Tillys Inc (TLYS) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Tilly's Inc. Fourth 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 your host, Gar Jackson, Investor Relations.

Thank you, operator. Good afternoon, everyone, and welcome to Tilly's Fiscal 2017 Fourth Quarter Earnings Call. Ed Thomas, President and CEO; and Michael Henry, CFO, will discuss the company's report 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 the 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, March 12, 2018, 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 risk and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2017 fourth quarter earnings release, which is furnished to the SEC today on Form 8-K, as well as our other filings with the SEC referenced in that disclaimer.

Today's call will be limited to 1 hour and will include a Q&A session after our prepared remarks. I now turn the call over to Ed.

Thanks, Gar. Good afternoon, everyone, and thank you for joining us today. I will summarize our fiscal 2017 fourth quarter operating results before discussing areas of focus for fiscal 2018. Mike will then review our results in more detail and introduce our fiscal 2018 first quarter outlook. For the 2017 fiscal year as a whole, Tilly's delivered a 24% improvement in year-over-year operating income. We concluded the fiscal year by announcing a special cash dividend of $1 per share, which we paid last month.

In the fourth quarter, Tilly's delivered a 10% increase in year-over-year operating income. Store comps were up 2.3%, driven by our fifth consecutive quarter of store traffic growth despite what reportedly continues to be negative mall traffic Environment. E-com sales dropped 12% due to certain technical issues that I will discuss a bit later, resulting in total comp sales coming in flat. Despite our flat comps, we delivered meaningful improvement in operating income due to consistent inventory and expense management.

In terms of merchandising, our broad and diverse collection of brands performed well across all department. Our men's business led the way with a high-single-digit positive comp followed by footwear that's also comp positive. While all other departments decreased in the single digit, the branded portions of these assortments performed well. We lost ground with our private label assortment, particularly in women's, girls and boys. With the transition into spring assortments, newness in color and styling are driving improved results across all apparel departments compared to the fourth quarter. Total comp sales are up low single digits, thus far, in the first quarter despite continuing negative e-com sales. Newness and exclusivity will continue to be key for differentiating our merchandising efforts in fiscal 2018.

Turning specifically to e-com, which represents 14% of our total sales for the fourth quarter. Sales decreased due to technical issues we encountered with our new order management and website platform systems during sustained high transaction volume periods. We went live with these new systems in early November, and e-com sales come positive for the month. However, as we entered December, we began experiencing problems that resulted in incomplete orders and issues supporting omni channel execution among other items. Today, we continue to work hard with our third-party service providers to fix these issues as quickly as we can and as a result of these efforts to date, the e-com sales trend is beginning to improve relative to the fourth quarter results. Although we are still negative on a quarter-to-date basis, e-com sales are trending more favorable in recent weeks, and we are beginning to see the return of positive daily comps. We expect e-com sales to remain inconsistent for the near term as we complete the remaining fixes, but we believe we are on the right track to have e-com contributing to top line growth again within a reasonable period. And again, despite these technical e-com issues, we still delivered bottom line results for the company as a whole that were in line with our original outlook for the quarter due to the positive 2.3% store comp with good inventory and expense management overall.

Turning to real estate. We are excited to be getting back into store growth mode in fiscal 2018. As we noted during our last earnings call, we plan to open up to 15 new stores during fiscal 2018. We currently expect to open 1 store late in the first quarter, followed by 5 in the middle to late portion of the second quarter, and 4 more during the third quarter based on the 10 negotiated -- 10 total negotiated deals we have thus far.

We also expect to open 3 rescue pop-up stores by the end of the first quarter. Beyond new stores, we have nearly 120 lease decisions to make over the course of fiscal 2018 and 2019. We continue to fight for improved economics wherever available to strengthen our bottom line, and we will not hesitate to close stores if the right economics cannot be obtained. While the exact number of store closures we will have in fiscal 2018 is uncertain, we began -- we currently anticipate closing 1 store later this month and possibly closing up to 5 more during the third quarter.

Turning to marketing. As we discussed on our prior calls, we believe our emphasis on in-store events has created enthusiasm about Tilly's and has contributed to driving improved store traffic for 5 consecutive quarters despite what is reported to be continuing negative mall traffic environment. We believe more direct consumer interactions improve our customer engagement and generate additional excitement about Tilly's, and we will continue this effort throughout 2018 with numerous events and contests. We like to thank all of our brand partners who help us with the planning and execution of these events.

In closing, fiscal 2017 represented Tilly's second consecutive year of improved year-over-year operating income results. We are off to a good start for fiscal 2018 despite our short-term e-com issues. We aim to continue our operating momentum as we return to store growth mode this year.

Now I will turn the call over to Mike to provide more details on our fiscal 2017 fourth quarter operating performance and to introduce our fiscal 2018 first quarter earnings outlook. Mike?

Thanks, Ed. Good afternoon, everyone. Our fourth quarter operating results compared to last year's fourth quarter were as follows. Net sales of $164.3 million increased 2.6% from $160.2 million due to the extra week in this year's fourth quarter, partially offset by ending the fiscal year with 4 fewer stores than a year ago.

Our comp sales performance during the fourth quarter was a combination of both good and bad news. The good news was that store comps, which represented 86% of our total sales, were up 2.3% with positive store traffic for the fifth consecutive quarter. The bad news was that e-com sales, which represented 14% of our total sales, decreased 12% due to the systems issued that Ed noted earlier. The combination of positive store comps and negative e-com resulted in flat total comps. Gross profit of $51.4 million was an improvement of $2.3 million or 4.8% compared to last year's $49.1 million. Our gross margin rate of 31.3% improved 70 basis points to last year's 30.6%. This improvement was driven by occupancy savings of 90 basis points, partially offset by product margins that declined by a modest 20 basis points due to lower initial mark-ups.

SG&A expenses were $40 million or 24.3% of net sales compared to $38.7 million or 24.1% of net sales last year. This increase was largely attributable to minimum wage increases and de-leverage of increased payroll cost on the flat sales comp.

Operating income of $11.4 million or 7% of net sales was an improvement of $1 million or 50 basis points compared to last year. Income tax expense was $5.2 million or 43.5% of pretax income compared to $4.2 million or 40.2% of pretax income last year. This year's income tax expense includes a net charge of approximately $0.2 million as a result of the Tax Cut and Jobs Act signed into law during December.

Despite our flat total comp, net income of $6.7 million or $0.23 per diluted share was in line with our original outlook range, which had not contemplate tax reform. Last year's net income was $6.3 million or $0.22 per diluted share. Weighted average diluted shares for the quarter were 29.5 million versus 28.9 million last year.

Turning to our balance sheet which remains strong. We ended the quarter with cash and marketable securities, totaling $136 million and no debt compared to $133.9 million and no debt at this time last year. As a reminder, last year, the company paid a first-ever special cash dividend to stockholders of $20.1 million in the aggregate in February 2017. The company just recently paid a second special cash dividend to stockholders of $29.1 million in aggregate, as previously announced. We finished the quarter with inventory per square foot down 9% comparable week 1 year ago, marking our ninth consecutive quarter with sales comps stronger than inventory comps. Total capital expenditures for fiscal 2017 were $13.8 million compared to $17 million for fiscal 2016.

Turning to our outlook for the first quarter of fiscal 2018. Based on current and historical trends, we expect first quarter comparable store sales to be in the range of flat to up low single digits on a percentage basis, bottom line results to range from a loss of approximately $0.5 million to income of approximately $1 million, and earnings per share to range from a loss of $0.01 to income of $0.03. This compares to last year's operating loss of $0.3 million and loss per share of $0.01. We expect our tax rate to be approximately 27% and weighted average shares to be approximately $29.5 million. We expect inventories per square foot to remain consistent with last year's levels. We expect to end the first quarter with 222 total stores comprised of 219 full-sized stores, and 3 rescue branded pop-up stores. Fiscal 2018 full year capital expenditures are expected to be approximately $20 million, primarily for the new stores we discussed earlier and continuing IT investments. Operator, we'll now take questions.

(Operator Instructions) Our first question comes from Jeff Van Sinderen, B. Riley FBR.

Ed, maybe you can just give us a sense on a couple of things. I think you said the store comps were up 2.3 in Q4. Did I hear that correctly?

That's correct. Yes, Jeff.

Okay. So the store comps are actually strong, but obviously, the e-com glitch was an issue. Maybe you can just give us a little more color on the e-com glitch, what needs to happen to fix it, and then what the timeframe is to have that operating as you want it to?

Sure. The e-com, as Mike mentioned, the e-com glitch, we went live at the beginning of November, and actually until you get into a high trend and it was extensive testing before we went live. And we really didn't detect any material problems. And then once we got into a higher transaction period in December, that's where we started to get into some of the problems that were discovered mostly related to integration of -- into our inventory omni channel management system. So those problems have not all been fixed, but they've been substantially fixed. And as Mike mentioned, we've seen some improvement in our e-com business, certainly better than what we have seen during the fourth quarter and with some positive comp days. And also, there's still some things that has to be fixed. We have temporarily turned off most of our omni-channel capabilities, really, since December, and would expect to have those turned on -- early back early in second quarter, Jeff.

Okay. So essentially, the main issue should be resolved as we're into Q2?

Yes.

Okay, good. And then I guess any more color you can give us on the women's business? Just wondering kind of how you're feeling about that. It sounds like you're seeing a little better trends in springtime, just wondering any other thoughts you can give us there?

Sure. Slightly better. And we expect, as the -- as we get further into spring, we expect it to even get better. There's a couple of trends that we see that will be positive for the business. You'll see more variety in bottoms, in the bottoms business, with wide leg and some other silhouettes. And then also a shift in -- away from wovens, not totally, but a shift more into net tops, and that's generally good for our business. So that's kind of where we stand as of this discussion.

Okay. And then 1 more, and then I'll let someone else jump in. Just wondering if there are any other, I guess, what you learned from the store events that you did in 2017. And then anything you can touch on in terms of plans for store events in 2018?

Sure. I mean, the store events, we've tried a lot of different types of events in the stores, and all of them seem to be pretty successful nationwide. It has brought a lot of brand identity recognition to us in our newer markets, and that momentum seems to continue. So we have a ton of events planned throughout the balance of this year. We'll continue to tweak the type of event, but -- and we've had great partnership with a lot of our brand partners in helping us execute these events. So we're excited to continue them going forward.

Our next question comes from Sharon Zackfia, William Blair.

This is Sharon. Can you hear me?

Yes.

Great. I guess my first question is going to be on SG&A. Obviously, as you've been investing more in the business, we've seen that kind of growing at a kind of higher cadence year-over-year recently. I think kind of in the mid-single digit range the last 3 quarters. Is that a good kind of year-over-year dollar amount to kind of think about, going forward, on a steady-state business position? Or is that accelerating now that you'll be accelerating units' dollar amount again?

So during the last several quarters, we had a few quarters of raw dollar decreases in SG&A. And so fourth quarter, in particular, we had said that was not expected to continue because of the combination of the new system expenses of going live with the new order management website systems, another round of minimum wage increases and store payroll. Then as you transition into Q1 for fiscal '18 on top of those 2 things I mentioned, you still have an additional full quarter's impact of store payroll increases, any merit increases here in the corporate office starting a new fiscal year. So there are some additive things that will come into SG&A. Overall, though, because of the other structural changes that we've made over the last 2 years, you're still looking at a low single-digit comp like a 1% to 2% comp before we could start generating leverage on SG&A expenses, and that's what we'd expect to remain true as we go through the year. It used to be, I think, a few years back, the company would say it took a 3 to 4 comp to begin leveraging SG&A. That's really no longer true. It really only takes about 1 to 2 comp to get leverage out of SG&A, going forward.

Okay. And then on the comments on the quarter to date, I think I remember last year, February was a really challenging month for you. And I appreciate what's going on with the e-com, but I guess I would have thought (inaudible) is gone or positioned quarter-to-date. I don't know if you were already kind of adjusting for some of that cadence that's going to happen. I know the comparisons get a lot tougher as this quarter goes on, but if you can give us kind of some clarity. Are you actually running most single amount because, again, I think the comparisons get much more challenging as we get into April.

Yes, you're spot on, Sharon. February was a very difficult month for us, comp wise, last year. And Ed and I would agree with you. We actually expected to come out February stronger than we actually did, but we are at low single digits as we sit here. But -- and you're right that going to the March, April time period, those were tougher compares last year that we have going against us. And so as you think about a guidance range, we've allowed for that potential decrease that allows for that range of flat to up low single digits for this quarter. We still -- everything that we see in the underlying trends of our assortment seems to point to us having a decent spring season. And of course, Easter's moved around this year and shift some volume forward and what have you. But that's what led to our range, as we pitched it, knowing that we do have those tougher compares coming up, and did exit February softer than we would have liked.

Okay. And last question on private label. I mean, can you give us your thoughts on kind of where private label exist at Tilly's longer term? And if you see any kind of shift towards more branded over time as we execute a number of flat quarter. It's kind of an anomaly rather than some sort of new paradigm.

Sure. The -- we averaged around 30% of our mix is private label, and that hasn't really changed for several years. I don't expect that to materially change at all, either up or down. I mean, right now, what we're seeing is we're in a stronger branded cycle than not. And usually, when you're in a strong branded cycle, there's sacrifice on the private label side. But there's nothing that's fundamentally changed that would have caused me to want to change the way we've been operating in terms of percentage of mix. And as a matter of fact, we introduced a couple of new brands on the women's side, minor right now, in the fourth quarter of last year. So I wouldn't expect anything materially to change related to that strategically. Okay?

Our next question comes from Janet Kloppenburg, JJK Research.

Ed, can you hear me?

Yes.

Okay. I'm traveling. So I didn't know if it's kind of (inaudible).

Janet, that's okay.

I was wondering if you could talk a little bit about the timing around improvement or when the glitch on the operational side in the DTC business channel will be resolved. And also, what the outlook there is for improved digital -- for higher digital marketing, enabling you to, perhaps, grow that business in line with what the industry is experiencing. And I also was wondering, on the women's side, if we just think about forward, we seek better plans going forward, are you encouraged that, that comp could actually accelerate, as you see it into the trends that you talked about, most notably in bottoms? Or you're just happy with it that it's turned positive.

Okay. So starting with e-com, again, we went live with the new system the beginning of...

Very early November.

Very early November, and we saw positive results the first few weeks and then we started to see that -- we saw the glitches as it related to omni-channel and inventory management at the beginning of December during a high volume period. So the timing of -- we've identified what we believe are most of the problems, some of which have been fixed. And there's still some remaining ones, and the omni-channel capabilities are expected to be turned back on the beginning -- some time early in the second quarter. And it take us a little while, but it should be -- we should be in a really good position going into back-to-school with all channels. So that's kind of where we are, and we think we have significant opportunity putting aside these problems to grow the e-com business, going forward. So anyway, related to the women's side, that true test is really always as we get into back-to-school. And so we are encouraged by what we've seen in market, and I would expect it to get better again as we progress into the higher volume months, and we're starting to see a slight improvement now.

And the men's business continues to be solid?

Yes.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Ed Thomas for closing remarks.

Thank you again for joining us today. We look forward to discussing our first quarter results with you in late May. Have a good evening.

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