Tillys Inc (TLYS) 2023 Q3 法說會逐字稿

Welcome to the third quarter 2023 results conference call. (Operator Instructions) Please also note this event is being recorded. And I'd now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead.

Good afternoon, and welcome to the Tillys fiscal 2023 third quarter earnings call. Ed Thomas, President and CEO, and Michael Henry, EVP and CFO, will discuss the company's results and then host a 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'll also be able to find a recorded replay of this 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, November 30, 2023 sectors is based on various 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 disclaimer regarding forward-looking statements that is in 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. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. I'll now turn the call over to Ed.

Good afternoon, everyone, and thank you for joining us today. We continue to believe that our inflation remains a significant headwind on discretionary spending for our young family, young adult, teen, and protein demographic. Despite what remains a challenging sales environment for us. I am proud of our team's efforts towards protecting product margins, managing inventory and controlling expenses.

Our third quarter results represent a sequential improvement from a first and second quarter earnings results and exceeded our expectations, primarily due to achieving stronger product margins and lower operating lowering operating expenses after starting the quarter was negative 3.7% comp store sales decline in August amid the peak of the need driven back to school period. Our comp sales decelerated sequentially in the post back-to-school period to negative double digits in each of September and October.

For the quarter, all geographic markets comp negative within a five point range with reduced customer traffic across all store formats. Compared to last year. Total transaction volume was down high single digits, while the average transaction value was slightly higher than in last year's third quarter. From a merchandising perspective, girls apparel and footwear comped positive while all other departments comped negative during the third quarter. While acknowledging that the environment remains challenging for our customer demographic, we believe we had some product content issue on our part that we are working to fix as quickly as we can.

Graphic tees has been an area of weakness for us within both men's and women's apparel. And we have been lacking sufficient fashion newness environment overall within accessories, strong backpack business wasn't enough to overcome declines in other areas. We believe we have identified certain opportunities to improve our performance across departments as we finish fiscal 2023 and look into 2024.

In terms of risk store real estate, we opened three new stores during the third quarter and an additional three stores just ahead of Thanksgiving. We currently expect to close four stores near the end of the fiscal year and five natural lease expiration for fiscal 2024. We anticipate we currently anticipate opening four new stores and have only one known store closure at this time. We have nearly a 100 lease actions to consider for fiscal 2024 affecting almost 40% of our store portfolio.

Given where our current operating margins are, we plant and be aggressive in existing stores that are not acceptably and the lease terms. Our preliminary education for total fiscal 2024 capital expenditures is approximately $15 million in ongoing distribution, and technology enhancements.

Turning to the fourth quarter, fiscal 2023, total comparable net sales, including both physical stores and e-com, decreased by 6.5% through November 28, 2023, with store comps down 13.6%, while e-com was up 11% relative to last year's comparable period. Prospect area over the final seven weeks of the third quarter continued into the first two weeks in the fourth quarter. However, the trend of our business began to improve during the fall final two weeks of fiscal November, including said, positive turn on our business was driven in part by a more aggressive promotional stance than we have historically taken to this period.

Based on recent holidays seasons, we expected that our comp sales may slow down again in the early part of December before improving trend wise in the final days leading into Christmas. We are encouraged by the overall sequential improvement in our business trends over the last two quarters and are working diligently to attempt to accelerate our improvement going forward. I now turn the call over to Mike to discuss our third quarter operating results in our fourth quarter outlook in more detail. Mike?

Thanks, Ed. Our third quarter operating results compared to last year were as follows. Net sales were $166.5 million, a decrease of 6.4%. Net sales from physical stores decreased by 6.4% and represented 79 points here, while e-commerce net sales decreased by 6.2% and represented 20.4% of total net sales. Comparable net sales, including both physical stores and e-commerce, decreased by 9% (sic - see press release, 11.3%) . We ended the third quarter with 249 total stores, an increase of two stores since the end of last year's third quarter.

Gross margin, including buying distribution and occupancy expenses, was 29.3% of net sales compared to 30.7% of net sales last year. Buying distribution and occupancy costs deleveraged by 90 basis points on lower net sales despite decreasing by $1 million collectively. Reduced freight costs within distribution were partially offset by higher occupancy costs as a result of to net additional stores compared to last year and increased common area maintenance expenses overall.

Product margins were just 50 basis points below last year, improved sequentially this year by 80 basis points compared to the second quarter and by 170 basis points compared to the first quarter. Total SG&A expenses were $51.2 million or 30.8% of net sales compared to $48.3 million or 27.1% of net sales last year. Primary increases in SG&A were attributable to non-cash store asset impairment charges of $1.7 million, marketing expenses of $0.7 million in combined store and corporate payroll and related benefits expenses of $0.7 million.

Operating loss was $2.5 million or 1.5% of net sales compared to operating income of $6.3 million or 3.6% of net sales last year. Other income was $1.3 million compared to $0.7 million last year, primarily as a result of earning higher rates of return on our marketable securities this year. Income tax benefit was $0.3 million or 28.0% of pre-tax loss compared to income tax expense of $1.8 million or 26.3% of pretax income last year. Net loss was $0.8 million, or $0.03 per share compared to net income of $5.1 million or $0.17 per diluted share last year.

Weighted average shares were 29.9 million this year compared to 30 million last year. Turning to our balance sheet, we ended the third quarter with total cash and marketable securities of $94 million and no debt outstanding as compared to $106 million and no debt outstanding last year. We ended the third quarter with inventories at cost up 0.8% per square foot unit while inventories were down 3.2% per square foot compared to last year.

Total year-to-date capital expenditures were $10.5 million this year compared to $11.9 million last year. Turning to our outlook for the fourth quarter of fiscal 2023. Please note that this year's fourth quarter includes an extra week, making it a 14-week quarter compared to 13 weeks last year. Based on our quarter-to-date comparable net sales results and current and historical trends, we currently anticipate our total net sales for the fourth quarter of fiscal 2023 to be in the range of approximately $172 million to $178 million, translating to an estimated comparable net sales decrease in the range of approximately 6% to 9%.

We expect our SG&A to be approximately $55 million to $56 million, pretax loss to be in the range of approximately $5 million to $8 million. Our estimated income tax rate to be approximately 26% and loss per share to be in the range of $0.12 to $0.20 based on estimated weighted average diluted shares of it approximately $29.9 million. We currently expect to end fiscal 2023 with 240 total stores, a net decrease of one store from the end of fiscal 2022.

Operator, we'll now go to our Q&A session.

(Operator Instructions) Jeff Van Sinderen, B. Riley.

Hi, everyone. And I know you mentioned some things that you're working on in terms of merchandise content. And I guess I'm wondering now that a new CMO has been there for a little bit. Maybe you could just speak more on about the opportunities that you're seeing to improve merchandise content. And I know you mentioned graphic tees, but maybe there's other areas where you feel like, you know, you've got more opportunity, maybe concentration in various categories. Just any other color you can add there?

Hi, Jeff. On. I would say the single biggest category where we have opportunity on is on women's fashion tops, that was the content actually we have as good and we're just now enough. So I think one of the things that shape that lower has been working on is doing a better job of timing of the seasonality of certain goods, but also shifting of online graphic tees, which has been a very strong category for a long time into more fashion tops. I wouldn't say there won't be any drastic changes to any particular categories at all.

Okay. Good. And then I know you mentioned a little bit higher promotional activity this year around Black Friday weekend and newer positive comps. And maybe you can just talk about a couple of things around inventory, how you're positioned in inventory on the area is that are selling well, in other words, you have enough of the stuff that's moving well, our moved well and Black Friday weekend and on maybe just touched on on the planned promotional cadence this year versus last year for the remainder of Q4?

I would say the single biggest change we made from what we've done historically is we simplified. They have promotions and 2% runoff as opposed to a lot of logos. We simplify that. And that drove business across pretty much across positive business across all categories for a couple of days. For sure. And we weren't as aggressive as what of a lot of our peers were in terms of what that percentage of wireless, but it was different approach for us and it definitely simplified the buying process with our customers. Inventory is in pretty good shape, Jeff.

Yes, overall or inventory ages better than it was at this time a year ago. So feel good about the level of inventory content that inventory as we sit here right now. And then you also asked about Q4 promo cadence. And so we have various planned promotions on the biggest days of the season coming up in the we are big weekend days that are that are in between here and Christmas that it would be fairly consistent with what we've done traditionally.

Okay. Are you shifting those the doing more of the percentage off versus the bogo since those were on Black Friday weekend?

It's mixed, Jeff.

Matt Korand, MKM.

Hey, guys. It's [Mack Jay] going on for Matt. Can you just talk a little bit more about the divergence between quarter to date store comps versus the e-commerce comp? I assume more promotions through the websites translating to better performance relative to stores, but just any other dynamics to call out here?

Nothing specific to point to it's been kind of surprising to us, quite honestly, to see that kind of divergence between stores and e-com. We normally don't see that wide of a gap. So honestly, I'm not sure, but this customer convenience at this early stage of the holiday season of people deciding to shop online as opposed to physically go into stores. It's been a surprising divergence.

There is a little higher level of promotions online than it historically. We do tend to clear a lot of our kind of the end of life red tag goods on online. So there is also there is pretty consistently a higher level of promos online and in stores generally. But that's the case all year long, usually.

Yeah, that's pretty typical. There's clearly been a challenge and physical store traffic there. And part of I think has been more convenience oriented than not. And we operate off proud of our fall assortment on every store and online. So the choice choices were very similar. I think it was probably customer choice of what channel they want on the shopping.

Got it. Makes sense. I guess on the health of inventory, any guidepost surges, what are we looking to see to get inventory growth back in line with comps?

Yes, it's not too far off now. I mean, we ended the quarter on a unit basis than 3% and change versus the minus 6% comp. So it's not too far apart as we speak. And as I mentioned earlier to Jeff's question, the inventories more current right now than it was at this time last year or so. We always endeavor to get inventory comp is close to sales comp as we can. We're going to have a negative comp fourth quarter in the year in getting those inventories down.

Got it. Makes. Makes sense. A last one for me for fiscal '24, you just help us understand a little bit more. What's behind the lower store outlook for Forestar is just seems a little bit behind normal cadence of does that represent a more cautious view you might have on the consumer? Is it more macro or is it more so around the 100 or so lease actions that you referenced earlier in the call.

It's totally driven by what we are. We're being cautious because of the uncertainty of what the consumer environment as being kind of a. We have several stores in the pipeline that are targeted for expansion for us being negotiated. And when we decide that there's more consistency in the environment out there, we have been a good position to accelerate that growth when that time comes.

Marni Shapiro, The Retail Tracker.

Hey, everybody. A couple of questions. I think on that follow up on on the conversation you were just having first on the promotions over the holiday season as you move to more percent off, I thought it was by the way of really effective in the stores that caught my eye and I wrote about it and have pictures about it. I'm curious, we saw a difference to people buy fewer units or were they the same number of units go out the door? It just made it easier for people to shop.

It was lower units and average transaction value ended up lower. So we did get feedback from our store teams and district managers that it was well received by customers generally because it is so much easier to think about managed and both of those throughout throughout the assortment. So it is to get a good response in terms of how the customers viewed it. But it did in routing our transaction value and units per transaction.

That makes sense. And I always think that separates don't like to do math when they're in the store. So if you comment that, I wanted to make it easier for ourselves. And then I'm just curious because I too was looking at the numbers between online and in-store. And I'm curious if you guys have is there a difference and why what they're buying?

Because I find when I'm on your site, it's your fashion content on the women's side, even in women's tops ads, which you had referenced is really kind of good. And then you have things like the crop puffer vest and things like that, which online is all this stuff is really easy to get to find. And I find in your stores and probably have leading to some of the issues going on in the stores. It's not always so easy to find those items and just to give a little bit of work to find them. So I'm curious if you're seeing more fast and go out the door online than in stores or if that might be driving more of what's going on online versus in stores.

Now, actually, it's been a store in women side, those stores have been consistently better than online for us also improved because we've made some very targeted changes to our improving how we merchandise online spin-off done yet. But certainly we've made and we've seen positive results as a result. Just a matter of the where the customer chose to show up as opposed to the particular visual merchandising or the assortment.

It's just been in the month of November that we've seen this divergence. When you look back at the third quarter stores and e-com comps were within 1% of each other. So we have very consistent performance between stores and e-com throughout the third quarter and then suddenly we get to November and this divergence and emerged in was a little surprising to us, honestly.

That's definitely a change. And then I'm just also curious, you know, some of the pressure you've seen, especially in the junior side, but even just overall, the junior side has had some good smelters. Are you seeing better sales coming out of your own brand versus other other brand? Because your your especially on the junior side, I think your fashion on your own brands has been pretty good, I think really cut on. And so I'm just curious if you're able either kind of gaps in the market with branded goods, they are able to make up with your own brand. And is that outpacing what your what the market that they're doing?

So our best brand continues to be rescue our own brands. And it crosses over on multiple categories of goodness. And that's intentionally developed and designed into fill in where we think they're avoids from what the brands have offered us, what we're able to secure from outside brands.

So it's always a balancing act and have enough there's never any one point in time where it stays the same forever initiatives that never changes. And, you know, I think we have a pretty experienced team to the women's side that they've been around for a while. They know the market well, they adjust accordingly.

Mitch Kummetz, Seaport Research.

Yes, thanks for taking my question. On the assortment, you've mentioned women's fashion tops doing well, but you don't have enough graphic tees being weak, but how quickly can you just and if so, like is that sequentially benefit to cost once you get that out?

We can adjust pretty quickly in almost every category. I mean, bottoms and shows the lead times are a lot longer than apparel. And so but the in our where we saw the opportunity was really again and thoughts where we did adjust on the fly. And we I think that we think we've made a lot of changes on that will positively impact the business in the categories where we felt we were maybe under represented.

Any concerns on graphic tees in terms of that inventory, but it's been weak that that might require some more markdowns or any issues there?

Not really. I mean, I think that we shifted our focus on some of the types of licenses that we went after. We will in all these categories like music and sports, and we just we didn't probably didn't move quick enough to get into some of these a fresh categories because the graphics business has been so solid positive for us for so long. We were somewhat surprised that at some of the changes, but we can adjust and we will adjust. And I know there's no real markdown liability there.

Okay. And then on footwear, a positive comp in the quarter, what's driving that is better trend in footwear now or the more about product availability? I know there's some other vendors they're having to supply chain issue. I know this has been kind of cleared up boots. Is that you have better inventory? Are you seeing better from there as well?

I think it's more availability of certain brands like Nike, our among others. And three by I mean, we've seen, yes, new valves. We've seen we brought in a couple of new back brands, which is not a major part of the assortment, but certainly no to us recently new to us. And then there was improvement in the inventory well ability.

And then lastly, Mike, and from a product margin, even down 50 bps in the quarter, are you thinking about that for Q4?

We'll if we're at the better end of our outlook, we would actually expect product margins to be slightly up for at the bottom end of our range. We might be slightly down, not much different than what we just saw in the third quarter at this time based on what we currently know.

This will conclude our question-and-answer session, and I'll turn the conference back over to Ed Thomas for any closing remarks.

Thank you all for joining on the call today. We look forward to sharing our fourth quarter results with you in mid-March 2024. Have a good evening, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.