there been any quantifiable pick-up in comp from add-ons, anything you can share there?

It's -- I don't think it's had any material impact on our overall results at this point. We're just happy with some of the activity that we're seeing. And it was a very, very limited soft launch that we went through for a few months. So more to come on that later. And as mentioned earlier, we just rolled it out to most of the inventory in all the stores, and so it's really the initial results. We are very encouraged with that, and it's another -- obviously, it's another thing that we're doing to drive traffic, more traffic to the stores in a very challenging traffic environment.

Absolutely, but still encouraging to hear. And then I guess, lastly, for me, following on special dividends and with the stocks trading, I think, kind of in the 4x range on EBITDA, is there -- what are the updated thoughts on buybacks, dividends, anything along those lines?

There's really no new news on that at all. We just did the special dividend. So as we've said many times before, our cash position is something that our board evaluates pretty regularly, but there's nothing new since the last dividend, okay?

(Operator Instructions) Your next question is from Janet Kloppenburg of JJK Research.

I think you said that, it was Mike, that it was men's and boys' that your -- the comp improvement, maybe you could talk about -- highlight the women's business, maybe your footwear business, accessories and what's going on there and what might be the outlook as we think about the rest of the year? And as far as the in-store events go, that seems to be helping traffic. Is that something that -- what percentage of stores was that done in? And is there a plan to develop more of these kinds of events going forward?

Okay. So Janet, on the merchandising, the categories, you have men's and boys' that really drove it. But the other categories, women's, footwear, they weren't materially -- we didn't see big decreases in any of those major categories at all. And as a matter of fact, subsequent to quarter end, we've seen some improvement in some of those categories that may have been running a little softer than what we have liked. I think in the women's category, I think the biggest call out there is there really was no dominant trend. So I'm encouraged by what I've been seeing. But still, it's a little volatile out there, as you know, and we're going to be -- we're going to walk before we run.

Can you tell if some merchandise margin pressure is coming on the women's side?

Some, but not -- yes, some.

Yes. Again, women's in particular was down less than 1%. So let's just be clear. It's not like there's a major problem or major assortment issue within the women's assortment. It was down less than 1%.

Okay. Can you talk about any of the other categories where business slipped?

There's really not much to say on any of the other categories. They were all -- they were down -- ones that were (inaudible)...

On low single digits.

Really small. So anyway -- and again, we're seeing improvement in many of the areas that we -- that have -- may have been a little softer. Part of the category -- part of the challenge we have early on was weather, and some of the summer categories started out well, but they bounce back nicely since the country's got warmer. So there's not much I would read into what they are hearing.

Okay but events?

Then -- okay, now the second question was related to events. So one of the things that we've been very proactive with as a company is knowing that traffic is very challenging out there for everybody, we're trying to drive traffic to our stores. And one of the key elements that we've been really successful with is doing these events. And a lot of them have been done chain-wide, and we're going to continue to do those for the balance of the year. I think we learned a lot by some of the stuff that we've done. And it's something that has worked for us, and we're going to continue to do that. Some of the events like -- some -- for example, we've done one of the events we ran with -- co-branded with Adidas and we've done it with Vans. So we'll continue to do those because there's no question, it's a tough environment out there, but we know that we can work harder, and we are working harder at driving traffic to the stores.

I would now like to turn the conference back over to management for some closing remarks.

Okay. Well, thank you for joining us. We...

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.